In Short
- Purchasing company shares involves understanding both the market value and any associated risks.
- Due diligence is essential to assess the financial health and potential liabilities of the company.
- Legal documentation, such as a share purchase agreement, formalises the transaction and protects buyer interests.
Tips for Businesses
Conduct thorough due diligence before purchasing shares to fully understand the investment’s risks and rewards. Consult with legal and financial professionals to ensure the share purchase agreement is comprehensive and protects your interests. This preparation will help mitigate risks and support informed decision-making in the investment process.
When purchasing company shares from an existing shareholder, several important documents and steps must be taken. You want to ensure that you obtain legal title to the shares and that the transaction protects you. This article outlines the key steps and legal documents to consider.
1. Non-Disclosure Agreement
The first legal document you will likely encounter in a transaction process is a non-disclosure agreement. This document is a confidentiality agreement that protects confidential information the seller provides to you regarding their shares, the company, and the business operated by the company.
This means that you can only use the confidential information provided to you for a permitted purpose, specifically your consideration of the proposed transaction. In some cases, it may be mutual to protect the information you provide to the seller as well.
If you are dealing directly with a broker or agent who is acting on behalf of the seller, that person will often require you to enter into a non-disclosure agreement directly with them. They may request this before providing you with the seller’s name and the relevant company information. Because you engage them to act as the intermediary between you and the seller, they will likely be the person providing you with the relevant confidential information rather than the seller themselves.
2. Heads of Agreement
It is common for a buyer and seller to enter into a non-binding document setting out the key commercial terms of the transaction. This document is commonly called a:
- Heads of Agreement;
- Memorandum of Understanding; or
- Non-Binding Indicative Offer, among other names.
In this article, we will refer to this document as an ‘HOA’.
A HOA will also typically include an indicative timetable for the transaction, outlining the timeframe for the parties to work towards, including the due diligence process. It may contain some legally binding terms (regarding confidentiality and exclusivity), but it is generally considered a non-binding document. This means that the transaction will not be legally binding until both parties sign a formal share sale agreement. The due diligence process typically begins after the signing of the Heads of Agreement (HoA) or the Non-Disclosure Agreement.
Continue reading this article below the form3. Due Diligence
A key document you may receive from the seller is a Disclosure Letter. A disclosure letter is commonly used in business, share and asset sales to assist buyers with their due diligence process. It contains information about the business, including its operations, finance, contracts and liabilities. The disclosure letter allows the seller to qualify the warranties and representations made in the share sale agreement.
Purchasing all of a company’s shares entails ownership of its trading history and any pre-existing liabilities. This can include debts to the Australian Taxation Office or liabilities to customers for work that has been performed.
Your legal team can assist by conducting searches of the company and reviewing material contracts for any red flags. For example, you should ensure that contracts with key customers or suppliers have a sufficient term remaining and do not contain any unusual indemnities or obligations. If the company has a shareholders’ agreement and a company constitution, your legal team can review these documents to ensure that the transaction complies with the requirements outlined in them.
Your accountant or financial advisor can conduct financial due diligence by reviewing the company’s financial records (profit and loss statement, balance sheet and cash flow statement) to provide you with advice concerning:
- the company’s value;
- risks relating to taxation, payroll, and superannuation;
- historical financial performance and projected financial position of the business.
The timing of due diligence can occur before or after you sign the share sale agreement. From a buyer’s perspective, it is preferable for due diligence to take place before signing the share sale agreement so you can adequately address any risks you uncover. For example, you might ask for a reduction in the purchase price or additional warranties and indemnities. If due diligence is to occur after signing, the agreement must include a clause allowing you to walk away from the sale if you discover anything unsatisfactory.
