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When a purchaser looks to acquire a business, it usually faces a choice between acquiring all the assets of the business or acquiring the shares in the company that owns the business. Each approach has its own benefits and risks. This article focuses on the issues which arise for a purchaser when acquiring shares in a company.

Past Liabilities

The risk for purchasers when acquiring shares in a target company is that the purchaser will inherit the history of the company including all past liabilities.

These liabilities can include:

  • historic tax liabilities including unpaid tax,
  • existing or past litigation or compensation claims from employees or customers of the business,
  • liabilities arising because of how the company and its businesses were operated in the past prior to the sale of the shares.

The above liabilities will remain with the target company after completion and the purchaser, as the shareholder of the company, will need to contend with these problems.

One of the ways to assess the degree of risk arising in connection with past liabilities is to conduct a thorough due diligence check to search for any skeletons in the closet. This process should take place before any binding commitment is made to acquire the shares or it should be a pre-condition to any share purchase.

However, while potential liabilities may be uncovered during the due diligence process, there may be some risks or liabilities that are not uncovered.

A well-crafted ‘share sale agreement’ can help minimize these risks by including representations and warranties from the seller regarding the target company and the business carried on by that company, as well as providing indemnity obligations to these warranties. A well drafted shareholders agreement can also quarantine liability for claims in connection with past conduct to the seller of the shares.

Encumbrances & Security Interests

The security interests and encumbrances that exist at the time of the purchase of the shares in a target company will ordinarily continue to apply.  This means that unless otherwise agreed, the purchaser will purchase the shares subject to those encumbrances and other interests.

For example, if there are security interests registered on the Personal Property Security Register (PPSR), the sale of the shares in the company will not impact these registrations.  Accordingly, a purchaser should determine what each charge relates to, and what guarantees are given in respect to the security interest and if there are any that need to be removed prior to the completion of the transaction, then this can be reflected in the share purchase agreement.

If these security interests and encumbrances are not contemplated by the purchaser prior to the purchase of the shares, then they will remain with the target company. The purchaser then has the difficult task of trying to ascertain and deal with any issues that may emerge from these security interests after the transaction has completed.

Employees

A benefit of purchasing shares is that unlike an asset purchase which ordinarily requires existing employees of the business to have their employment terminated and to then be employed by the purchaser from completion of that purchase, the share purchase does not impact the employees as the employer company will remain the same.

However, as employee entitlements will remain with the target company, the new shareholder will need to honour each employee’s existing accrued entitlements.

Because a purchaser of shares in the target company also takes over the existing employment arrangements, it is important for the purchaser to understand precisely what those arrangements are and whether there are any unusual entitlements offered to any of the employees.  Issues to look for include the post-employment restraint clauses, the notice period for termination, and if there are any termination payments that need to be made if an employee is terminated.

Key Contracts

Like existing employment agreements, a benefit of the purchase of shares in a company is that the contracts that the company is party to will not need to be novated or re-signed, as the only change that occurs is to the shareholding of the company.

However, a purchaser should always review existing contracts between the seller and third parties carefully.  There is a risk that these contracts may include a requirement for the counterparty to approve the change in the shareholding of the target company. These clauses are known as ‘change of control’ provisions.  If any clauses like this exist, the purchaser will need to be careful to comply with the terms of the contracts on a change of control of the target company.

It is not uncommon for real property leases, financial agreements, and contracts with Government providers to include these types of clauses.

Notwithstanding some of the risks that can emerge when acquiring a business through the purchase of shares, there are also benefits. It is important to seek legal advice if you are contemplating acquiring a business, so you can be properly informed of the risks and the ways the risks can be mitigated, and the appropriate way in which you should acquire that business whether through an asset or share purchase.

Further Information and Contact Details

If you wish to discuss the contents of this article or would like us to assist with the preparation of any service agreements, including catering agreements, please contact any member of our Commercial team on 8251 7777 or by email:

This Newsletter is produced by Pigott Stinson. It is intended to provide general information only. The contents of this Newsletter do not constitute legal advice and should not be relied upon as legal advice. Formal legal advice should be sought from us in respect of the matters set out in this Newsletter. Liability limited by a scheme approved under Professional Standards Legislation.