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The key terms in your sale of shares agreement

Updated: Feb 10, 2023


We have often been approached by clients requiring assistance with a sale of shares agreement in respect of shares in a private company. We have also been approached by clients post-facto who have purchased shares in a private company, only to become aware of issues later on. The decision to purchase shares in a private company should not be taken lightly, as there are various considerations to keep in mind when doing so.


With a sale of shares, the seller of the shares transfers their shares in a private company to a purchaser. The sale needs to be in accordance with the Companies Act 71 of 2008, the Memorandum of Incorporation of the Company as well as in accordance with any existing shareholders agreement entered into. There are advantages and disadvantages to buying shares in a private company. There may, for example, be hidden liabilities, or historical tax debts, or new tax debts which can arise for periods before the purchaser becomes the new shareholder. That being said, it is recommended to for the following to be included in a sale of shares agreement (amongst many more considerations!):

  • That the seller warrants that any pre-emptive rights have been waived or do not apply (this basically means that any other shareholders who may have had a right to acquire the shares first, have "given up" this right or it is not applicable in the circumstances- this is to avoid a situation where a purchaser buys and pays for shares in good faith, only to have the sale later set aside because the seller of the shares should have first offered them for sale to the other shareholders in the company;

  • Any warranties that may be appropriate in respect of the business of the company and how it has been managed, as well as a disclosure of any defects in the management and operation of the company;

  • That the shares are not encumbered in any way (for example, are not pledged to any third party as security for a debt);

  • That the company has been conducted in accordance with the company laws of South Africa;

  • That there are no historical tax debts or there will not be any tax debts (as the company is itself liable for tax- a change in shareholders would not affect the company's obligation to pay tax);

  • That the Annual Financial Statements for the past few years have been drawn up correctly (this is to avoid a situation where a purchaser has acquired shares on the basis of "promising" yet false/ incorrect financial statements which was presented to the purchaser to lure the purchaser into purchasing the shares);

  • That the company is not a party or will not be a party to any labour disputes (again, the company is the employer, therefore would be responsible for any debts and/or judgments against it);

  • That the company is not a party to any litigation or will not be a party to pending litigation;

  • Dispute resolution clause, and how any dispute arising in terms of the agreement will be dealt with- this needs to be practical and affordable;

  • That the company will pass any resolutions to issue the new shares (as this could dilute the shareholding) as well as any resolutions to appoint new directors (as this could affect the structure and direction of the company), if applicable; and

  • That the seller will deliver all documents pertaining to the shares and the company to the purchaser on the transfer date (as a purchaser cannot take over a company without having all the necessary documents to keep the business going).

It is crucial to obtain legal advice when selling or acquiring shares, as there are various risks either way, which risks can be addressed if dealt with prior to signature of the agreement.


Spence Attorneys can assist with your commercial agreements and advise you in commercial matters. Email us at info@spencelaw.co.za


CAPE TOWN | JOHANNESBURG


Copyright (C). This article is for information purposes only, may contain errors and/or omissions, and should not be regarded as legal advice. Always seek legal advice from your attorney. Spence Attorneys will not be held liable for any person acting or failing to act on any content on our website. Copyright and subject to our online terms and conditions.

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