SHARE PURCHASE AGREEMENT
A share purchase agreement is a legal contract between two parties: a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The contract is proof that the sale and the terms of it were mutually agreed upon.
The purchase of shares constitutes the purchase of a company’s operating business – none of the existing contracts with the company change. If a shareholder sells their shares in a company, then they achieve a complete break in the relationship between them and the target business. The buyer, however, will insist upon some contractual promises about the company (warranties) which will continue to bind the shareholder after the sale.
Contents of a Share Purchase Agreement
The agreement contains all the terms and conditions that are finalised when it comes to the sale and purchase of the shares of the company. The following are listed in a share purchase agreement:
- Name of the company
- Par value of shares
- Name of purchaser
- Warranties and representations made by seller and purchaser
- Employee benefits and bonuses
- Number of shares being sold
- Details of the transaction
- Indemnification agreement for unforeseen costs
Advantages of SPAs
No third party involvement
The buyer will step into the seller’s shoes as shareholder or director, however, the company’s employees, contracts, properties, etc will remain in the company’s ownership. There is therefore no need for the assets of the company to be transferred, thus a share sale can often be completed without any third party involvement. A share purchase, therefore, is often a lot more discreet than an asset purchase.
No liability for debts
At completion, the seller of shares will have no liability for the debts of the business, which become the responsibility of the new owners. This is because a company has a separate legal personality from its directors and shareholders. By comparison, if there is an asset sale, then, with a few exceptions (eg employees), the seller will keep all the current liabilities of the business, unless he can negotiate with the buyer to take them over with the business.