WHAT IS A SHARE PURCHASES AGREEMENT?

A share purchase agreement provides a comprehensive summary of the terms, restrictions and conditions that are inherent with or necessary for the purchase and sale of a company’s shares.

In this type of contract, the seller and buyer are usually referred to as the vendor and the purchaser.

WHAT STEPS ARE REQUIRED?

Each party has an obligation to make certain that there is a mutual understanding of and an agreement to all of the terms of the proposed agreement. A letter of intent can be used to explain all of the terms and conditions so that there is no ambiguity as to what the proposed agreement will entail.

The buyer must exercise due diligence when considering and comparing the letter of intent and the actual subsequent purchase agreement. The seller should also make certain that the letter of intent and purchase agreement contain the exact same language, terms, restrictions and representations.

WHEN DO YOU NEED A SHARE PURCHASES AGREEMENT?

This type of agreement is needed when the vendor/seller wants no further liability for the company. The seller has no further liability for the debt of the company after the share purchase agreement is completed. This provides the seller with a much better outcome than an asset sale because in the latter the seller is usually responsible for the current debts of the company.

Each party has an obligation to make certain that there is a mutual understanding of and an agreement to all of the terms of the proposed agreement. A letter of intent can be used to explain the terms and conditions so that there is no ambiguity as to what the proposed share purchase agreement will entail.

The buyer must exercise due diligence when considering and comparing the letter of intent and the actual subsequent share purchase agreement. The seller should also make certain that the letter of intent and purchase agreement contain the exact same language, terms, restrictions and representations.

WHAT ARE THE MAIN ELEMENTS OF A SHARE PURCHASES AGREEMENT?

• Information about the company:
  A prospective buyer should know about the financial stability of the company of which he or she will purchase shares. The company informational section should cover the date of incorporation if applicable, number of employees, business outlook as well as industry outlook for the next five or more years as well as any negative actions that may have taken place in the past and have the possibility of reoccurring. If the company has a business rating or industry rating; this information should be included also.

• Names and salient information about the company and purchaser:
  The names and contact information of the parties should be included. The list of corporate or company officers should also be included.

• The number and par value of the shares as information regarding any laws that    may impact the sale of the specific type of shares that are being sold:
  The agreement should clearly state how many shares are being sold and the par value or issuance value of the shares, If there are applicable laws that affect this type of sale a comprehensive summary and precise citation of the laws should be included so that all parties can be informed as to any possible violations and to prevent possible legal action at  later date.

• Date and location of the sale:
  The effective date of the sale must be listed. The location of the sale should also be listed because it may prove very important in the event of subsequent legal action.

• Warranties, disclaimers, and representations required to complete the sale:
  Two of the most common restrictions used in the sale of shares are the non-compete and non-solicitation clauses The non-compete clause prohibits the seller of the shares from creating a business that would be in competition with the buyer and the non-solicitation clause prevents the seller from pursuing the buyer’s customers.Warranties provide some measure of reassurance and redress to the buyer in case there are representations that were not entirely accurate. Warranties also serve to provide information heretofore undisclosed that may affect the value of the shares or even the buyer’s willingness to purchase if originally known.

• Indemnification language:
  Simply put this is verbiage that provides guidance as to what should be done and who will bear the cost in the event that something unforeseeable should occur.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF A SHARE PURCHASES AGREEMENT? 

• Disadvantages:
  There are a lot of risks involved in the sale and purchase of shares. Even with warranties and indemnification clauses a buyer can find him or herself in a financial catastrophe because the share purchase agreement is contingent upon the veracity and integrity of the seller. Even if the seller is honest the risk is very high because the company or the industry in which the company is a part of could experience an unexpected financial downturn and the shares could quickly become worthless or obsolete.Transference and Inheritance of company problems is a major drawback because the buyer buys the company for better or worse and if the company had problems prior to the sale of the shares those problems are passed onto the buyer. It is somewhat similar to buying a defective used car.

• Advantages:
  The seller has no further liability for the debt of the company after the share purchase agreement is completed. This provides the seller with a much better outcome than an asset sale because in the latter the seller is usually responsible for the current debts of the company.