What is a Share Transfer Agreement?
A share transfer agreement is a legally binding contract that outlines the terms and conditions for the sale and transfer of shares from one party, known as the seller, to another party, referred to as the buyer. The seller might be an individual or a corporate entity that owns shares in a company, while the buyer can also be an individual or a corporate entity interested in purchasing those shares. These agreements are crucial to the business world and the economy as they facilitate the change of ownership and management of companies, ensuring that transactions are clear, fair, and above board.
The importance of a share transfer agreement cannot be understated. When individuals or companies purchase shares, they do so with the understanding that they are buying into the management and future of that entity. A share transfer signifies not just a numerical exchange but an investment of confidence and capital into an organization. Therefore , a share transfer agreement aims to protect all parties involved by clearly stipulating the terms of the agreement, including the number of shares to be sold, the price per share, any conditions that need to be met, and the process to be followed.
Apart from stipulating the above details, these agreements can also include warranties or representations made by either party. For instance, the seller may assure the buyer that the shares being sold are free of all encumbrances, such as liens or rights of first refusal. Alternatively, the buyer may make certain representations about their financial status or operational capabilities. These warranties are significant as they can help protect parties against future legal action.
Share Transfer Agreement Clauses
In the world of corporate law, a share transfer agreement is a relatively common document that sets out the terms under which an individual or entity intends to sell their shares and the terms the buyer is willing to meet in that regard. Such agreements can be somewhat simple, or they may be quite extensive depending on the terms of the sale and the relationship between the seller and the buyer. Below you will find a list of the most essential clauses that should be included in any such agreement, whether it involves a single party selling to a private unlisted company, or a private listed company going through a takeover by which multiple parties will be involved.
Parties – This is a simple section, where the individuals or entities who are involved in the contract are named, with a parenthetical clarification indicating whether they are the buyer or seller in the agreement, to ensure there is no doubt about the nature of each party’s involvement in the transaction.
Consideration – This clause is important in that it will indicate what is being provided to the seller in relation to the sale of the shares. It should detail whether it involves simply cash, or if any share swaps, dividends, etc. are being taken into account as part of the deal.
Representations and warranties – These sections essentially provide for assurances by the seller that his claims about the shares being sold are accurate and reflect the necessary conditions needed to consider them actually on offer and able to be sold. This could include the seller agreeing that the shares are validly issued, that there are not any undue restrictions or encumbrances, that he or she owns 100 percent of the shares of the business, etc. The buyer similarly typically agrees to certain representations and warranties, such as that they have not been involved in any previous business dealings with the seller or that they are not subject to any other relevant legal matters.
Indemnities – These clauses place a burden on one of the parties to compensate the other (such as the lender in the case of a loan) in the event of any losses that were included within the agreement’s terms. The extent of indemnities will depend on the nature of the agreement and the specifics of the transaction.
Default – This section provides details of what happens in the event of a default, such as what happens to the purchase price or execution of the agreement if either party does not adhere to the obligations within.
Advantages of a Word Format Template
Opting for a Word format for your share transfer agreement offers a host of advantages. The most significant benefit is the ease of customization. Law firms often provide templates with specific prompts to help in customizing content to your specific situation or kind of transaction. Having this at hand streamlines the process immensely, as these aspects can often go overlooked and without someone with an eye for detail. They will also provide professional looking documents with consistent formatting and design. Just copying and pasting pertinent information from an old agreement is seamless and will not worry your clients. The third reason is that they are easy to access and use as part of your standard operating procedures. You can easily keep them on a shared drive, along with checklists, for easy access and use by your staff.
How to Draft a Share Transfer Agreement
The beauty of using a Microsoft Word template is that it makes the task of drafting a share transfer agreement easier. However, it does not negate the draftsperson’s responsibility to ensure that the transfer agreement meets the specific needs of the client or that it complies with any applicable legal requirements and standards.
The share transfer agreement should be drafted reflecting the following concepts:
General Purpose. The share transfer agreement should clearly set out the various purposes for which it is being made, including the following:
Structure. At the outset, the draft should establish the structure of the agreement, including the preamble, the recitals, the definitions section, the operative provisions and the closing provisions.
Operative Provisions. The operative provisions of the share transfer agreement are the substantive sections of the agreement. Here are the keys to drafting the operative provisions:
Defining Key Terms. When drafting the operative provisions, the drafter will need to define key terms such as "Seller" and "Buyer." In keeping with best practices for drafting agreements, all defined terms should be referenced in the agreement, including where their more generic equivalents are referenced in the agreement.
Closing Provisions. The closing provisions consist of boilerplate provisions that should be made applicable to the entirety of the agreement. They should be similarly placed at the end of the agreement. Typical closing provisions include provisions regarding the governing law, the assignment of rights and obligations, the further assurances, exhibits and attachments, how any amendments should be made and how notices should be given.
Exhibits. Once the share transfer agreement is prepared, the attached exhibits need to be duly completed, including the cheques and share certificates.
