The startup’s share sale agreement guide

By Vivian Michael | Shares

How to use a share sale agreement

A share sale agreement outlines sale terms between a share seller and buyer.

And, a share sale agreement is not to be mistaken for a shareholder agreement because they have 2 different roles. 

This difference means it's not ideal to replace a share sale agreement with a shareholder agreement.

So what exactly are these differences ?

In a nutshell, a share sale agreement deals with share sale terms.  And not all sale terms are going to be relevant to current shareholders; that's the most important reason why sale terms should not go into the shareholder agreement. 

A shareholder agreement typically deals with the rights and responsibilities of all existing shareholders, that is, what can happen during and after being a shareholder; there's typically no mention of sale terms or sale warranties because they are not relevant to current shareholders.

I am pointing this out upfront to avoid confusion and address the myth that one of the agreements can be avoided altogether. 

So, this then leads us to what goes into a share sale agreement.

And if you are short on time, in a nutshell, the items in the quick nav menu below go into a share sale agreement. 

Now, while many share documents are uselessly long, below are the key clauses in a share sale agreement.

Now if you do want the details, you can read the points below.

Share sale terms

First, important information about the key share sale terms like the price, class and payment due date are all share sale terms that are in a share sale agreement.

And in addition to the sale terms, purchase conditions like the ones described below are usually included.

Purchase conditions

What purchase conditions are usually in the share sale agreement ?

Purchase conditions are rights the buyer has before the share sale and below are some examples of purchase conditions:

  • a verified copy of the financials; and
  • corporate consents for the share sale.

Additionally, the seller may make some statements and promises to the buyer about the shares, these are usually called representations and warranties and are described below. 

Representations and warranties 

So what are representations and warranties ?

Simply, representation is a true statement and a warranty is a promise. 

A seller needs to be careful that they only include representations and warranties about the sale shares that they know to be true

Why is truth so important ?

This is because false representations and warranties can lead to a claim against the seller.

And, in addition to representations and warranties, there may be some conditions that the seller needs to meet before the sale is complete. These are commonly called pre-completion conditions and are described below.

Pre-completion conditions

Why are pre-completion conditions important ?

Pre-completion conditions are important actions the buyer can take before the share sale and may include checking property and documents to give themselves comfort about what they are buying.

Also, pre-completion conditions may cover how the business must be run right up until the share sale is complete, again for the buyers peace of mind.

Below are some typical pre-completion conditions:

  • run the business as usual; 
  • comply with laws and contracts; 
  • maintain business relationships;
  • use best efforts to keep existing employees; and
  • not transfer any assets outside of usual course of business; and
  • not create any mortgage or security interest.

Now, you can expect a larger share sale to attract more of these above conditions. And a smaller share sale may not attract this many conditions.

And to find out what happens at the final stage of completion, read on.

Completion - what happens ?

Completion refers to the date that money is going to change hands between the share buyer and seller and what needs to happen on that day.  

So what happens if there is a default or termination ?

Termination & default clause

If there is a default or the agreement is terminated, the termination and default clause covers what happens next and below are some examples of termination and default solutions: 

  • either the buyer or seller can give each other a completion notice; and
  • the completion notice can give additional time to fix a problem e.g. 14 days to provide a document etc. 

And what happens if a default is not fixed ?

If a default is not fixed, then the other party may be able to terminate the agreement or take other steps called 'default remedies'. 

So what exactly is a default remedy ?

A default remedy is simply what needs to happen to fix a problem between the share buyer and seller, like: 

  • terminate the agreement;
  • specific performance - take steps to meet agreement terms; 
  • damages - damages for breach of contract; and
  • resell shares to another buyer.

And what about duties ? Who is responsible for duties ? read on.

Duties

The buyer usually pays duties (like stamp duties and interest) but you should clarify this in the share sale agreement to avoid disputes.

Also, to avoid disputes, a general dispute resolution clause as described below can be useful.

Finally, solving disputes

A good dispute resolution clause can save you money.

So what's the point of a dispute resolution clause ?

The idea is that all parties to the share sale agreement attempt informal dispute resolution before going to court. 

Importantly, a dispute resolution clause does not mean that you are waiving your right to go to court altogether. It gives you a chance to settle a problem before it goes to court.

Do you need help from an Australian business lawyer for startups? Contact us today for help on info@michaellawgroup.com.au or 1300 478 278 Australia wide or on +61 2 9151 7233 from overseas. We are always glad to help.





About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to startups that would otherwise DIY, rely on legacy contracts or go without.

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