Key points for negotiating a contract for the sale of shares in a company

The sale of shares in a company, also known as a share deal, is a strategic transaction that allows for the transfer of control and ownership of a company without the need to dispose of its assets individually. Unlike an asset deal, where specific assets are sold, a share deal involves the transfer of all or part of the shares in the legal entity, with all the inherent advantages and risks.

From a legal and commercial point of view, negotiating a contract for the sale of shares in a company requires a thorough analysis of various key aspects. A mistake in the negotiation or a poorly worded clause can lead to unexpected liabilities or the nullity of the sale. Therefore, in this article we will address the main key points that must be considered to ensure a safe transaction for the buyer.

1. Letter of intent or indicative offer: the step prior to due diligence

Before beginning the Due Diligence process, it is customary for the buyer to provide the seller with a Letter Of Intent (LOI) or an Indicative Offer, which serves as a preliminary document setting out the essential terms under which the sale of the company is to be carried out.

Although this document is not generally binding, it is very important, as it defines the basis for negotiation and reduces uncertainty between the parties. Key elements that are usually included in a letter of intent include:

• Indicative price and payment structure: estimated purchase price and possible adjustments.
• General terms and conditions of the sale: clarification as to whether it is a sale of shares or assets.
• Term and conditions of Due Diligence: duration of the process and scope of the analysis.
• Exclusivity clause: commitment by the seller not to negotiate with third parties during a specified period.
• Conditions precedent: aspects that must be fulfilled for the transaction to take place (regulatory approvals, financial approvals, etc.).
• Confidentiality: obligation of both parties not to disclose sensitive information about the company being sold.

Signing a letter of intent builds trust between the parties and allows for a more efficient negotiation process. However, it is essential that this document be carefully drafted to avoid unwanted commitments or misinterpretations that could hinder the negotiation of the purchase agreement and the closing of the transaction.

2. Due Diligence: the basis for a secure sale of company shares

Before closing a sale agreement, it is essential to carry out a Due Diligence process to assess the financial, legal, tax, and operational situation of the company. This phase allows the buyer to identify potential contingencies, such as hidden debts, pending litigation, contractual breaches, or governance issues.

The most relevant aspects of Due Diligence include:

• Financial and accounting situation: analysis of balance sheets, debts, and solvency.
• Regulatory compliance: verification of compliance with tax, labor, and regulatory regulations.
• Key contracts: review of contracts with customers, suppliers, and financial institutions to detect change of control clauses.
• Litigation risks: assessment of potential litigation, ongoing proceedings, or pending penalties.

The results of this audit influence price negotiations and the drafting of warranty clauses, adjusting the risk assumed by the buyer in the sale transaction.

3. The sales contract: price and adjustment mechanisms

The purchase price of shares can be established in various ways. The most common structure is a fixed price, although sometimes a variable portion of the price (earn-out) can be agreed upon, whereby part of the price is determined and paid based on the company's future results; or even certain adjustment mechanisms can be agreed upon that depend on the performance of certain financial indicators after the transaction is closed. Two notable methods for determining the price are:

• Locked Box: the price is set based on a reference balance sheet and is not subject to subsequent adjustments.
• Completion Accounts: the price is adjusted after closing based on audited financial statements.

Each of these options has different implications in terms of risk and guarantees, so the choice must be aligned with the buyer's and seller's strategy in the sale.

4. Manifestations and guarantees: protection against contingencies

Un elemento central en cualquier contrato de compraventa de participaciones es el capítulo de representaciones y garantías sobre la situación jurídica, financiera y operativa de la sociedad. 

A central element in any share purchase agreement is the section on representations and warranties regarding the legal, financial, and operational status of the company. 

Some of the most common warranties include:

• Solvency and absence of hidden debts.
• Regulatory and tax compliance.
• Validity of current contracts.
• Absence of undisclosed litigation or penalties.

If any of these warranties prove to be false or inaccurate, the buyer may demand financial compensation or even the termination of the sale agreement.

When, as a result of the Due Diligence process, the buyer has become aware of certain contingencies, in order to reinforce the obligation to compensate for any potential damage that may be caused to the buyer or to the company that is the subject of the sale, a specific compensation regime is also negotiated, establishing broader quantitative and temporal limits on the seller's liability than those applicable to damages arising from the breach of representations and warranties.

5. Non-competition and permanence clauses

To protect the value of the acquired company, non-competition clauses are often included, whereby the seller agrees not to engage in similar activities for a specified period. The maximum term that is usually negotiated is two years, which can be extended to three years in the case of a sale that includes the transfer of customers as goodwill and technical knowledge.

Likewise, in many share deals, a retention agreement (management retention) is established, ensuring that certain key executives remain with the company for a period of time after the sale. This facilitates the transaction and minimizes operational risks.

6. Payment mechanisms and compliance guarantees

Payment for the sale of shares can be made in various ways, including:

• Cash payment: full amount at closing.
• Deferred payments: payment in installments, subject to specific conditions.
• Payment by shares or financial instruments: when the transaction involves the exchange of shares or stock in other companies in the buyer's group.

To mitigate risks, it is advisable to establish guarantees such as escrow accounts or bank guarantees to ensure compliance with payment obligations, for example, in the event of a breach of representations and warranties or when it is confirmed that a specific indemnity has taken place.

7. Conditions precedent and closing of the sale transaction

The sale agreement may include conditions precedent, i.e., requirements that must be met before the sale becomes effective. Among the most common are:

• Regulatory or third-party approvals (banks, shareholders, competition authorities).
• Obtaining essential licenses or permits.
• Restructuring of the company or part of its assets prior to closing (carve-out).

Only once these conditions have been met can the final closing take place, with the execution of the sale of shares and payment of the agreed price.

In conclusion, negotiating a share purchase agreement requires planning. Each clause must be negotiated to mitigate risks, ensure legal certainty, and optimize the interests of the parties involved.

The success of a sale of shares in a company lies not only in agreeing on a price that suits both parties, but also in anticipating contingencies, structuring guarantees, and defining a post-closing strategy that ensures business continuity. Having a specialized legal team is key to achieving efficient negotiation and a more secure sale.

Our commercial lawyers can help you with any questions you may have about matters affecting your company or business. Contact them here.

Esther Pérez

Director in the commercial area