Share Sale Agreement: Buying and Selling Shares in Australia

Author: Petro Kaloterakis, Progressive Legal

Are you looking to buy shares in a company or sell your own? Are you buying to take a leap into new business? Maybe you want to sell some shares for profit or perhaps it’s just time for you to move on in business. If this sounds like you, the share sale agreement is a cornerstone document.

If you’re a business owner, investor, or legal professional in Australia, it’s essential to understand this crucial agreement. This guide will help you understand what a share sale agreement is, why you need one, and what to consider when drafting it. Let’s break down the details to ensure you’re well-prepared for your next business move.

What is a share sale agreement?

A share sale agreement is a legal document outlining the terms and conditions of the sale and purchase of shares in a company.  

It’s essentially a contract between the seller (the one selling the shares) and the buyer (the one buying the shares). This agreement is designed to ensure both parties are on the same page about their rights, obligations, and the specifics of the transaction.

Why is a share sale agreement needed?

So, why bother with a share sale agreement? Here are a few good reasons:

1. Clarity

It lays out the details of the transaction, including the number of shares being sold, the price, and payment terms.

2. Legal protection

It legally documents the terms of the sale, protecting both parties.

3. Dispute prevention

It helps prevent misunderstandings and disputes by clearly outlining each party’s obligations and rights.

4. Regulatory compliance

It ensures that the transaction adheres to Australian corporate law and regulatory requirements.

What do I need to consider when creating a share sale agreement?

You need think carefully and thoroughly when creating a share sale agreement. To ensure it’s comprehensive and legally sound, here are some key considerations:

Valuation of shares

Determine the value of the shares being sold. This can be done by mutual agreement between seller and buyer or through methods like asset-based valuation, earnings-based valuation, or market-based valuation. 

Due diligence

Conduct thorough due diligence to assess the financial health and legal standing of the company whose shares are being sold. It is also important to consider the percentage ownership and any restrictions on the shares being purchased.  

Regulatory requirements

Ensure the transaction complies with all relevant laws and regulations, including the Corporations Act 2001 (Cth), specifically those relating to:  

Members’ rights and remedies: Chapter 2F ensures the rights of minority shareholders are protected. Any sale should not unfairly prejudice the interests of any shareholder. 

Takeovers: Chapter 6 regulates the acquisition of control over companies, including the requirement for takeover bids if acquiring a substantial interest. 

Financial assistance: Section 260A restricts companies from financially assisting someone to acquire shares in the company unless specific conditions are met. 

20% rule: Section 606 prevents a person from acquiring more than 20% of the voting shares in a company without making a formal takeover offer. 

Tax implications

Think about the tax implications for both the seller and the buyer. It’s a good idea to get advice from a tax professional, but here’s something to consider.  

In Australia, selling shares usually triggers capital gains tax (CGT). The seller may need to pay CGT on any profit made from the sale.  

The tax payable depends on various factors, including how long the shares were held and the seller’s overall taxable income. Some CGT concessions or exemptions might apply, especially for small business entities. 

Consent and approvals

Check if any consents or approvals are required from third parties, such as other shareholders or regulatory bodies.

Key terms to include in a share sale agreement

A solid share sale agreement should include the following key terms: 

1. Parties involved

Clearly identify the seller and the buyer. 

2. Description of shares

Detail the class and number of shares being sold. 

3. Purchase price

Specify the purchase price and payment terms. 

4. Warranties and representations

Include warranties and representations from both parties about the accuracy of information provided and the legitimacy of the transaction. 

5. Conditions precedent

Outline any conditions that must be met before the transaction can be completed. 

6. Completion date

Specify the date when the transfer of shares will be completed. 

7. Confidentiality

Include confidentiality clauses to protect sensitive information. 

8. Governing law

Specify the governing law (typically the laws of the state in Australia where the company is incorporated). 

9. Dispute resolution

Outline the process for resolving any disputes that may arise. 

Is a share sale agreement legally binding?

A share sale agreement is legally binding, but only if it meets certain requirements under Australian law. Here’s what needs to happen: 

1. Offer and acceptance

The seller offers to sell shares under specific terms, and the buyer accepts these terms. 

2. Consideration

The purchase price paid by the buyer for the shares. 

3. Intention to create legal relations

Both parties must intend for the agreement to be legally binding. This is typically demonstrated through the formal drafting and signing of the agreement. 

4. Legal capacity

The parties involved must be of legal age and sound mind to enter into the agreement 

5. Consent

The agreement must be entered into freely and voluntarily by both parties. 

6. Legal purpose

The purpose of the agreement must be legal. A share sale agreement for the transfer of shares in a legitimate company clearly meets this criterion. 

Once both parties sign the agreement, they are obligated to adhere to its terms. Breaching the agreement can result in legal consequences, including potential financial damages.

Other documents needed when buying and selling shares

In addition to the share sale agreement, several other documents may be required when buying and selling shares: 

Share transfer form

This is a form that records the transfer of shares from the seller to the buyer.

Board resolutions

These are resolutions from the company’s board of directors approving the sale and transfer of shares.

Shareholder agreements

Shareholder agreements are existing agreements that may affect the sale, such as pre-emption rights or buy-sell agreements.

Disclosure letters

These are documents that disclose any potential issues or liabilities associated with the company.

Tax clearance certificates

Certificates confirming there are no outstanding tax liabilities.

Relevant ASIC forms

These are forms used by ASIC to update the Company details and members register. ASIC must be notified within 28 days if any transfer of shares occurs.

Practical tips for drafting a share sale agreement 

1. Engage legal counsel

Always seek legal advice when drafting a share sale agreement to ensure it meets all legal requirements and protects your interests.

2. Be specific and clear

Avoid ambiguous language. Be as specific and clear as possible about the terms of the agreement.

3. Review and revise

Regularly review and revise the agreement to ensure it remains relevant and accurate. 

4. Tailor to specific needs

Customise the agreement to suit the specific needs of the transaction and the parties involved. 

Key takeaways

A share sale agreement is crucial for business transactions, providing a clear and legally binding framework for the sale and purchase of shares. It protects the interests of both parties and ensures the transaction complies with Australian laws and regulations. 

Taking the time to draft a comprehensive share sale agreement is an investment in the success and legality of your transaction. By seeking professional advice, you ensure your agreement is robust and addresses all necessary considerations, including tax implications like capital gains tax. 

At Progressive Legal, our experienced corporate lawyers create tailored, legally sound share sale agreements. Let us help you navigate the complexities of your next share transaction with confidence and peace of mind. Make an enquiry below or give us a call on 1800 820 083 today to get started.

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