Are you looking to purchase someone else’s shares? Has the vendor drafted a share sale agreement for you to sign? Before you sign the share sale agreement, you should have a corporate lawyer review the document carefully to ensure that you are well protected. Amongst other things, the share sale agreement should contain a detailed suite of vendor warranties, even if you are already an existing shareholder and director of the company.
In this article, we’ve set out some of the most common vendor warranties that you will want in a share sale agreement.
Power and authority
It is extremely important that the vendor has full power and capacity to own the shares and transfer ownership of these shares. This is usually the first warranty that will be provided by the vendor.
If the vendor has been working in the business, you will want the vendor to warrant that all of the accounts in the business have been prepared in accordance with the applicable laws and acceptable accounting standards.
Records and corporate matters
In cases where the vendor is the director of the company, and where you have not been a director in the same company, or have not been employed by the company, and are unaware of the ins and outs of the business, you need the vendor to warrant that all records are up to date and have been properly kept. The vendor should also warrant that all documents which need to be filed with ASIC have been duly filed.
Assuming that you are purchasing the shares with the intention that the company will continue to operate and earn revenue in the same manner, then you will want to be assured that the contracts that the company has in place will continue after the completion of the share sale. This means that you will want the vendor to provide a warranty that the vendor is not aware of the company being in default of any of its existing contracts. If the vendor is aware of such defaults, the vendor should inform you of this so that you are able to make adequate adjustments to the purchase price, or you may decline to purchase the shares altogether.
You will definitely want the vendor to warrant that the company is solvent. After all, who wants to purchase shares in a company that is insolvent?
This will require the vendor to warrant that the company:
- has not gone into liquidation;
- has not passed a winding-up resolution or commenced steps to do the same; or
- received any deregistration notices from ASIC.
As a purchaser, you are not required to provide nearly as many warranties as the vendor of the shares. This is because you will be taking on all the risk once the transaction is completed. However, there are certain warranties that the vendor may want you to provide. If you want to know what sort of warranties a vendor will want from you, we have another article which may be of interest in, have a read.
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