December 12, 2023

Navigating Share Purchase Transactions: A Comprehensive Guide

A share purchase transaction involves the purchase of some or all the shares in a target corporation. My experience is that no two share purchase transactions have the same exact steps. I like to think of share purchase transaction as a meticulous dance of offers, negotiations and due diligence between the buyer and the seller. Business lawyers must always remember that at the core of their legal undertakings lie pivotal business negotiations. It is essential to strike a balance, ensuring that while the legalities are ironclad, there remains flexibility for the ever-evolving business considerations that drive the very essence of commercial transactions. This means that legal decisions should not be made void of the consideration that the buyer and the seller are often highly motivated to conduct the transaction and sometimes excessive legal force can cause the transaction to fall apart. Below you will find the steps involved in a standard share purchase transaction.

Execution of Confidentiality Agreements During Preliminary Discussions (Optional)

The execution of confidentiality agreements during preliminary discussions is an optional and sometimes crucial step in the share purchase negotiation process. In these initial stages, both the buyer and the seller often exchange sensitive and confidential information to assess the feasibility and desirability of the transaction. These agreements, commonly known as Non-Disclosure Agreements (NDAs) or confidentiality agreements, serve as legal safeguards to protect the confidentiality of the disclosed information. They establish a legally binding obligation for all parties involved, ensuring that sensitive data, such as financial records, trade secrets, and business strategies, remains secure and undisclosed to third parties. By requiring the signing of confidentiality agreements at this early stage, participants can engage in open and transparent discussions, fostering trust and facilitating a smoother path toward a successful share purchase negotiation.

Letter of Intent (LOI) (Optional)

An LOI functions as a preliminary document that paves the way for the eventual creation of the formal Share Purchase Agreement (SPA). This crucial initial step is akin to creating drawings of a building before construction begins. Within the LOI, the basic terms and conditions of the prospective deal are outlined. These terms typically include fundamental elements such as the proposed purchase price, the anticipated closing date, deposit terms, and the overall structure of the transaction. The intention of an LOI is to lay out the basic terms of the transaction as to ensure the buyer and the seller have a mutual understanding and closely aligned expectations prior to negotiating the ensuing share purchase agreement. Afterall there is great expense in negotiating a share purchase transaction and there is no point of proceeding with negotiation of the agreement of purchase and sale if the parties are too far apart from one another on basic terms of the transaction.

There are three different types of LOIs, each catering to different objectives and levels of commitment. The first is a binding LOI, wherein the parties agree to be legally bound by the outlined terms. Binding LOIs are rare and only used under specific circumstances. The second type is a non-binding LOI, which signifies a preliminary agreement but does not impose legal obligations on the parties involved. Finally, there is the hybrid LOI, which blends elements of both binding and non-binding features to offer a tailored approach that aligns with the specific requirements and preferences of the parties. Typically, hybrid LOIs are non-binding with the exception of confidentiality and exclusivity provisions included within them.

The choice between these three types of LOIs hinges on the unique circumstances of the transaction and the preferences of the parties. My experience is that the hybrid LOI is the most popular type of LOI.

By ensuring that all parties have a shared understanding of the fundamental terms and conditions, a well-drafted LOI can streamline the negotiation process, fostering a more efficient, productive, and ultimately successful share purchase transaction.

Share Purchase Agreement (SPA) Preparation and Negotiation

A share purchase agreement serves as the principal document outlining the terms of the transaction between the purchaser and the seller. I take great satisfaction in crafting shareholder agreements, finding the process both stimulating and fulfilling. It is within these documents that buyers and sellers set out their boundaries and safeguard their respective interests as the transaction unfolds. Sellers typically aim to maximize their financial return while minimizing their obligations related to indemnities, representations and warranties, and covenants. Conversely, buyers seek to negotiate the lowest possible purchase price while securing more extensive indemnities, representations and warranties, and covenants.

In my role as a business lawyer, I always recommend to my client(s) to nurture a positive relationship with the opposing party(ies). I emphasize that while lawyers can be effective negotiators, there are occasions where direct discussions between the involved parties over an informal meeting or even telephone call may be more cost-effective and time efficient. As such, while I guide my client in the right direction and meticulously draft the shareholder agreement, I recognize the correct instances when it may be better for the parties to negotiate an aspect of the agreement on their own.

