Buying shares in a company

One way to transfer control of a business to a purchaser is for the purchaser to buy the shares in the company which has been conducting the business.

Advantages to the vendor:

• • Simplicity — Selling shares is much easier than transferring each of the individual assets making up a business.
• • Tax — In most cases, the individual shareholders will be better off receiving their money as consideration for the sale of shares rather than having the consideration paid to the company. The money paid to the company may incur further taxation when it is then distributed out to the shareholders.

Disadvantages to the vendor:

• • Warranties — The purchaser will require from the vendor shareholders extensive warranties as to the company, and indemnities for any undisclosed liability of the company. Should any liability of the company emerge in the future, this may result in the purchaser claiming indemnity from the vendor shareholders.
• • Tax — A future tax audit could reveal liabilities going back to periods well before the completion of the sale.
• • Workers Compensation — An audit by the workers compensation insurer may, similarly, reveal hidden liability for premiums pre-dating the sale.
• • Liability claims — Claims for liability for example under customer warranties for goods and services provided by the business prior to the sale can be the subject of subsequent claims.

Advantages to the purchaser:

• • Simplicity — A simple sale of shares is easier to accomplish than a transfer of individual assets.
• • Duty — In New South Wales, Victoria, Tasmania, the ACT and South Australia, there is generally no duty on sales of shares or on sales of businesses. In Queensland, Western Australia and the Northern Territory, there is duty on the sale of businesses but no duty on the sale of shares. Accordingly, in those states, the purchaser saves stamp duty by purchasing shares in a company, rather than purchasing the business. In all states and territories, there may be duty on certain interests in landholders (entities whose assets include real property) and duty may apply where the shares being transferred have a land use entitlement.

Disadvantages to the purchaser:

• • Liabilities — The purchaser is affected by any pre-existing liabilities of the company, which emerge after the sale, although these may be recovered to the extent of enforceability against the vendor shareholders under the warranties in the share sale agreements.

See Buying shares in a company.