Buying a business by purchasing the shares in a company can often be simpler than buying the assets of the business itself.

A key reason for this is that contracts with customers, suppliers, and employees can usually stay in place. Whilst the idea of purchasing all of the shares in a private company may appear reasonably simple once you've agreed on a purchase price, as a buyer there are several important documents and steps required to ensure you obtain proper legal title to the shares and, indirectly, the business.

Share sale agreement

The longest and most detailed document you will need when purchasing a company's shares is a share sale agreement. It's very important that this document is given the attention it deserves. A properly drafted share sale agreement will, among other things, set out the following material terms:

• the number of shares you will purchase;
• the purchase price for the shares;
• whether you will pay for the shares in a lump sum or by instalments;
• any conditions that need to be satisfied before the sale can complete, for example, the landlord's consent;
• the obligations on completion required to transfer legal ownership of the shares;
• any warranties to be provided by the seller regarding the shares, business, and company;
• any non-compete provisions preventing the seller from operating a similar business after completion; and
• confidentiality and dispute resolution provisions.

Negotiation

Usually, the seller's lawyer will draft the share sale agreement, and your lawyer will review it. During negotiations, your lawyer's role is to strike the right balance between the seller's position and your position (as the buyer). More often than not, the seller's lawyer will draft the share sale agreement to be very favourable to the seller. Therefore, you should prepare yourself for several rounds of negotiations, which can take anywhere from a few weeks to a few months. A skilled lawyer will guide you through this process and explain the critical legal points.

The most heavily negotiated points often relate to what will happen if there is a breach or disagreement in the future. For example, limits on the seller's liability where one of the seller's warranties (otherwise known as promises) is untrue, and the amount of time you have to bring a claim, are areas of particular focus for the buyer's lawyer.

There are standard warranties included in most share sale agreements. However, the most important will be those specific to the business in question including, for example, the seller stating that it is not aware of any reason a customer of the business might seek to terminate a supply contract.

Due diligence

Buying a business through the purchase of shares in a company results in the buyer taking ownership of its past trading risks. This can include debts to the Australian Taxation Office and other creditors, or work done for customers.

The first step to protect yourself from any such risks is to complete a thorough due diligence on the company. This can involve both legal and financial due diligence. Your lawyer can assist by conducting searches of the company and reviewing key contracts. For example, you should ensure that the contracts adequately lock in key clients.

Your accountant or financial adviser can review the business's financial records to provide you with details concerning:

• the value of the business; and
• risks relating to taxation, payroll, and superannuation.

Due diligence can occur before or after you have signed the share sale agreement. If after, the agreement should include a condition precedent which allows you to walk away from the purchase if you discover anything unsatisfactory. You can also address any risks that you uncover by including additional warranties.

Completion obligations

The share sale agreement will set out various completion obligations. These are obligations that you and the seller must comply with and include documents that the seller must hand over at completion. Many of these will relate to assurances about the seller's ability to sell the shares and the company's approval of the sale. Also, there must be approval of the change in control relating to the shareholders and directors.

Generally, the following documents will be required:

1. Directors' resolution – a written resolution signed by the directors approving the transfer of the shares, cancellation or issue of share certificates, and any director resignations or appointments.
2. Shareholders' resolution – a written resolution of the shareholders approving the transfer of the shares and accepting the waiver of any pre-emptive rights.
3. Waiver of pre-emptive rights – the shareholders will sign this waiver to confirm that they are not enacting their rights to purchase the shares.
4. Share Transfer Form – a form which sets out the transfer of the shares from the seller to you (as buyer), and the purchase price paid for the shares.
5. Share Certificate – the seller's share certificate will be cancelled, and a new share certificate issued to you.
6. Appointment/removal of directors – the current directors will need to provide signed notices of resignation, and the new directors will need to sign letters of consent to act.

Shareholders' rights

If the company has a shareholders' agreement and a constitution, you should review these documents to ensure that the sale complies with all relevant requirements.

If a shareholders' agreement exists, it will usually provide shareholders of the company with 'pre-emptive rights' to purchase the shares of a selling shareholder. This means that current shareholders have the first right to buy shares being sold by the seller. If they have this right, then all of the continuing shareholders will need to sign a waiver of their pre-emptive rights if the shares are being sold to a third party.

Notifying ASIC

Once a share sale transaction has completed, the company must notify ASIC within 28 days of the changes to shareholders, directors, and any address changes. You can do this by completing a Form 484 available on the ASIC website.

For personalised advice on buying a business via a share purchase, contact Hardies Lawyers today. Explore our blog for more insights into business succession planning and stay informed about the latest strategies to future-proof your business.

Disclaimer: This article is for educational purposes only and does not constitute legal advice. You should seek legal or other professional advice before acting or relying on any of the content.