Share purchase agreements – what you need to know

Share Sale & Purchase Agreements will generally include the following:

Selling the Shares

A provision relating to the procedure as to when the shares in the business have been transferred. This may include a mechanism for the previous directors in the company to resign, new directors to be appointed and other Companies House formalities which may need to be undertaken.

Warranties

These are statements given on completion by the seller to the buyer which will relate to the business and give the buyer some protection over issues of concern they may have about the target business.

The purpose of a warranty is two-fold:

  • To give the potential buyer some protection in the case that the seller has not been as forthright as to some of the details of the business; and
  • To extract some key information from the seller which he may not have otherwise volunteered and would affect the purchase price and whether the potential buyer would want to purchase the company altogether.

Disclosure Letter

This document is a chance for the seller to provide information to the buyer where the actual position is not as stated in the warranties. This allows the Seller to reveal certain information to the buyer which may protect them once completion has taken place.

Seller’s Protection

This clause will attempt to limit the liability which will be placed onto the seller. The seller’s solicitors will attempt to do this by limiting the scope of their client’s potential liability, the amount of time in which they are to be liable for warranties, the total amount they are to be liable for and minimum thresholds for liability.

Indemnities

During the due diligence procedure certain issues may be found by the buyer, if this is the case, he may seek certain indemnities from the seller that these issues will not arise in the future.

Restrictive Covenants

This clause is placed into the Agreement in order to prevent the seller from interfering with the business after completion has taken place. Restrictive covenants should be drafted very carefully to ensure that they are enforceable by the buyer. If they are drafted too vaguely or too strictly, they are likely to be unenforced by the court.

These tips courtesy of Darlingtons, solicitors in London. Thanks.

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