What is a Share Purchase Agreement?
A Share Purchase Agreement is a legally binding contract that outlines the sale and purchase of shares in one company of a target party. This contract sets out the terms and conditions of the agreement for the acquisition of the shares and includes information such as the consideration (i.e., the purchase price), parties to the agreement and the representations and warranties made by the parties. The agreement should also address indemnities for breaches of representations and warranties, closing arrangements, payment arrangements, conditions precedent, governing laws, termination provisions, liability limitations, exclusivity, confidentiality, dispute resolution, assignment, notices and counterparts.
Share Purchase Agreements are often used during the sale or acquisition of companies (or businesses) whereby the buyer does not need to acquire the individual assets of the business and make new applications for licenses with various government authorities . For this reason, Share Purchase Agreements can be more simple, quick and inexpensive compared to other forms of business acquisitions.
While signing a Share Purchase Agreement can be as simple as signing your name on the dotted line, it is still important that all parties enter into the agreement with each party’s interests protected.
The Share Purchase Agreement records the terms of the agreement between the buyer and the seller of the shares, therefore, the agreement is essentially a "roadmap" for the purchase or acquisition of the business in the future. Parties to an agreement should attempt to make it work for both parties as much as possible and, hopefully, avoid disputes along the way. For this reason, parties may want to seek legal advice to ensure that the agreement is enforceable and protects each party as it should.
Essentials of Share Purchase Agreements in Australia
Australian share purchase agreements typically contain several key elements aimed at clearly defining the transaction and the obligations of each party. Among these are representations and warranties, the purchase price and completion terms, as well as conditions precedent, indemnities, and dispute resolution clauses.
Pursuant to the provisions of the Australian Corporations Act, the seller of shares must disclose any latent defects in a company. Responsibility for such disclosures and for any breach of them can significantly reduce the purchase price or lead to the purchaser’s rescission of the agreement.
Representations and warranties included in Australian share purchase agreements are subject to caveatis. The buyer acknowledges that it has not relied on any such statements because they cannot be verified.
Australian share purchase agreements also include warranties, indemnities, limitations of liability and the recourse from those liabilities in the event of a breach. Other typical clauses include conditions precedent to the completion of the sale and provisions for the adjustment of the purchase price, which often includes the balance sheet. The agreement may contain additional clauses, such as confidentiality, buyer’s and seller’s covenants, the governing law, and dispute resolution clauses.
Legal Aspects of Share Purchase Agreements
When a purchaser and vendor are finalising the terms of a deal, there are a host of legal issues to consider, including the structure of the transaction, the capital gains implications, and the disclosure and warranties that should be contained in the sale agreement.
There are a number of legal issues that arise from a sale of a company that a purchaser should carefully consider, including the composition of the target company, its structure, and its financial status.
It is always best to seek advice in relation to the sale and purchase of shares, as the Corporations Act 2001 regulates the offer and sale of securities, including shares.
Many companies will issue rights attaching to their shares. For example, unlisted companies may issue options, convertible notes, or employee incentive rights so it is important to ensure that target company has not issued any options or convertible notes or that any outstanding rights have been exercised or fully disclosed.
A big factor involves determining whether the purchaser of the shares is buying a going concern, and whether the target company can be considered a ‘widely held company’. Registered office, the where tax returns and other business records are stored, and where the directors and shareholders meetings are held, all impact the location and type of company. A ‘widely held company’ has a number of advantages in relation to exemptions available in relation to Annual General Meetings and financial reporting obligations.
If the target company is an Australian company, there are restrictions and obligations under the Corporations Act in relation to the sale of shares or interests in the share capital. The Corporations Act requires a prospectus or a cleansing notice to be given to all purchasers when shares are sold, and purchasers should be particularly careful to ensure that they have not been given any false or misleading information in relation to their investment.
A seller who offers his shares at a premium is offering them at a different price than the market (unless the premium is attributable to a capital payment already made by the offeror at the time of issue of the original shares). The offeror must give an offeror’s statement to all offerees before the offer can be accepted, which is a document which contains a number of pieces of specified information regarding the nature and effect of the offer. The market price of shares must be calculated according to the formula specified in the Corporations Act.
