Buying shares in a company

For a vendor the sale of shares in the company, which owns the business or asset, is often the preferred method.  It is an efficient process whereby all or part of the shares are sold and transferred to the new owner. If both vendor and purchaser are GST registered, the transaction can be zero rated as the business is sold as a ‘going concern’. Generally, a sale of shares is tax free.

On the other hand purchasers will be required to spend more time ensuring the Agreement for Sale and Purchase of Shares is comprehensive; so that it contains a full due diligence condition as well as other clauses which limit or negate any risk associated with ownership of the shares. 

The Financial Statements of the vendor company should be examined carefully and the shareholder’s current account (if any) should not be overlooked. The current account effectively represents money which is owed to the shareholder/s. Before the sale and purchase proceeds, we recommend the current account should be reduced to Nil.

It is very important that the purchase does not inherit any liabilities associated with the business and there should be suitable vendor warranties and indemnification provided by the vendor.

Note: If the purchaser is only acquiring a limited number of shares, so that there will be several shareholders, we strongly recommend the parties also enter into a comprehensive Shareholders’ Agreement to govern the relationship between the shareholders (if one does not already exist).

Asset Purchase vs Share Purchase
Whether an asset purchase or share purchase is appropriate will ultimately depend on the particular requirements of both vendor and purchaser. Electing the wrong method however could be costly. That is why the advice of suitably qualified and experienced professionals is invaluable.

We work closely with your accountant to structure the transaction so that it minimises risk whilst maximising benefit to you. Prospective vendors or purchasers should seek professional advice at the earliest opportunity to determine the best method.

If you are considering buying shares in a business, please contact us for good legal advice that will give you peace of mind.