In Part 1 of this series, we looked at:
- the basic items which are covered in a share sale agreement;
- each party’s obligations; and
- when to use a non-disparagement clause.
In Part 2, we look at other important items in a share sale agreement, including indemnities, releases, confidentiality, intellectual property and restraint of trade.
The share sale agreement should set out clearly what information is considered confidential. This usually includes information about the business and its operations, future strategies relating to the business, and also the terms of the share sale agreement itself.
Parties are often prohibited from disclosing any confidential information to third parties. This is, however, subject to several exceptions, for example, disclosing information to professional advisors is normally allowed, and disclosure required by law is also allowed. These exceptions should be clearly set out to avoid disputes.
If the vendor developed intellectual property for the company, but the ownership of the intellectual property remains in his or her name, then you, in the position of a purchaser, need to ensure that this ownership is transferred to the company. The transfer of ownership of the intellectual property should be simultaneously with, if not prior to, the transfer of ownership of the shares.
Restraint of trade
If (once again, we are assuming you are the purchaser of the shares) the vendor has been working in the business for a long time, you probably do not want the vendor to sell you all of his or her shares, and then set up the same shop next door. This can be prevented with a properly drafted restraint of trade clause.
You should note that restraint of trade clauses need to be carefully drafted to ensure that they are enforceable at law. Courts are unlikely to uphold restraint of trade clauses which are too broad and prevent a party from carrying on his or her trade.
What is covered in a share sale agreement is often unique for each business. While we have provided information about certain items which are usually covered, there may be certain items which need to be included for your particular business or industry. For example, if your business involves financial services, there will need to be clauses relating to the transfer of the relevant licences.
Share sale agreements are complicated documents. Regardless of whether you are the vendor or purchaser, if you are looking to sell/purchase shares from someone else; we recommend that you seek the assistance of an experience corporate lawyer.