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The sale and purchase of shares are a standard part of business in the UK. Most share transactions occur intending to take control of a private company. However, depending on the size and value of the target company, it may be necessary to purchase some shares (rather than all) and seek to increase your shareholdings over time. This article will explore how the inclusion of important wording within a well-drafted share purchase agreement can help finalise the purchase of a company’s shares.
Most Common Share Transactions
The two main forms of company share transactions in the UK are partial and complete share purchases.
As the names suggest, partial share purchases involve a buyer purchasing some (but not all) shares in a UK private limited company. So naturally, complete share purchases involve a buyer intentionally purchasing all of a company’s shares.
The primary purpose of the latter is to gain control of a company and its finances. However, it is common for buyers to take a long-term view of obtaining possession of a business and make multiple partial share purchases until they own enough shares.
Why Are Share Purchase Agreements Essential?
UK regulations require the recording of share purchases in writing. Therefore, share purchase agreements are vital between seller and purchaser as evidence of the deal. Typically, parties wish to avoid debate about whether they agreed on a sale of ‘13’ or ‘30’ shares. Accordingly, a share purchase agreement avoids such disputes.
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1. Manner and Method of Purchase Payment
Once a purchase price is in place for the shares, you should detail how and when the purchaser will pay it.
It is then helpful to consider the following:
- whether you wish the share purchase price to be paid as a lump sum or in instalments;
- whether you wish to negotiate a fixed or flexible purchase price (a flexible purchase price might increase depending on certain factors within, for example, a year of sale); and
- how the purchase monies should be transferred.
You must provide enough detail about the date for the transfer of purchase monies rather than fixating on the purchase amount alone.
2. Confirmation of Completion Paperwork
You must complete specific documentation upon the conclusion of a share purchase. These documents may relate to:
- corporation tax liability;
- completion accounts; and
- correspondence with Companies House.
A well-drafted share purchase agreement will confirm the documentation requirements relating to the share exchange and which party takes responsibility for doing so. It should also clarify the timeframe for completing each piece of documentation. Naturally, the point of doing so is to clarify which party has responsibility for each piece of paperwork to make sure to include all.
3. Non-Competition Clauses
No one wants to take control of a company by purchasing all its shares and find the share seller immediately starting a rival company. After all, one of the reasons for buying the company is to make a profit. Accordingly, encountering new competition can hinder this.
In this way, many share purchase agreements contain anti-competition clauses. These are also known as restrictive covenants, which restrict the share seller from starting a rival business within a prescribed period. This helps give the purchaser certainty that the company can focus on internal matters rather than a competitive rival in the initial period after a share sale.
4. Indemnity Provisions
An indemnity clause can clarify that any material breach of the share purchase agreement will lead to financial compensation. Some clauses will specify the minimum or maximum level of remuneration, while others will clarify that any financial loss caused by a contract breach is recoverable by the innocent party.
Key Takeaways
Parties should evidence share asset purchases in writing. In most circumstances, a share purchase agreement is suitable. This document aims to ensure that all parties have absolute certainty on the rights, obligations and responsibilities of each other. The share purchase agreement is the primary document to consult if any legal dispute arises. Moreover, its existence usually prevents disputes from reaching a final hearing.
If you need help negotiating and finalising a share purchase agreement, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Particular regular requirements require written confirmation of any share purchase. A share purchase agreement helps the buyer and seller (and relevant company) stay on the right side of UK rules and regulations.
The majority of share purchase agreements will require the parties to keep certain information confidential from others. Most documents will require the parties to avoid details of negotiations becoming public and any confidential information belonging to the relevant company.
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