A share purchase agreement is a contract for the sale and purchase of shares of a corporation. A share purchase agreement can document a wide range of transactions — from a single investor buying a minority stake in a startup, to a friends-and-family round at the earliest stages of a company’s life, to a private equity firm acquiring 100% of a mature operating business. The share purchase agreement sets out who is buying what shares, at what price, on what terms, and with what protections. A share purchase agreement may sit alongside any existing shareholder agreement, subscription documents, and corporate records, and is often coordinated with an employee stock option plan, tax planning, and financing arrangements.
Compensating founders, co-founders, and key employees. A share purchase agreement can be used to issue shares to founders, co-founders, and key employees as part of building out the corporation’s ownership structure. Recording these share issuances and transfers through a share purchase agreement creates a clear paper trail of who owns what, at what price, and on what terms, which supports later financings, tax filings, and due diligence on the corporation.
Investing in a private company. A share purchase agreement is commonly used by angel investors, seed-stage investors, and friends-and-family investors to document a purchase of newly issued or existing shares of a private corporation. The share purchase agreement records the price, the number and class of shares, the closing mechanics, and the investor’s rights going forward.
Selling shares in a corporation. A share purchase agreement allows a shareholder to sell some or all of their shares — whether as part of a full exit, a partial liquidity event, or a transfer to a new investor, co-founder, or family member. The share purchase agreement documents the transfer and records the commercial terms of the sale.
Creating a paper trail for lenders, investors, and tax authorities. A share purchase agreement creates a formal record of the transaction that can be provided to lenders, future investors, accountants, and the Canada Revenue Agency. This paper trail supports financing, tax filings, future rounds of investment, and later due diligence on the corporation.
Business Corporations Act, RSA 2000, c B-9. Alberta’s corporate legislation, which governs Alberta corporations, share transfers, share issuances, and the corporate actions required to complete a share purchase agreement involving an Alberta corporation.
Canada Business Corporations Act, RSC 1985, c C-44. Canada’s federal corporate legislation, which governs federally incorporated corporations and the corporate mechanics of a share purchase agreement at the federal level.
Income Tax Act, RSC 1985, c 1 (5th Supp). Canada’s federal tax legislation, which governs the tax treatment of a share purchase agreement for both buyer and seller, including capital gains, the lifetime capital gains exemption, and tax elections relevant to share transactions.
Securities law compliance. A share purchase agreement that involves the issuance or sale of shares is a distribution of securities and must fit under applicable securities legislation. Exemptions commonly relied on in private share purchase agreements include the accredited investor exemption, the private issuer exemption, and the family, friends, and business associates exemption. A share purchase agreement that does not fit within an available exemption can expose the parties to securities law consequences.
New shares versus existing shares. A share purchase agreement can involve the issuance of new shares by the corporation — a subscription — or the sale of existing shares from a current shareholder — a secondary transfer. The two structures have different legal, tax, and corporate consequences, and a share purchase agreement needs to be drafted to reflect which is actually happening. Hybrid transactions that involve both primary and secondary components require particular care.
Shareholder agreement, existing rights, and consents. A share purchase agreement involving existing shares may need to work around rights of first refusal, tag-along rights, and transfer restrictions in an existing shareholder agreement. A share purchase agreement involving new shares may trigger pre-emptive rights held by existing shareholders. Identifying these existing rights and addressing any required consents is a standard part of any share purchase agreement.
Price, payment terms, and valuation. The purchase price in a share purchase agreement can be a simple fixed amount, a per-share price tied to a valuation, or a formula price tied to the corporation’s financials. Payment can be at closing, deferred, or structured through promissory notes or earn-outs. A share purchase agreement that does not clearly define price, payment, and valuation methodology creates risk of dispute on closing and afterwards.
Representations, warranties, and disclosure. Representations and warranties are the primary vehicle for risk allocation in a share purchase agreement. The scope of the representations, any knowledge or materiality qualifiers, and the disclosure schedule that qualifies them are all commercial terms.
Do I need a share purchase agreement for a small investment? A share purchase agreement is generally advisable for any share transaction, regardless of size. Small investments are sometimes documented informally, but the absence of a share purchase agreement leaves both parties exposed to disputes about price, share class, rights, and what was represented about the corporation.
What is the difference between a share purchase agreement and a subscription agreement? A subscription agreement is a specific type of share purchase agreement used when the corporation is issuing new shares directly to the buyer. A share purchase agreement for a secondary transfer documents the sale of existing shares from a current shareholder to a buyer. The terms “share purchase agreement” and “subscription agreement” are sometimes used interchangeably, but they describe different legal transactions.
Who signs a share purchase agreement? A share purchase agreement is signed by the buyer and the seller — which, for a new issuance, is the corporation itself, and for a secondary transfer, is the selling shareholder. The corporation may also be a party to a share purchase agreement for a secondary transfer where it is giving representations about itself or acknowledging the transfer.
This information is for education and entertainment purposes only. It is not intended to be legal, business, or other professional advice to be relied on. Do not make or refrain from any decisions on the basis of this information. Please contact us to receive advice from a qualified lawyer. View our Terms of Service for more information.