Share Purchase Agreement: What should you be careful about when closing

The purchase of shares in a limited liability company is one of the most common commercial transactions in practice. It is a perennial topic in the world of corporate law, so it might seem that there is nothing to mess up. The reality, however, tends to be different. Do you know what to keep in mind when entering into such an agreement? What form should the contract take? What should be checked to avoid unpleasant surprises?

Purchase Agreement and Its Effects

A purchase agreement is a special type of sales agreement through which one party transfers its share in a company to another person. Such a contract must be in writing and have the signatures of both parties oficially verified. The transfer is only valid against the company when the company becomes aware of it, i.e. when one copy of the contract is delivered. It is only from this moment that the company is obliged to treat the new shareholder as its (new) shareholder.

Transfer of shares

The legal regulation of the transfer of shares in a limited liability company is contained in Section 207 et seq. of the Business Corporations Act. Although the law sets out the conditions for the transfer clearly, individual companies may set out the conditions slightly differently in their articles of association. For example, they may require the approval of the transfer of shares by a specific body of the company, even among shareholders, or issue so-called share certificates.

Transfer of shares to a shareholder vs. to a third party

According to the legal regulation, each shareholder can transfer his share to another shareholder without any additional conditions. However, the shareholders may, in the articles of association or in the shareholders' agreement, agree on restrictions beyond the scope of the law, which may take various forms. For example, a pre-emption right may be agreed, which requires the person wishing to transfer the share to first offer to buy the share to the person entitled to the pre-emption right. It may also be provided that the transfer of the share requires the consent of a certain body of the company (typically the general meeting or the supervisory board, if established).

Transferring a share to a non-partner is more complicated. By law, the transfer must be approved by the general meeting. However, the shareholders may also modify this rule in the articles of association and exclude the need for the approval of the general meeting.

Therefore, if the articles of association state that the transfer of shares requires the approval of the company's governing body, this is a condition that cannot be bypassed. There is usually a period of six months from the date of conclusion of the agreement to grant approval. After this period, the parties are deemed to have withdrawn from the share purchase agreement. This time limit may be adjusted directly in the articles of association. A shareholder who has not been granted approval by the competent body of the company without giving reasons, or in cases where the body is obliged to do so under the articles of association, has the right to withdraw from the company within two months of the request for approval.

It is therefore important to carefully review the articles of association of the company whose shares you plan to purchase before concluding the share purchase agreement to avoid any complications. The articles of association of each limited liability company is publicly available in the collection of documents of the commercial register. In addition, we recommend to check in advance whether the shareholders have entered into a shareholders' agreement. If so, the acquirer of the shares will have to accede to this agreement as well.

Do you need legal advice on the transfer of a business share? Find out more about our services here ↗.

The share represented by the equity certificate

Some companies may issue so-called equity certificates, which are securities that represent shares in the company. An equity certificate can only be issued if explicitly stated in articles of association expressly and it is only possible for shares that are not subject to restricted or conditional transferability.

The transfer of a equity certificate is transferred by means of a equity certificate agreement and through an endorsement (signature of the transferor on the reverse side of the equity certificate together with the identification of the transferee). The share is then transferred by delivery of the equity certificate to the transferee. The share transfer agreement does not require a specific form and can therefore be concluded orally.

The transfer of shares, which is represented by a equity certificate, is very simple and efficient, as there is no need to draw up a transfer agreement or to convene a general meeting to approve the transfer. However, to ensure legal certainty, even in this case we always recommend having a written share purchase agreement.

What to be careful about in the agreement?

A well-drafted share purchase agreement should contain provisions that protect the rights of both the transferor and the transferee. For example, the transferor should declare that it is the rightful and exclusive owner of the transferred share and has the full right to dispose of it. This is particularly important where there may be a conflict, for example if the transferor has previously entered into another contract for the transfer of the same share. It is also advisable to include a declaration that the share is not encumbered by third party rights, such as liens or pre-emption rights, which could restrict the transferee from disposing of the share or even jeopardise the whole transfer process.

On the other hand, certain provisions, such as the amount of the purchase price, are preferable not to be explicitly mentioned in the agreement. Since a copy of the share purchase agreement is submitted to the registry court, it may be in the interest of both parties to keep the purchase price confidential. However, since the purchase price is one of the essential elements of the share transfer agreement, it is necessary to specify in the agreement that the amount of the purchase price is specified in a separate document (Side Letter) which will remain confidential and will be accessible only to the transferor and the transferee.

Don't forget to register in the commercial register

In order for the new shareholder to be officially registered as a shareholder, the change must be recorded in the commercial register. To do this, a form available online (on the e-justice website) must be filled in and the share purchase agreement must be attached.

Be aware of tax implications and planned changes

In connection with the transfer of a business share, it is also important to consider tax aspects, in particular the taxation of the transferor's income from the sale of the share. Recent legislative changes adopted as part of the government's consolidation package bring significant changes in this area.

Currently, in order to be exempt from personal income tax, it is necessary to meet the so-called time test, i.e. to hold the business share for at least five years. If this condition is not met, the income from the sale is subject to taxation regardless of its amount.

However, from 1 January 2025, the rules change. Exemption from tax will only apply to income from the sale of a share where the time test (five years) is met, and at the same time, the total income from the sale of all business shares in the given tax period does not exceed CZK 40,000,000. This amount refers to the total income from all transfers made during the period, not each individual transaction.

We can help you with contract preparation and tax aspects. ↗

Appropriate timing of share transfer

The issue of the share purchase agreement is more complex than it seems at first sight. Even with the upcoming changes in tax legislation that will come into force on 1 January 2025, it is important to consider the timing of the transfer of the share carefully. If the purchase price of the share is higher than CZK 40,000,000, we recommend that the transaction is carried out this year in order to take advantage of the current tax conditions and avoid the new restrictions.

If you need assistance in the preparation of the purchase agreement, approval by the general meeting or registration of changes in the commercial register, please contact us. We will be happy to help you.

Author

Michaela Puškár Garajová ↗

I am the head of the corporate team and the Prague office of SEDLAKOVA LEGAL. My practice focuses primarily on negotiating investments (both from investment funds and startups), providing legal assistance to startups, setting up holding structures and shareholder relationships, and handling corporate agenda of companies.

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