There are various reasons why shareholders may decide to sell their shares in a company: to retire, to start a new business, to raise money, to cut ties with the other company investors, as an exit strategy etc.
Keep reading for more information about sale of share agreements as well as an overview of the legal procedure involved when shares in an Australian private company are sold.
Overview of Share Sales
During a share sale, a selling shareholder may sell part of or all of their shares. Whichever they choose, a shareholder can dispose of their shares through a share sale agreement, wherein the shares are offered to other shareholders (or to external third parties, if the shares were not acquired by other shareholders). for an amount of money.
Transfer of Shares
Before you think about drawing up a sale of share agreement, you need to consider the following:
1. Is the company best placed to sell the shares at the given time?
Will you get the best value for your shares selling at this time? It generally takes a little bit of planning to achieve the best sale price.
2. Do your shareholders approve?
Sometimes you will run into issues bringing another shareholder on board. Do other members of your company approve of the new potential member?
3. Are there any specific clauses in the shareholder agreement/ constitution that prohibit the sale?
Examples of these clauses are preemptive rights under the shareholder agreement, drag along tag along options, etc. These can prevent you from offering your shares first to third parties or compel you to sell your shares to third parties.
4. Are you a director of the company and need to resign?
Normally, in smaller to mid-sized companies, you do not want to continue being a director if you sell all of your shares in the company unless there is some sort of a remuneration.
5. Does a deed of accession need to be made with respect to the new shareholder?
With a deed of accession, the new shareholder will be bound by the existing shareholder agreement in place.
Registration of Shareholders
Once the transfer is signed and delivered, the names of the buying parties will be entered in the shareholder register.
Within 28 days after the issuance of shares to the new owner, the company must inform the Australian Securities and Investments Commission (ASIC) about the transfer by lodging a change to company details. The form should include information about:
- the number of shares sold;
- share class codes;
- agreed purchase price for each of the shares; and
- amount unpaid on each of the shares (if applicable).
What is a sale of share agreement?
A sale of share agreement is used to formalise the transfer of share ownership from one shareholder to another so that the transaction occurs smoothly. Generally, the document contains the number of shares being sold, the selling price, and obligations relating to the sale.
What is in a good sale of share agreement?
When preparing a sale of share agreement, make sure that it includes the following:
- details of parties (buyer and seller)
- number of shares to be purchased
- total purchase price
- settlement date
- duties and obligations of the parties in relation to the sale
- pre-sale conditions (e.g. licence approvals, consents, etc.)
- seller’s warranties and indemnities (for undisclosed tax liabilities)
- restrictive covenants and non-compete clauses
- remedies in the event of default
- variations and waivers
- completion arrangements
Frequently asked questions about sale of shares
When selling capital assets like shares, you either make a capital gain or capital loss. In the year you sold shares, you need to report these gains or losses in your tax return. The capital gains you made will then be added to your assessable income and referred to as capital gains tax (CGT)
Yes, the agreement will show that both vendor and purchaser agreed to the sale and the terms and conditions of it.
Contracts will generally have a termination clause. If that's what you're thinking of doing, then make sure you abide by the termination clauses under your contract.
Generally, it is a solicitor who will draft the agreement and then you negotiate thereon.
Anything! These could be:
- breach of warranties
- not purchasing what you initially intended to purchase
- disapproval by shareholders
- over-inflated value of shares
- failure to meet condition precedents under a contract e.g. transfer of lease/licences, etc.
These are just some of the reasons why you need a lawyer to review your sale of share agreement.
How TNS Lawyers can help you
One of the most straightforward ways to transfer partial or full ownership of a business is through buying and selling shares. However, like with most commercial transactions, share sales could lead to complex issues.
With extensive experience in the purchase and sale of businesses, we can help you achieve the clean break you deserve. Protect yourself from post-sale liabilities by engaging a lawyer who can draft and/or negotiate a fair sale of shares agreement for you.
For more information about share sales, mergers and acquisitions, and other corporate law matters, arrange a consultation with our lawyers on (03) 9052 3214. You can also email us at firstname.lastname@example.org or send in your enquiries using the contact form below.
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