By the time the share purchase agreement arrives, you've usually signed heads of terms and spent weeks answering the buyer's questions. Then a long contract lands, written by the buyer's solicitor, and most of it seems to be about what you'll owe if something goes wrong.
That's broadly right. The buyer relies on the contract for its protection, so its solicitor writes a lot of it in, and your solicitor's job is to keep it reasonable. The main clauses follow in the order they usually appear, with what each one means for you and where the negotiation tends to happen.
It covers a share sale. If your company is selling its business and assets instead, the document is an asset purchase agreement, which works in a similar way. Our guide to share sales and asset sales explains the difference.
The parties and what's being sold
The sellers are everyone selling shares. If there's more than one of you, check whether each seller is liable only for their own share of any claim or for the whole of it. The buyer is often a company. If it's newly formed and part of the price is paid later, ask for a guarantee from someone with money behind them.
You'll confirm that you own the shares outright and have the right to sell them. These are sometimes called the fundamental warranties, and buyers often ask for them to sit outside the limits on claims described below.
The price and how it's paid
This clause sets the headline price and how it reaches you. Some is paid on completion. Some may be paid later, as fixed deferred payments or as an earn-out that depends on how the business performs. Our guide to earn-outs and deferred consideration covers the risks of money paid later.
The price is often adjusted for the cash, debt and working capital in the company. Either accounts are drawn up as at completion and the price moves to match, or the price is fixed from an earlier balance sheet and you promise not to take value out of the company after that date. Make sure the method and every definition it relies on are clear.
Look for a retention, where part of the price is held back, often in a separate account, to cover claims. Negotiate the amount, how long it's held, when it's released and who gets the interest.
Conditions and the time before completion
Some sales are signed and completed on the same day. If there's a gap while a landlord or regulator gives consent, the agreement lists the conditions that must be met first. It also restricts what you can do in between, such as paying dividends or signing large contracts without the buyer's agreement. Make sure those restrictions still let you run the business normally. The buyer may also ask you to repeat the warranties on completion day, so anything that changes in between needs disclosing too.
Completion
This clause lists what each side hands over on the day. From you, that usually means signed stock transfer forms, the share certificates, letters of resignation from any directors who are leaving and board minutes approving the transfer. The buyer pays the money due and then pays Stamp Duty on the transfer. Companies House must be told about changes of director within 14 days.
Use this clause to tidy up your own position. Any loan you've made to the company should be repaid, and any loan from the company to you settled. Ask for the buyer to release or replace personal guarantees you've given for the company's borrowing or lease. GOV.UK says that if company finance is secured on your personal property, you must tell the lender within 21 days of the sale.
Warranties
Warranties are statements of fact about the company, usually a long schedule of them. They cover the accounts, tax, staff, contracts, property, disputes, compliance and much else. The buyer relies on them in deciding to buy and what to pay.
If a warranty turns out to be untrue, the buyer can claim damages. It has to show the breach reduced the value of what it bought, and it's expected to keep its loss down. Your solicitor will try to soften the warranties. The usual ways are these.
- Deleting warranties you can't give, or that don't apply to your business.
- Limiting some to what you're aware of, such as threatened disputes.
- Limiting others to a recent period, such as disputes in the last few years.
- Adding "material" so trivial points don't count.
Read every warranty yourself. You know the business, and a warranty that's wrong is a claim waiting to happen, however carefully it's worded.
Indemnities and the tax covenant
An indemnity is a promise to repay the buyer pound for pound for a specific loss, such as the cost of a known dispute. It doesn't depend on the value of the shares falling, and disclosing the matter doesn't stop a claim, which is why buyers ask for indemnities for problems they've found in due diligence. Keep indemnities to named matters with a cap and a time limit. Ask for the right to handle any claim that triggers one.
A share sale usually includes a tax covenant, sometimes as a separate tax deed. You promise to pay for any tax the company owes for the period before completion that wasn't provided for in its accounts. It's standard, but its scope and limits are still worth negotiating.
Tax claims usually get a longer time limit than other warranties, because HMRC can look further back. It can normally assess a company's Corporation Tax up to four years after the end of the accounting period. That stretches to six years where the loss of tax was careless, and to 20 years where it was deliberate.
The disclosure letter
The disclosure letter is your document, prepared with your solicitor and handed over when the agreement is signed. It lists anything that would otherwise make a warranty untrue. A matter that's fairly disclosed can't usually be the subject of a warranty claim, so this is your main protection.
It usually has two parts. General disclosures cover things like the accounts and the records at Companies House. Specific disclosures are set against particular warranties, with enough detail for the buyer to understand the issue. Buyers tend to resist treating everything in the data room as disclosed, so don't rely on that.
Go through the warranties line by line with your accountant and whoever runs each part of the business. A disclosure may lead the buyer to ask for an indemnity or a lower price, but that's a conversation now rather than a claim later.
Limits on claims
Without limits in the contract, the Limitation Act 1980 normally gives a buyer in England and Wales six years to bring a claim on an ordinary contract, and 12 years if the agreement is made by deed. So the limits in the agreement matter, and they're usually in a schedule of their own.
- A cap. The most you could pay in total, often set by reference to the price.
- A minimum claim. Claims below a set amount are ignored altogether.
- A threshold. Claims must add up to a set amount before any can be made. Check whether the buyer can then claim the whole amount or only the excess.
- Time limits. Separate deadlines for general warranty claims and tax claims.
- The buyer's knowledge. No claim for anything the buyer knew about before signing.
- Other protections. No claim for anything provided for in the accounts, or for losses the buyer recovers elsewhere.
Restrictive covenants
You'll promise not to compete with the business or approach its customers and staff for a period after the sale. The buyer is protecting the goodwill it has paid for, and covenants that go further than that may not be enforceable. Negotiate how long they last and what they cover. Make sure they don't catch anything else you own or plan to do.
Warranty and indemnity insurance
On some deals the buyer takes out warranty and indemnity insurance. The insurer then takes the seller's place for claims, which can mean you agree a lower cap on your own liability. It covers problems nobody knew about at signing, not matters that were disclosed or known. Someone has to pay the premium, so ask your solicitor whether it's worth looking at for a deal of your size.
The small print that still matters
An entire agreement clause says the contract is the whole deal, and the buyer often confirms it hasn't relied on anything said outside it. Under the Misrepresentation Act 1967, a term that excludes liability for misrepresentation only works if it meets the reasonableness test in the Unfair Contract Terms Act 1977, so these clauses are worth getting right. Check too how the agreement is to be signed. One signed as a deed gives the buyer a longer default period to claim.
Where to spend your negotiating time
Your solicitor will mark up the whole draft, but your own attention is best spent on the parts that decide what you keep. In rough order of importance, they're these.
- How and when the price is paid, including any adjustment, retention or later payment.
- The cap, the thresholds and the time limits on claims.
- Any indemnities, and exactly what each one covers.
- The disclosure letter, which only you can make complete.
- The restrictive covenants, because they shape what you do next.
- The completion list, so your loans and guarantees are dealt with on the day.