Whether you are looking to purchase shares in a private company, or sell your shares in a private company, you will need to go down the administrative road of conducting the sale of shares. This would ordinarily entail having to go to a firm of attorneys who would need to prepare and draft the necessary documents and contracts in order to properly and effectively transfer those shares.

Unfortunately, the cost of lawyers can be prohibitively expensive, but ordinary business owners are left with no choice because they do not themselves know how to go about properly and effectively attending to a sale of shares transaction.

This article aims to educate you as much as possible, without going into to much legalese, of how to conduct and go about a sale of shares transaction without the help of lawyers.

The three basic categories of documents that you will require are the following:

  1. Sale of Shares Agreement;
  2. Share Transfer Form; and
  3. Authorising resolutions of both the shareholders and directors.

Sale of Shares Agreement:

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A Sale of Shares Agreement is the main governing document that serves to set out the details of the transaction, the obligations of each party, the purchase price to be paid, as well as the relevant time frames for the sale.

A Sale of Shares Agreement should at the very least have terms which pertain to the following:

Purchase Price:

It is important that, in order for the purchaser and the seller to clearly understand the expectations as to how much the shares will be sold for and the terms surrounding how the payment is to be made, the purchase price be recorded with sufficient detail in the Sale of Shares Agreement.

For example, the purchase price might be paid in one lump sum of R50 000.00 on X date, or it might be paid in instalments of R10 000.00 over 5 months, or there could be some other custom payment timeline. Which ever it is, this should be recorded.

One of the reasons that the above is so important is that in the event that payment is not made on time, there should be the ability for the seller to place the sale on hold and not permit the sale of shares to go through, and also allow for the seller to place the purchaser in breach and potentially force the purchaser to make payment of the purchase price.

Transfer Date:

It is very important to record what the actual date of the transfer will be as this date will be recorded in the requisite share register, share certificates and the like, and is a clear line in the sand to determine when the purchaser’s obligations to the company begin and the seller’s obligations in respect of the company cease.

Number and class of shares:

To ensure certainty, it is essential to record the number of shares that are being sold coupled with the class of those shares.

Alot of people when completing template Sale of Shares Agreements tend to fill in the percentage of what the sale will comprise. However, and depending on the time frame of the sale, and what other share sale transactions might be going on at the same time, the number of shares comprising the percentage might change, and as such, it is very important to record the number of shares rather than the percentage which is to be sold.

Additionally, as the company may be comprised of more than one class of shares, it is important to specify what class is the subject of the share sale.

Should this terminology be completely foreign to you, you most likely only have one class of shares in your company, and as such, the class of shares that will be transferred will be ordinary shares.

Warranties:

This might be bordering on a bit of legalese, but it is very important to understand. You do want to ensure, among others, that the seller is in fact selling shares which he in fact owns.

As such, it is important to have a clause which speaks to the warranties given by the seller that they are the sole owner of the shares, that they are not the subject of a pledge or some other form of security and that they can freely and effectively transfer the shares to the purchaser.

Confidentiality:

Ordinarily, and although this is not an obligation on the part of the parties, a confidentiality clause is ideal in that you do not want the seller or the purchaser to wilfully advertise and speak to others about the terms of the sale and what might internally be considered a sensitive and confidential matter.

Accession to the provisions of the Shareholders Agreement:

Should there be multiple shareholders of the company, and should there exist a Shareholders Agreement which was signed by the shareholders of the company, a clause which requires the purchaser to automatically agree to (accede) the terms of the Shareholders Agreement is necessary, so that the purchaser will, as from the date of the sale of shares, be bound to the terms of the same Shareholders Agreement.

Breach Provisions

Clear terms, setting out the procedure should either the purchaser or the seller not adhere to their obligations in terms of the Sale of Shares Agreement, should be included. These are what are known as breach provisions.

Normally, a breach provision will provide that should a party, such as the purchaser, not pay the purchase price on time, the seller will be entitled to place the purchaser in breach, and require that the purchaser rectify that breach by making payment of the purchase price within a specified time period, failing which the seller will be entitled to cancel the agreement and/or claim damages through a court of law.

Dispute Resolution

Somewhat related to the above, in the event that there is a dispute between the parties, a procedure to resolve any disputes should be set out.

Normally, the dispute procedure will involve the parties having to try attempt to resolve the dispute for a certain period of time informally between themselves, and if this fails we would suggest attempting mediation with a qualified mediator for a further period of time, and thereafter, should that fail, either looking at permitting the parties to take it to court or otherwise arbitration.

Share Transfer Form:

Although the Companies Act is not entirely clear on the exact nature of what and how shares are transferred, it only records that share transfers, such as a sale, should be “evidenced by a proper instrument of transfer”.

As such, along with a Sale of Shares Agreement we would advise a simple 1 pager instrument of transfer (share transfer form) which records who the purchaser is, who the seller is, the number of shares being transferred, the class of shares being transferred, the purchase price and the transfer date.

Which law is applicable to your site:

There is a possibility that your users might be accessing your site from all over the world, but you might be headquartered in a single country only. It is often cheaper to record that the law applicable to your website is the one in which you are situated, which will inevitably save you costs should you ever go to litigation. This is on account of the fact that if the litigation is to be held in a foreign country, you would have to appoint foreign lawyers, and potentially incur travel expenses and accommodation.

Authorising Resolutions:

Along with the aforegoing, there might well be certain authorising resolutions of the company which are needed.

For example, should a Shareholders Agreement exist, it will most likely have pre-emptive rights in that agreement, meaning that if a shareholder wants to sell any of their shares, they will first need to offer those shares for sale to the other shareholders before offering them to an outsider. If the sale of shares is in fact to an outside party, a Shareholders Special Resolution will need to be entered into where the shareholders waive those rights of pre-emption to permit the sale to go ahead.

Furthermore, the company will most likely need to cancel existing share certificates and issue a new share certificate to the purchaser which would require that a Directors Resolution be passed to permit this.

All the documents you need on our website:

At Hello Contract, we have all of the above documents available on our website so that you can conduct your sale of shares transaction entirely on a self-service basis without getting lawyers involved. All that you need to do is select the appropriate document that you would like to generate, answer a few questions, and our document generation software will automatically compile the Sale of Shares Agreement, the Transfer Forms and Authorising Resolutions necessary for you to conduct your sale of shares transaction.

All of these are available at the following links:

  1. Sale of Shares Agreement;
  2. Share Transfer Form; and
  3. Authorising resolutions of both the shareholders and directors.

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