This document sets out the basic requirements in a business sale agreement for sale of shares.
Sale of share agreements are often complex and will need to be customised for each particular transaction.
Share or asset sale?
When parties enter into negotiations relating to the sale of a business (where that business has a company structure), the parties must decide whether the business will be sold by:
- selling the shares of the company; or
- selling the assets of the company.
This decision will dramatically affect the issues to be considered by the parties, the due diligence investigations to be undertaken and ultimately the type of agreement to be reached.
Purchasers of businesses generally prefer to buy assets rather than the shares of a company. The risk is often higher in buying shares, as the purchaser will become responsible for the historical, actual and contingent liabilities of the business. However, there may be very good commercial reasons to prefer a share sale transaction when purchasing a business. Among other things, benefits include potential tax concessions.
When selling or purchasing a business through a share sale, there are numerous matters which must be considered.
There are regulations which govern the purchase of shares. For example, if the company is a listed company, (ie, one for which shares are traded on the Australian Securities Exchange (ASX)) the agreement needs to comply with the ASX Listing Rules. The Corporations Act 2001 (Cth) also set outs certain requirements relating to shareholders, voting rights and acquisition of shares. Practitioners should familiarise themselves with these requirements.
Regulatory approvals may also be needed. For example, the Foreign Acquisitions and Takeovers Act 1975 (Cth) regulates foreign ownership of Australian Companies. The Competition and Consumer Act 2010 (Cth) provides the Australian Competition and Consumer Commission (ACCC) with the power to determine whether the acquisition of shares by a specific purchaser would have the effect, or be likely to have the effect, of substantially lessening competition in Australia as a whole or in a state or territory in Australia.
Among numerous other matters, practitioners should also consider:
- tax implications relating to the sale;
- value of the shares to be sold;
- the warranties required from the seller of the shares (warranties would cover issues such as the conduct of the business, the ownership and completeness of assets, its financial and tax position, compliance with the law, potential litigation and environmental issues);
- indemnities required from the seller (including the seller indemnifying the buyer for any tax liability);
- conditions document for the particular transaction;
- the type of due diligence process to be followed and the type of issue to be canvassed in the due diligence process; and
restraint of trade requirements.
This document has been authored for Lexis Nexis by Jeremy Kriewaldt, Partner, Atanaskovic Hartnell and Elise Margow, Principal, Legally Speaking.
This document is prepared with the assistance of Specialist Editor Murray Landis, Partner, K&L Gates.