Share deal

What a share deal is

A share deal transfers shares in a company. The buyer therefore acquires the business as a whole, with all contracts, all employees, all permits and all obligations. The difference from an asset deal is fundamental: there you select, here you inherit.

The advantage lies in simplicity. Contracts stay in place, permits stay in place and operations continue without interruption. For the seller the transaction is often more favourable tax wise, because a capital gain on shares is treated differently from the sale of individual assets.

What transfers

• Contracts: Lease, suppliers, leasing, insurance and licences. They remain in force and only change economic owner.
• Employees: All employment relationships continue unchanged, with all rights, length of service and entitlements.
• Permits: Licences and certifications remain, provided the company is the same one. That is the biggest practical advantage in regulated sectors.
• Liabilities: Everything, including what is not in the books, such as undetected tax debts, ongoing disputes or warranty claims from old deliveries.

How the risks are addressed

Because the buyer also takes on unknown burdens, practice relies on three instruments. First, due diligence before signing, examining books, contracts, taxes, staff and litigation. Its findings feed into the price and into the warranties. Due diligence is never complete, however, because it depends on the documents the seller provides.

Second, warranties and indemnities in the purchase agreement. The seller warrants certain facts, such as completeness of the books, absence of litigation or compliance with tax duties. If breached, the seller is liable, usually capped at a maximum amount and limited in time. Those periods typically run between twelve and 36 months, longer for tax matters.

Third, retention of part of the purchase price. A portion is not paid immediately but retained or held in escrow for the duration of the warranty periods. Only when no claims have been raised is the amount released. For sellers that is unfavourable, but it is the price for the assumption of liability.

What to watch on both sides

For buyers the most important point is the quality of the documentation. Anyone unable to present complete statements, contracts and personnel records creates a risk premium in the price or a cancellation. Second, contracts with change of control clauses deserve close attention, as they grant a right of termination when ownership changes. Those clauses can undo the main advantage of a share deal.

For sellers it is crucial to word warranties as narrowly as the facts allow. A blanket assurance that everything is fine carries more risk than a specific assurance on named points. And the liability cap should stand in reasonable proportion to the purchase price, so the seller is not bound to litigation for years.