What is a share purchase agreement and why is it important?

A share purchase agreement is a contract which is used to transfer and assign ownership of a corporation. The seller is the current shareholder of the shares being sold.

The seller will simply agree to sell a certain number of shares to a buyer at a specified price. But, along with the shares, comes liabilities as well, and the well-known concept of caveat empor applies. Buyer beware.

So, you’re always going to find warranties and indemnities within the agreement designed to protect the buyer. A warranty provides the buyer with the reassurance that the seller has disclosed fairly, and provides a remedy for the buyer should a breach of warranty apply. Whereas an indemnity is often used to cover areas which are clearly not the buyer’s responsibility, such as unpaid tax bills, and usually works on the basis of a pound for pound compensation for specific loss.

So, good legal and good tax advice are really important here. A poorly drafted contract can result in the seller being forced to repay some or all of the sale price, or the buyer having no recourse, despite being misled, as to the true value of the business.