Share purchase
The purchase of shares constitutes the purchase of a company’s operating business, but none of the existing contracts with the company change. If a shareholder sells their shares in a company, then they achieve a complete break in the relationship between them and the target business. The buyer, however, will insist upon some contractual promises about the company (warranties) which will continue to bind the shareholder after the sale.
A typical Share purchase agreement will deal with the following matters:
Selling the shares
Once the shares in the target business have been transferred, ownership will pass to the buyer. It is likely that the buyer will want to appoint new directors, auditors, etc. The buyer may also want to remove the current officers.
Warranties
Warranties are contractual statements made by the seller on completion relating to the target business. They have two purposes:
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to 'flush out' any information which the buyer ought to know and which could affect the value of the company, or even the buyer’s decision to buy the business
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to give the buyer some comfort in the event that the business is not as the seller represented to them (eg the company may have some hidden problem or litigation)
While warranties are beneficial, the party giving them must be able to stand by them. When a buyer purchases shares, any warranties given by the seller are given by them personally. For more information, read Warranties in share purchase agreements.
Restrictive covenants
Restrictive covenants prevent the seller from competing with the buyer for a limited time once the sale is finalised. They may include:
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a non-competition clause that prevents the seller from setting up a business in competition with the buyer
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a non-solicitation clause that prohibits the seller from soliciting the buyer’s customers or suppliers
On their face, restrictive covenants are particularly important for the buying party, as immediate competition by the seller could harm the new business or significantly impair it. The covenant in question must be no more than adequate to protect the business interest, the reasonableness of the duration or scope of any restraint being tied to the nature of the interest in question.
Advantages of SPAs
No third-party involvement
The buyer will step into the seller’s shoes as shareholder or director, however, the company’s employees, contracts and properties will remain in the company’s ownership. There is, therefore, no need for the assets of the company to be transferred, thus a share sale can often be completed without any third party involvement. A share purchase, therefore, is often a lot more discreet than an asset purchase.
No liability for debts
At completion, the seller of shares will have no liability for the debts of the business, which become the responsibility of the new owners. This is because a company has a separate legal personality from its directors and shareholders. By comparison, if there is an asset sale, then, with a few exceptions (eg employees), the seller will keep all the current liabilities of the business, unless he can negotiate with the buyer to take them over with the business.
Disadvantages of SPAs
Inheriting outstanding problems
The buyer will inherit the seller’s company, which means they will also inherit any problems (eg outstanding tax bills) that exist at the date of the sale.
Risk
Because the buyer inherits a company, the share purchase generally involves far greater risk than an asset purchase. This justifies the inclusion of warranties, which are necessary to protect the buyer. For more information, read Warranties in share purchase agreements.
National security notification requirements
Business acquisitions, including share purchases, may require mandatory notification or qualify for voluntary notification to the government under the National Security and Investment Act 2021. Notification enables parties involved in an acquisition to attempt to obtain clearance for their acquisition from the government, removing the risk of their challenging it later on.
A acquisition qualifies for voluntary notification if:
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the acquisition is of an interest or right in (or in relation to) a certain type of asset or entity (eg a company via share purchase)
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the asset or entity has a connection with the UK
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a certain level of control (eg ownership) over the asset or entity is transferred (eg via voting rights), and
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the acquisition was not completed before 12 November 2020
An acquisition of an entity that qualifies for voluntary notification under the criteria above may also require mandatory notification if the entity operates within certain specified areas of the economy that pose a risk to UK national security. For example, artificial intelligence (AI), computing hardware, communications, energy, or transport.
For more information, read the government’s guidance on acquisitions that could harm national security.
Post-completion requirements
Following completion (ie the singing of the agreement), there are a few steps the buyer will need to take:
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payment of stamp duty
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filing notices of directors’, secretaries’ and auditors’ appointments and resignations at Companies House and
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integration of the target company into the buyer’s group (including VAT, payroll, etc)
A share purchase agreement itself is a private document and there is no requirement to file it with Companies House. However, you should notify Companies House of the change of share ownership in the target company’s next annual return.