The Distinction between Share Purchase & Asset Purchase Agreements
Differences Between Share Purchase And Asset Purchase Agreements In Australia
The fundamental difference between a share sale agreement and an asset sale agreement is that a share sale agreement is a sale of person i.e. a company who owns property whereas an asset sale agreement is a sale of property. In the case of an asset sale agreement the seller only sells property which it owns and in the case of a share sale agreement the entire company including its assets and liabilities are transferred to the buyer. An asset sale is less risky for buyers because they can choose who to buy from, what to buy, when to make a purchase and how it is to be financed. The downside of an asset sale is that all contracts must be assigned to the purchaser. This is not usually a problem where the seller sellers goods or provides services but it is a problem where the seller has contracts for a specific period of time or for the life of the contract. Advantages of an asset sale The obvious advantage of an asset sale is that the seller can leave the liabilities behind. It is preferable in some instances, e.g. when the company has lots of tax liabilities, to sell the company as a share rather than an asset sale. Often the business is doing well and it is worthwhile to the seller to sell the company because the new company will have no tax liabilities. Disadvantages of an asset sale The downsides of an asset sale outweigh the benefits in some cases as it may be necessary to obtain the consent of key customers before a change of ownership can take effect. An asset sale is also more expensive for the seller as it has to revert to the position it was in before the buyer arrived and this means that it may have to alter company share registers, open new bank accounts (unless there is an existing account) and re-issue shares. All of this can lead to delay and additional documentation. Both the seller and buyer will incur legal fees and when the transaction is an asset sale the seller’s legal expenses could equal a share sale. Difference of Share Sale In the case of the share sale the company and all of its assets and liabilities pass to the buyer. Any contracts such as loan facilities and other contracts remain with the company. However, for the buyer: If there is a holding company and subsidiary, the shares in the holding company will be sold. If a consolidation of shares is required there will be restrictions on issue of shares until the consolidation happens, and there may need to be a special resolution passed to approve the consolidation. This is not usually a problem. If the shares are to be ordinary shares and not preference shares, then there will not be any need to change the particulars of the share capital. They do not require a special notice as they are not preference shares. This will often do the trick. The same rules apply to restricted securities during a restricted period. The biggest advantage of shares sales is probably the fact that the sale does not require third party consent and hence is cheaper. However sometimes tax is an issue for the seller. Any marginal tax cap gain will be assessed as a 50% discount. A share sale may also be easier from a regulatory point of view because it does not trigger employee entitlements. Where employees are asked to move from one company to another, it can be a problem.
Structuring Share Purchase Agreements
Negotiating an S&P Agreement is generally a protracted exercise. What is not open for negotiation, though subject to adjustment depending on the circumstances, is the law governing the particular S&P Agreement. No matter how many variations or iterations of a S&P Agreement are floated at the negotiating table, the Australian legal concepts of warranties, indemnities, and guarantees will invariably make an appearance.
As outlined previously, an integration clause should be considered to be a ‘non-negotiable’ in any S&P Agreement as will be the use of both Liability Cap and Basket thresholds. These are generally the only ‘open and shut’ components of an S&P Agreement.
Common points of negotiation however include:
Australian law has in place a statutory duty of disclosure by sellers of securities prior to making a sale of their shares. The statutory duty of disclosure is very broad and requires sellers to disclose information which could influence the decision of a reasonable buyer. However, this duty is subject to significant limitations including:
To ensure that a seller’s financial documents have been prepared on a certain and presumed basis, a buyer should also include representations and warranties regarding the financial statements of the target, many of which are non-negotiable . In particular:
The buyer will want maximum surety from the seller via its ability to:
- include an exhaustive and reasonably tested warranty schedule
- negotiate broadly drafted indemnities with few exceptions
- provide specific disclosure against each representation and warranty – otherwise it is an unenforceable right to review an indefinite period of documents
- ensure no reliance is placed on the seller’s representations and warranties, all representations and warranties are qualified by the disclosure material, and that the scope of the seller’s liability is limited to the warranties and indemnities only
However, balancing these considerations are the seller’s preferences, which include the need to ensure that:
- its liability is limited to the warranties and indemnities only
- there is minimum liability under the indemnities – an undertaking to ‘use all reasonable endeavours’ is often included, and
- the scope of the indemnities are limited (the more detailed and comprehensive, the less negotiable they will be)
Common Issues in Share Purchase Agreements
The process of negotiating the terms of this agreement may throw up a few curve balls, each of which will need to be dealt with seemingly on the run. An issue may arise in relation to the purchase price, the treatment of the assets, the benefit and use of the premises, employees and contractors, issues that arise from the Target’s current dealings with competitors, and any pending legal proceedings or the outcome of investigations by government authorities. Unforeseen difficulties may arise particularly in relation to any long service leave or retirement payouts of staff. The takeaway point is that the parties (and perhaps their advisors) will need to draw on all their negotiating skills to bring the parties to a solution in relation to these critical issues.
Legal Counsel’s Role in Share Purchase Agreements
It is important to engage an experienced legal counsel for the drafting, reviewing and execution of an SPA to ensure that the SPA complies with the law and reflects the wishes of the buyer and seller and protects the interests of the buyer and seller. Expert assistance may be sought from an accountant on the valuation of the shares and a financial planner, tax and/or superannuation specialist on the taxation and superannuation ramifications of the acquisition. Legal advice on SPAs in Australia is provided by Australian lawyers and not financial advisers . The legal position and liability of Australian lawyers in the preparation and drafting of SPAs in Australia is strictly limited pursuant to the Australian Consumer Law and various Australian state-based professional negligence laws. Therefore, it is vital that the consultant provides only clear-cut instructions to the lawyer, gives relevant information, reviews the prepared documents carefully, obtains appropriate advice, follows the appropriate advice and acts lawfully.
