When a company shareholder decides to sell their shares, a share sale agreement is a useful way to manage the sale and protect the seller. A share sale agreement sets out each party’s legal rights and obligations in respect of the sale. The terms of a share sale agreement can be complex, and several mistakes can arise concerning:
- warranties and indemnities in the agreement; and
- your obligations as a seller post-completion of the agreement.
By keeping these issues in mind when using a share sale agreement, you can ensure that your transaction goes as planned.
Warranties
Within a share sale agreement, the seller can provide warranties to the buyer about its shares and about the target company. A warranty is a contractual statement a seller makes to a buyer, assuring that a certain state of affairs exists.
Warranties can protect buyers when the target company is not in the condition the seller had previously represented. For example, you might assure the buyer that your company owns all the intellectual property it currently uses in the operation of its business. However, if this turns out to be untrue, the buyer may be able to recover any losses they suffered due to your breach of this warranty. For this reason, it is important that the warranties you make under the agreement are true and correct at the time you enter into the agreement and at the date of completion (or such other date referred to in your agreement).
If you have engaged a lawyer to assist you with preparing the agreement, you must review all of the warranties they have included in detail. Only you, as the owner and operator of the company, will know if a warranty is true and correct. If something is untrue, you must disclose this or remove it from the agreement.
Indemnities
Relatedly, an indemnity can provide a buyer with additional protection. An indemnity is a contractual obligation by the seller to reimburse the buyer for a specific liability that could arise. For example, a seller might agree to indemnify the buyer for any loss the buyer suffers due to an ongoing dispute the target company is involved with. If the buyer brings a claim under the indemnity after completion of the agreement, the seller must reimburse them on a dollar-for-dollar basis for the loss suffered.
However, in share sale agreements, it is common to find that a buyer’s right to recover under an indemnity (and for breach of warranty) is limited. For example, if the seller has disclosed the matter and the potential liability before the buyer signs the share sale agreement, the buyer may have a limited right to recover.
In this sense, it is important that you consider in what instances you will indemnify the buyer. Without limiting your liability, you could expose yourself to unexpected costs.
Continue reading this article below the formYour Post-Completion Obligations
Completion refers to when you have transferred the shares to the buyer. Your share sale agreement should typically set out when and how completion will occur. It should also specify what happens if completion does not occur on the agreed date. After completion, you may need to meet further obligations according to your share sale agreement. A restraint of trade clause most commonly prevents sellers from involving themselves in a competing business for an agreed time period post-completion. Whilst a restraint of trade clause can provide the buyer with comfort that the goodwill of the company has protection, it can affect your actions after completion.
You should also note that the time period and scope of the restraint must be reasonable. Suppose your business has few long-term relationships and operates within a smaller geographical area. In this case, a shorter restraint period and area would be more reasonable since the buyer only needs a limited period of time and a limited radius to protect the business’ goodwill. On the other hand, suppose the business operates in a niche industry and is well known throughout that industry in Australia. Here, a buyer may require a longer restraint period and area. This may be necessary as you likely have significant expertise that can easily aid a competing business.
Above all, be clear on your obligations once your share sale agreement is complete. Doing so can prevent you from incurring costs due to reasonably avoidable legal proceedings.
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Key Takeaways
Shareholders of private companies typically use share sale agreements when selling their shares. Drafting a share sale agreement can be complex, and in particular, you should be aware of mistakes concerning:
- warranties you make as a seller in the agreement;
- indemnities you have agreed to provide in the agreement; and
- post-completion restraints you may be obliged to follow.
If you need help to draft a share sale agreement, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
In comparison to simple share sales, where the shares are usually bought at a fixed price, more complex transactions may allow for a price adjustment that recognises the change in the value of the shares from the time you negotiated the agreement to completion.
For more complex transfers, it would be wise to retain an accountant to help value your business and identify the tax implications of your sale.
In a share sale agreement, ensure the warranties you make are true and correct at the time you enter into the agreement and at the date of completion. Likewise, consider in what instances you will indemnify the buyer. Without limiting your liability, you could expose yourself to unexpected costs. Finally, be sure to check that any post-completion obligations are reasonable.
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