A sale and purchase agreement (SPA) that is intended for company shares is commonly referred to as share purchase agreement. This legal contract sets out all terms and conditions which relate to company shares sale and purchase.
The company shares purchase is the purchase of the operating business of a company. No existing contract of the company will change with a sale and purchase agreement. When a shareholder decides to sell shares, then the shareholder achieves a full break with the business. As for the buyer of the company shares, there can be some contractual promises regarding the company, which are also referred to as warranties, that continue to bind a shareholder, following the sale of the company shares.
A typical company sale and purchase agreement deals with several important matters, including the following:
Sale of the Company Shares
As soon as the shares of the target business has been shifted to a new ownership, the ownership will be passed on to the buyer. It’s most likely that the new owner of the company shares may appoint new auditors, key employees, and directors. The buyer can also choose to remove certain officers. If so, then it should be stated in the SPA and requires the agreement of all the parties.
A warranty is a contractual statement that is made by a seller on completion in related to the business shares that are being bought. Warranties have two main purposes:
- In order to flush out all information a buyer has to know which can affect the company shares’ value or the decision of the buyer of the company shares in buying a part or the entire business
- To give the shares buyer a bit of comfort when the business isn’t what the seller of the shares represented (this is when the company has a hidden issue or is in litigation
While warranties can be beneficial for the buyer of the company shares, the party that is giving the warranties are to adhere to them. Any warranty that is given by a seller is given to a buyer personally. The business won’t be liable in adhering to contractual terms.
A restrictive covenant in a sale and purchase agreement for company shares prevents a seller from being in competition with the shares buyer for a certain period of time when the sale has been finalized. This can include certain clauses, such as:
- A clause for non-competition which prevents a seller in setting up shop that is in direct competition with the new owner of the target business;
- A clause for non-solicitation which prohibits a seller in soliciting the customers and suppliers of the buyer
Restrictive covenants are very important for the party that is purchasing the company shares as immediate competition form the seller can do actual harm onto the business with new management. The competition can impair the success of the business. The covenant that is in a SPA has to be adequate in protecting the interests of the business. Still, the covenant should be reasonable when it lists a scope or duration for the restraint that being tied to the interest of the business in question.
Advantages of a Sale and Purchase Agreement for Company Shares
No involvement from third parties
The buyer will be stepping onto the shoes of the shares as the new director; but, the employees of the company, properties, contracts, and other assets, will still be owned by the company. This means there’s no need for company assets to be transferred. This is the reason why a share sale is capable of being completed without third party involvement. Share purchases are more discreet in comparison to the purchase of assets.
No personal liability for company debts
At completion, shares seller won’t have any liability with the business’ debts as the responsibility will be passed on to the company’s new owner. It’s because a business is a separate entity from the shareholders and directors. If there’s an asset sale, the seller will be keeping the current liabilities unless he/she is able to negotiate with a buyer in taking them with the company.
Disadvantages of a Sale and Purchase Agreement for Company Shares
A share purchase will involve a great risk, especially when it is compared to a purchase of assets. It justifies the buyer making sure warranties are included in the SPA in order to protect the buyer and the business’ interests.
Acquiring outstanding issues of the business
The buyer will be acquiring the company of the seller and that means also inheriting the issues that exist from the sale date.
Syed Hassan Ali has an experience of 13 years and is highly specialized in providing legal consulting for all types of notary requirements. By utilizing his diverse and deep knowledge, he has consistently aided individuals and organizations in finding flexible and timely solutions.