A share purchase agreement is the contract that governs the sale of equity in a private company, transferring ownership by conveying specific shares rather than individual business assets. It fixes the price, the payment terms, the risk allocation, and the conditions that must be satisfied before the deal closes. Getting its provisions right is what separates a clean ownership transfer from one in which the buyer inherits problems that surface months later.
What a Share Sale Actually Transfers
In a share purchase, the buyer steps into the seller’s shoes and takes over the entire corporate entity. Every contract, license, liability, and tax position attached to the company comes with the shares. In an asset purchase, by contrast, the buyer picks specific assets and generally leaves unwanted liabilities behind with the seller’s entity.
Share purchases are operationally simpler because contracts and permits don’t need to be individually reassigned. They carry more risk because the buyer absorbs everything, including problems that may not be visible at signing. That tradeoff is why the representations, indemnification, and escrow provisions discussed below do so much work in a share deal.
Information the Agreement Has to Nail Down
Before anyone drafts, both sides need to pull specific facts from the company’s records. The seller must identify the exact number of shares being transferred and their classification, whether common stock, preferred stock, or a specific series of preferred. That information lives in the articles of incorporation and the share register. The buyer should verify these records independently rather than take the seller’s word for it.
Both parties must be identified by full legal name, entity type, and jurisdiction of formation. For an individual seller, the name has to match the share register. For a corporate buyer, the formation documents confirm authority to enter the transaction. Any mismatch between the name on the shares and the name on the agreement creates a gap that can derail closing or invite challenges later.
In community property states, shares acquired during a marriage may be jointly owned even if only one spouse’s name appears on the register. Roughly ten states follow community property rules, and in those jurisdictions the non-titled spouse typically must sign a consent to the transfer. Skipping that signature can cloud the buyer’s title.
The agreement also has to state the purchase price and the payment structure. Some deals close with a single wire transfer. Others involve installment payments, earn-outs tied to future performance, or a mix. Sellers should check the company’s bylaws and any existing shareholder agreements for transfer restrictions or rights of first refusal that could block or delay the sale. These are easy to miss and painful to find at the last minute.
Representations and Warranties
Representations and warranties are the factual backbone of the agreement. The seller makes detailed statements about the company: its legal standing, tax compliance, intellectual property ownership, pending or threatened litigation, employee benefit obligations, and material contracts, among others. These statements form the baseline the buyer relies on when agreeing to pay the price. If any of them turn out to be false, the buyer has a path to recover through indemnification.
Not all representations carry the same weight. Fundamental representations cover foundational matters: the seller’s authority to sell, the company’s valid existence, and proper capitalization of the shares. These get the longest survival periods and the highest indemnification caps because a breach in any of them undermines the entire deal. General representations covering financial statements, contracts, and employee matters usually survive for a shorter window after closing.
Survival Periods
Every representation has a survival period, the window after closing during which the buyer can bring an indemnification claim for a breach. General representations commonly survive for 12 to 24 months. Fundamental representations often survive for the full statute of limitations applicable to breach-of-contract claims in the governing state, which can run from three to six years. Tax-related representations frequently have their own extended survival period of six or more years, reflecting the longer audit window tax authorities enjoy.
Sandbagging
One of the more contested points is what happens when the buyer learns about a breach before closing but proceeds anyway. A pro-sandbagging clause preserves the buyer’s right to bring an indemnification claim even if the buyer knew a representation was inaccurate at signing. An anti-sandbagging clause bars claims for breaches the buyer already knew about. When the agreement is silent, the result depends on the governing state’s default rules, which vary. Buyers push for pro-sandbagging language, sellers for anti-sandbagging. Leaving it to chance is a mistake either side can regret.
Covenants
Covenants are promises about future conduct rather than statements about current facts. Pre-closing covenants typically require the seller to run the business in the ordinary course, avoid taking on significant new debt, and refrain from unusual distributions or material asset sales without the buyer’s consent. The goal is to keep the company’s value stable between signing and closing, which can be weeks or months apart.
Post-closing covenants frequently include non-competition and non-solicitation restrictions, preventing the seller from launching or joining a competing business or poaching key employees for a set period. In the acquisition context a two-to-five-year non-compete is typical, with three years the most common. The restriction has to be reasonable in geographic scope and duration to be enforceable, and the specifics get negotiated heavily.
Indemnification, Caps, Baskets, and Escrow
The indemnification section assigns financial responsibility for problems that surface after closing. If a representation turns out to be false or a covenant is breached, the indemnifying party compensates the other for resulting losses. This is where both sides push hard, because the mechanics determine who actually bears the economic risk.
Caps and Baskets
Two limits shape how indemnification plays out. The cap sets the maximum total amount the indemnifying party can be required to pay, commonly 10 to 20 percent of the purchase price for general representations. Fundamental representations often carry a higher cap or no cap at all. The basket functions like a deductible: the buyer cannot recover losses until they exceed a specified threshold, typically 0.5 to 1 percent of the deal value. Some baskets are tipping baskets, meaning that once the threshold is crossed the indemnifying party owes from dollar one. Others are true deductibles, where only the excess above the threshold is owed.
Escrow and Holdbacks
Indemnification rights are only as good as the buyer’s ability to collect on them. To back the seller’s obligations, a portion of the purchase price is commonly placed in escrow with a neutral third party. Typical holdbacks run 5 to 15 percent of the price, with 8 to 12 percent standard in the lower middle market. The funds are released on a schedule, often with half at 12 months and the remainder at 18 or 24 months, assuming no unresolved claims. For transactions above roughly $25 million, representations and warranties insurance is increasingly used in place of traditional escrow, letting the seller walk away with more cash at closing while the buyer looks to the insurer for coverage.
