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If you own a business with other shareholders, it is crucial to prepare yourself if one or more shareholders wish to leave the business. This article will step you through the documents you need to manage the sale of shares process when a shareholder leaves the business. Most importantly, you will want a well-drafted share sale agreement to set out each party’s legal rights and obligations.

This article is Part Two of a three-part series on what to consider when a shareholder leaves the business. Part One discusses administrative and company secretarial requirements. Part Three considers protecting confidential information, intellectual property and imposing a non-compete clause.

What Type of Share Sale Agreement Do I Need?

A share sale agreement is a legal document that includes the terms of the sale of shares. Share sale agreements can be simple or detailed, depending on the circumstances of the share sale.

Where the seller and buyer know the company well, then it can be a simple agreement. This agreement can simply document the main terms of the sale and include a few key clauses setting out each party’s legal rights and obligations. On the other hand, where the buyer is new to the company, you will generally need a more detailed agreement. A more detailed agreement will include clauses that provide the purchaser with warranties and indemnities.

Key Terms of a Share Sale Agreement

In your share sale agreement, there are certain terms you want to include. We detail such terms below.

Key Term Explanation
Price

The share sale agreement should include:

  • the share purchase price;
  • the calculation of the share price; and
  • terms around how the purchaser will pay for the shares.

In straightforward situations, like where you are selling shares from one business partner to another, the share price may be a fixed price. This price will be payable on the completion date of the sale.

However, more complex situations include when the sale is completed once certain agreements have been satisfied, or when adjustments to the purchase price have been made to account for costs.

Trances This clause should detail how and when the buyer can purchase the shares. The agreement will outline whether the buyer can purchase shares all in one parcel, or over a period of time. A seller will generally want to sell their shares in one parcel in a share sale.
Operations

Your buyer will want warranties about the business operations. These can be simple or detailed, depending on the buyer’s requirements. Common and important warranties are that the business:

  • has been conducted according to law;
  • is solvent; and
  • has all the required regulatory approvals to operate.
Title Warranties that the seller owns and has good title to the shares.
Tax Warranties about the business tax, including that the business has paid tax when due and payable, and correctly calculated tax requirements.
Litigation

Warranties about litigation, including that there is no litigation against the company.

Releases Releases, including that the seller has no claims against the business for a suite of potential claims including employment issues and debts.

Other Key Terms

Confidentiality Provisions

Depending on the specifics of your business, there may be certain information that a potential buyer would like to know. However, in the case the buyer withdraws from the sale, you want to protect your business’s trade secrets

If this is the case, you may want to consider entering into a non-disclosure agreement with the buyer during negotiations. Alternatively, you can include confidentiality provisions in your contract.

Intellectual Property

Most likely, your company has accrued some intellectual property (IP). In a share sale, terms related to IP will ensure that the seller assigns all IP regarding the business, to the business. More on this clause in Part Three.

Restraint of Trade

A buyer may wish to include a restraint of trade clause to prevent a seller (or exiting shareholder) from operating a competing business. The restraint of trade clause may set up geographical limitations, such as not opening a competing business within the same suburb or city. Additionally, the clause can last for a certain period of time.

Limitations

You may also negotiate to include limitations on buyers and seller’s liability such as for tax on the sale of the shares.

Dispute Resolution Clause

It is essential to include a dispute resolution clause in your sale agreement. In the event a conflict arises, you want peace of mind that a resolution process is followed.

What Happens to Employees in a Share Sale?

Since you are managing a share sale, the entity that operates the business stays the same. The only change is to the shareholders of the company, which will become the purchaser and the purchaser’s nominated directors.

Therefore, even if a shareholder leaves the business, the employees do not ‘transfer’ but stay where they are. Once you sell your shares, the employees of the business will continue in their positions. They will also keep all their entitlements, including annual and long service leave, rates of pay and conditions.

Although, the buyer may still want warranties about the employees, including that superannuation is up to date, and that there are no employee claims against the company. You can detail these within the share sale agreement.

Completion of the Share Sale

Further, the share sale should include details about the completion of the sale. Importantly, you want to confirm how the shares will transfer from the seller to the purchasing party. The completion details include what each party will provide on completion, for example, whether the seller will provide their previous share certificate, and any company credit or debit card, when the sale completes.

Before completion can occur, there may also be company obligations, including obligations to carry out any administrative and company secretarial requirements. Likewise, certain earn-out provisions may be relevant. For example, will the seller be required to stay for a period of time and work in the business and be paid out according to how the business performs? A buyer will generally want earn-out provisions so that the price paid depends on how the business performs over a period of time, such as over one to three years.

Most importantly, to transfer shares from the purchaser to the seller, you must update the company’s members register. Only then can the shares transfer through ASIC.

Key Takeaways

When a shareholder leaves the business, there is no need to panic. Instead, a well-drafted share sale agreement can ensure a smooth sale of shares process. There are various key terms that you must include in this agreement, including:

  • price;
  • trances;
  • operational
  • title;
  • tax;
  • litigation; and
  • releases, amongst others.

For assistance with drafting your share sale agreement and to negotiate the terms to best protect your interests, contact LegalVision’s sale of business lawyers on 1300 544 755 or complete the form on this page.

Frequently Asked Questions

What is the difference between a business sale and a share sale?

If a shareholder is looking to leave the business, a share sale is most applicable to you. In a share sale, a shareholder (or all shareholders) sell their shares, giving majority control to the new owner. 

Alternatively, you can conduct a business sale (or asset sale). This is where a company sells their assets such as client lists, trade marks and equipment to a new owner. A business sale describes when a company sells all of its assets.

Do I need a share sale agreement?

Absolutely. In a sale, such as a share sale, there are many aspects which you and your potential buyer will negotiate. Do not leave it all to memory or rely on an oral agreement. It is best to engage a lawyer to help draft a share sale agreement to adequately protect your business interests.

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