4. Share Sale Agreement
A share sale agreement is usually the longest and most detailed document you will encounter when purchasing company shares from an existing shareholder. While other documents in the transaction are also essential, you should devote most of your attention and effort to ensuring that this document is suitable for you. A well-drafted share sale agreement will, among other things, address the following terms:
- the number of shares and class of shares you will purchase;
- the purchase price for the shares and how and when payment is due;
- that the shares will be unencumbered and free from any security interests;
- whether you will buy the shares in a lump sum or by instalments;
- if there are conditions that need to be satisfied before the sale can be completed, for example, the landlord’s consent if the company is a party to a property lease;
- the obligations on completion to allow for the legal transfer of ownership;
- a full set of warranties that the seller is providing to you about the shares, business and company;
- any indemnities or limitations of liability
- if there will be a non-compete preventing the seller from operating a similar business after completion; and
- confidentiality and dispute resolution provisions.
5. Negotiation and Exchange
Usually, the seller’s lawyer will draft the share sale agreement, and your lawyer will review it. However, this is a matter parties need to agree on. It is not uncommon for the buyer to prepare the agreement, particularly if they are a larger corporate entity than the target company and the seller. The seller’s lawyer will often draft the share sale agreement to be very favourable to the seller.
Your lawyer’s role is to review and advise you on the terms of the agreement that require amendments to make the agreement more favourable for you and suitable for your specific situation.
Depending on the nature of the transaction, there may be several rounds of negotiations, which can take anywhere from a few weeks to a few months. A skilled lawyer will guide you through this process and explain the critical legal points for you to consider.

Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
The most heavily negotiated points often relate to what will happen if the share sale agreement is breached. This includes the limits on the seller’s liability where one of the warranties is untrue and the amount of time you have to bring a claim. Standard warranties are included in most share sale agreements.
However, the most important will be those specific to the business in question, which your due diligence will uncover. An example of a warranty is the seller warranting that the company has not received notice of termination of any customer contract.
Once you and the seller have agreed on the terms of the agreement, you will complete the signing and exchange process. The agreement will become legally binding once the parties have signed and exchanged it.
6. Completion
You and the seller may need to satisfy certain requirements before completion can take place. These are called conditions precedent. You cannot proceed with completion unless you satisfy or waive these requirements. These conditions precedent usually represent fundamental requirements for the transaction.
For example, if you do not want to complete the transaction without obtaining the consent of a major customer to continue their contract with the company, you would include obtaining their consent as a condition precedent in the share sale agreement.
Completion Obligations
The share sale agreement will also set out several completion obligations. You or the seller must satisfy or deliver these obligations to each other at completion. Many of these will relate to procedural requirements for the seller to transfer their shares to you, such as the following documents:
- Board Resolution: A written resolution signed by the directors of the company approving the transfer of the shares, cancellation of share certificates held by the seller, issue of new share certificates to you and any directors’ resignations and appointments;
- Shareholders Resolution: A written resolution of the shareholders waiving any pre-emptive rights they have in respect of the sale of shares (this may be needed if not all shares are being sold or if there are multiple sellers);
- Share Transfer Form: A form that sets out the transfer of the shares from the seller to you and the purchase price paid for the shares. Both you and the seller must sign this.
- Share Certificate: The seller’s share certificate will be cancelled, and a new share certificate will be issued to you; and
- Appointment/Removal of Directors: The current directors will need to provide signed notices of resignation, and the new directors will need to sign letters of consent to act.
There will also be other completion obligations specific to your transaction. However, the most important obligation of the buyer at completion is generally the payment of the purchase price.
7. Post Completion
After completion, the company must notify ASIC within 28 days of any changes to its shareholders, directors, or any changes to its registered address.
Key Takeaways
While the share sale agreement is the most important document in a share sale transaction, other documents and steps are required to effect the transfer of shares and protect you in the transaction. It is best practice to conduct thorough due diligence on the company. Likewise, ensure that any warranties in the share sale agreement reduce your risk as much as possible.
If you are considering entering into a share sale transaction, 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
A non-disclosure agreement is a legally binding contract that ensures confidentiality. It protects confidential information that the seller provides about their shares, the company and the business operated by the company.
A share sale agreement is a document formalising the sale of company shares from an existing shareholder. Amongst other key terms, it will address the number of shares and class of shares on purchase. It will also detail the purchase price for the shares and outline the payment terms, including how and when payment is due.
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