Common Errors to Avoid
The transfer of interests in a closely-held business may be one of the more important obligations involved in the management of a business, but that does not mean it is automatically free from potential legal or financial pitfalls….
Any ambiguity in a Share Transfer Agreement could create a dispute down the road. This risk befell the compensating partner of a deceased partner in Duffy v. Duffy, 55 A.D.3d 1313, 1314 (4th Dept. 2008), in which the surviving partner’s estate was found to have exercised the compensatory share purchase option on behalf of decedent even though it was never unequivocally exercised. …
A Share Transfer Agreement should be drafted to make it as clear as possible who is buying and selling which shares to avoid this situation. In Duffy, the court decided "that the agreement obligated the [Estate] to sell [the decedent’s] shares and [Surviving Partner] to purchase them at his death." But the Court left open the question of whether the Estate was obligated to sell the shares to the surviving partner or if it could elect to sell them on the open market. …
Even if the sale price is clear, the payment terms may be vague in poorly drafted agreements. In Riemer v. Riemer, shareholders and majority owners in corporate meal service in New York moved for an order directing the minority shareholder to perform his purchase obligations under the Buy/Sell Agreements. 85 N.Y.S.2d 771, 772 (Sup. Ct. 2d Dep’t 1949). The agreements provided three methods of sale: first, ten installments, second, six installments, and third, four installments. Id. at 773. The Court concluded that it was "doubtful whether the first method was intended to apply , because it is general in its terms and not specific to the minority stockholder," and held that the second method was to apply. Id.
The sale price payable to a selling shareholder should be strictly enforced, restricting the amount to the specific installment amounts stated in the agreement, and not the overall purchase price. In Riemer, a shareholder and his wife agreed to a buy/sell agreement concerning their shares in a corporate business. 85 N.Y.S.2d 771, 772 (2d Dep’t1926). The agreement provided for the purchase of the shares by the company in six annual installments with interest. Id. After the death of one of the shareholders and his wife, this deceased shareholder’s estate and son moved for an order directing the company to perform its purchase obligations under the agreement. Id. The defendants contended that the plaintiff could not recover the full purchase price, but that he was bound only by certain installment payments. Id. The defendants argued that the initial installment was to be paid on July1, 1942, and each year thereafter. Id. Defendants further argued that while the sale price was $18,000, only $11,400 (the total of installment payments) needed to be paid. Id. The Court disagreed and held that the estate was entitled to the full purchase price. Id.
"Whether the defendant is bound to perform his purchase obligations under the buy/sell agreements depends upon the intention of the parties and is primarily a question of fact." Id. at 772, in Riemer v. Cheerly. … Therefore, it is important to take extra care when drafting a Share Transfer Agreement, as ambiguities could cause expensive litigation down the road.
Proofreading and Finalizing the Draft
The Share Transfer Agreement is an essential document for the transaction between the parties. There are a number of important factors that must be reviewed prior to the signature of the parties to the agreement.
1. Some areas where advice is typically sought include:
a. Legal advice as to share transfer restrictions and corporate procedures
b. Tax advice as to implications for seller and buyer (if new company)
Revenue shared
New vs New
Depreciation / Amortization
Credit bidding (if insolvency)
c. Commercial consideration required (earnouts, security, net adj, etc)
2. Items to consider in proof reading the document
a. Funds in trust
i. Requirements of state law
ii. Non negotiable interest bearing
b. Approval and Consents
i. Approval from counterparty or third party (with respect to consent or waiver)
ii. Approval from regulatory authority (if required)
c. Payment of debt (Assumption/Indemnities) exception, also references in Schedules and exhibits
d. No adverse change clause
e. Timing of change of control provisions
f. Representations and warranties
i. Indemnified vs indemnifying
ii. Knowledge qualifiers
iii. Notice
g. Expenses (Payment / Reimbursement)
h. Counterparts (PDF, facsimile or physical signature)
3. Steps to finalize
a. Counterpart signatures (note: information entered into signature blocks is not normally visible in a scanned copy). This may require:
- Faxing signatures
- Email signatures
- Physical signatures
b. Payment (escrow agent, attorney)
1. Instructions to bank
2. Transfer from escrow to bank account
c. Instructions to notify parties and calculate dividends
- Steps to execute
- Contemporaneous actions (written consent)
- File and record documents with regulatory body (if required)
Free Share Transfer Agreement Template
For your convenience, we have made a FREE Share Transfer Agreement template available for download in Word format here. Simply follow the link and you will be able to edit the Share Transfer Agreement to suit your needs.
Our free downloadable template is designed to provide a starting point for you to customize an agreement specific to your situation and needs . Before using the template, however, it is advisable that you load it using a word processor program (such as Word or Google Docs) and ensure that you understand all the terms and clauses. Make adjustments as necessary to fit your particular circumstance.
NOTE: This template is a guideline only. You are STRONGLY advised to have any agreement between you and the other party reviewed by your legal counsel to ensure that it meets the needs of both parties to a transaction and/or otherwise complies with applicable law.