Due Diligence
Due diligence is the investigation the buyer runs before committing, and it is where most problems either get discovered or get missed. Because a share purchase transfers the entire entity with all its history, the review has to reach well beyond recent financial statements. A thorough examination typically covers corporate formation documents, outstanding debt and financing, material contracts, intellectual property, real estate interests, employee and benefit obligations, pending or threatened litigation, environmental liabilities, tax filings and positions, and regulatory compliance.
What diligence turns up directly shapes the agreement. An unresolved tax dispute may lead to a specific indemnity, a price reduction, or a walk-away right. A key customer contract about to expire gets priced in or addressed through a closing condition. Skimping on diligence in a share purchase is the fastest way to overpay, and the consequences tend to surface at the worst possible time.
Ancillary Documents
The main agreement doesn’t operate alone. Several supporting documents are prepared and delivered at or before closing.
- Board resolutions, which confirm that the directors have authorized the sale and empowered specific officers to sign. Without them the transaction can be challenged as unauthorized.
- A disclosure letter, where the seller lists specific exceptions to the representations and warranties. If the agreement warrants that no litigation is pending, the disclosure letter identifies any existing disputes so the seller isn’t in automatic breach at signing. The buyer agrees not to claim on matters properly disclosed in this letter.
- A stock power, the instrument that actually transfers legal ownership. It identifies the certificate numbers, the number of shares, and the names of transferor and transferee, and it authorizes the company’s transfer agent to update the records.
- Officer’s certificates, in which authorized officers confirm that the representations remain true as of closing and that all closing conditions have been satisfied.
- Legal opinions, which in larger transactions come from the seller’s counsel and address matters like the valid existence of the company, the enforceability of the agreement, and the absence of conflicts with other obligations.
Closing Conditions and Execution
Most share purchase agreements don’t close the moment they are signed. The agreement lists conditions that have to be satisfied before either party is obligated to complete the transaction. Common conditions include the continued accuracy of the representations as of closing, completion of required regulatory filings or approvals, the absence of any legal proceeding that would block the deal, and delivery of all ancillary documents. If a condition isn’t met, the party benefiting from it can refuse to close or, if the agreement allows, terminate.
Once conditions are satisfied, the parties execute. Modern transactions frequently use electronic signatures and same-day wire transfers. The buyer sends the purchase price, less any escrow holdback, to the seller’s designated account, and the seller delivers the signed stock powers and other closing documents. Confirming receipt of the purchase price is standard before closing is considered legally complete. After closing, the company’s share register is updated to reflect the buyer as the new owner, which is what secures voting rights and future dividends.
Antitrust Filings for Larger Deals
Share purchases above a certain size trigger federal antitrust review. Under the Hart-Scott-Rodino Act, both buyer and seller file a premerger notification with the Federal Trade Commission and the Department of Justice, pay a filing fee, and observe a waiting period before completing the transaction. For 2026, the size-of-transaction threshold is $133.9 million. Transactions below that amount are generally exempt, though other exemptions and exceptions apply depending on the parties’ size and deal structure. Closing before the waiting period expires carries substantial civil penalties, so the timeline in the agreement has to account for regulatory review.
Tax Considerations
Tax treatment often drives which structure the parties prefer. Sellers generally favor share sales because the proceeds are taxed as capital gains rather than ordinary income. Buyers typically prefer asset purchases because they can step up the tax basis of the acquired assets to the purchase price, generating larger depreciation and amortization deductions. In a share purchase the company’s existing basis in its assets carries over unchanged. That tension is one of the main negotiating dynamics in any acquisition.
Both parties have to report the transaction. Sellers report capital gains from the sale of shares on Form 8949, with totals flowing to Schedule D of their individual or corporate return.1Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Accurate records of the original purchase price (the tax basis) and any adjustments are essential for calculating the gain correctly.2Internal Revenue Service. Reporting Capital Gains
Section 1202 Qualified Small Business Stock
Sellers of shares in certain small C corporations may qualify for a partial or complete exclusion of capital gains under Section 1202 of the Internal Revenue Code. For stock acquired after September 27, 2010, and held for at least five years, up to 100 percent of the gain may be excluded from federal income tax. The maximum excludable gain is the greater of $10 million or ten times the shareholder’s adjusted basis in the stock. The company must be a domestic C corporation with gross assets that never exceeded $50 million, and it must operate in an active trade or business other than certain excluded fields like financial services, law, and consulting. The qualification rules are strict and should be evaluated well before any sale process begins.
Section 1045 Rollover
Sellers who don’t meet the five-year holding period for the full Section 1202 exclusion may still defer capital gains by reinvesting the proceeds into new qualified small business stock within 60 days of the sale, provided the original stock was held for at least six months. The Section 1045 rollover doesn’t eliminate the tax. It pushes recognition into the future, until the replacement stock is eventually sold without further reinvestment.
Section 83(b) Election for Restricted Stock
When shares received in connection with a share purchase agreement are subject to vesting or other restrictions, the recipient can file a Section 83(b) election to pay tax on the stock’s current fair market value rather than wait until the restrictions lapse. The election must be filed with the IRS within 30 days of the transfer date, with a copy provided to the transferor.3Internal Revenue Service. Form 15620, Section 83(b) Election Missing the 30-day deadline is fatal. There is no extension and no way to file late. Filing in time means any future appreciation gets taxed at capital gains rates when the stock is eventually sold, rather than as ordinary income when the restrictions lift.