A share sale agreement is an agreement used when there is sale and purchase of the shares of a company. A share sale agreement is important from the perspective of a purchaser because it sets out the terms and conditions of the purchase of shares in a company. It provides legal protection to the purchaser by defining the rights and obligations of both the buyer and the seller. It is important to remember that when a purchaser purchases the shares of the company, they also purchase all of its liabilities, debts and problems.
The key terms that should be included in a share sale agreement to protect the purchaser are:
- Purchase Price: This specifies the price at which the shares are being sold. It is important to clearly state the purchase price to avoid any disputes over the valuation of the shares.
- Representations and Warranties: These are statements made by the seller regarding the shares being sold. These may include information about the company’s financial statements, assets, liabilities, and legal disputes. If the seller breaches any of these representations and warranties, the purchaser may have the right to seek compensation or cancel the agreement.
- Conditions Precedent: These are conditions that must be met before the sale can be completed, such as obtaining regulatory approvals or completing due diligence. It is important to clearly state these conditions to ensure that the sale is not completed until all necessary requirements are met. A lot of emphasis on this should be placed if the reason for purchasing the shares is because the company holds certain licenses or contracts that are valuable and essential to the purchaser. Do not that some licenses and contracts are terminated upon the transfer of shares, so it is important for the purchaser to understand this risks and do the necessary.
- Post-Completion Obligations: These are obligations that the seller must fulfill after the sale is completed, such as transferring ownership of the shares and providing access to relevant documents. It is important to specify these obligations to avoid any confusion or disputes after the sale is completed. The purchaser does not want to be in a position where the seller does not or refuses to cooperate.
If these key terms are not included in the share sale agreement, the purchaser may face several problems such as:
- Disputes over the purchase price, leading to delays or cancellations of the sale.
- The purchaser may not be able to seek compensation or cancel the agreement if the seller breaches any representations or warranties.
- The purchaser may not be able to seek compensation for liabilities and debts “hidden” or not disclosed by the seller.
- The purchaser may not have clear guidelines on what needs to be done before the sale can be completed, leading to confusion or unexpected delays.
- The seller may not fulfill their post-completion obligations, causing issues for the purchaser, such as difficulties in obtaining relevant documents or transferring ownership of the shares.
- Any penalties or liabilities incurred by the previous shareholders are passed over to the new shareholders and controllers of the company (the purchaser). The Purchaser cannot “ignore” them just because it happened before they were the shareholders. Penalties or liabilities by Companies Commission of Malaysia (CCM), Bank Negara Malaysia (BNM) and such other agencies will have to be paid by the company (and the purchaser).
- Debts to suppliers, clients or loans of the company are to be taken over by the purchaser; even those which were not disclosed or made aware to the purchaser when purchasing the shares.
Overall, a share sale agreement is important for a purchaser as it provides legal protection, ensures transparency and helps to avoid any misunderstandings or disputes.