A standard share purchase agreement, among other things, outlines the following important matters:

  • Purchase price and deposit terms;
  • Number and class of shares being purchased;
  • Holdbacks;
  • Representations and warranties by the parties;
  • Terms regarding the survival of the representations and warranties;
  • Indemnity provisions;
  • Transition provisions;
  • Covenants of the parties including post-closing covenants;
  • Conditions; and
  • General contractual terms.

The creation and negotiation of share purchase agreements require an understanding of the legal framework, strategic approach to negotiations, and skill in drafting clauses that protect the interests of the client. I see the drafting and negotiation of share purchase agreements as an intricate interplay of skill, precision and foresight that transforms a standard contractual exercise into a masterful legal craft.

Due Diligence

One of the most critical stages of a share purchase transaction is due diligence. This process involves a thorough examination of the target corporation to ensure that the buyer is getting what they expect. I like to divide due diligence into three categories:

  1. a) Business Due Diligence: Business due diligence represents a critical phase of the share purchase transaction, where prospective buyers delve into the operational heart of the target corporation. This type of due diligence goes beyond financial figures and legalities; it seeks to uncover the essence of how the business functions day-to-day. Buyers carefully examine the company’s operations, gaining insight into its management practices, customer relations, and overall culture. They assess the efficiency of processes, the quality of customer service, and the effectiveness of internal systems. This thorough exploration provides invaluable insights into the company’s strengths, weaknesses, and growth potential, enabling buyers to make informed decisions and, ultimately, ensuring a smoother transition and post-acquisition success.
  2. b) Financial, Accounting, and Tax Due Diligence: Financial, accounting, and tax due diligence form a critical aspect of the share purchase process, necessitating the expertise of financial professionals such as accountants and tax lawyers. I always recommend that the prospective buyer work closely with a skilled accountant who can assist the buyer conduct financial, accounting and tax due diligence on the target corporation. Unless a business lawyer is well-versed in tax and accounting, they should not be involved in financial, accounting and tax due diligence. In my practice, I collaborate with proficient accountants who offer expert tax, accounting, and financial advice to my clients regarding the share purchase transaction.
  3. c) Legal Due Diligence: Lawyers play a pivotal role here. They conduct various searches, including writ searches, bankruptcy searches, lien searches, and litigation searches. They also obtain clearance certificates, such as WSIB clearance certificates and tax clearance certificates. Legal due diligence includes reviewing material contracts and negotiating with third parties with whom the corporation has business relationships. The goal is to ensure that the buyer is fully informed and protected from unforeseen legal issues. This proactive approach helps shield the buyer from unforeseen legal entanglements, instilling confidence and trust in the transaction’s legal integrity. In my practice, I let my clients know that I take responsibility for conducting legal due diligence, but the extent of such due diligence is determined by the client’s budget and business goals. Understandably the level of legal due diligence conducted on a small business transaction will look very different from a large merger and acquisition transaction.

The Closing

The closing is the culmination of the share purchase transaction. At this point, closing documents prepared by both parties are executed, and funds are exchanged. Lawyers play a crucial role in ensuring that all closing deliveries are satisfied, and the transaction proceeds smoothly. Once both lawyers are satisfied with their closing deliveries, they authorize the completion of the transaction, causing official transfer of the shares. In today’s world, most transactions are closed virtually with the help of electronic signatures and documentation.

Post-Closing Obligations

Even after the transaction is closed, there are responsibilities that continue. Post-closing obligations are outlined in the SPA and are designed to ensure proper transition of ownership. These may include dealing with post-closing holdbacks, additional obligations, updating of corporate records, transferrin of licenses, permits and customer relationships. Effective management of post-closing obligations is crucial for maintaining business continuity and legal compliance, and it reflects the shared commitment of both parties to the long-term success of the acquired company.


This article is intended solely for general informational purposes and does not constitute legal advice. The information provided here is not a substitute for professional legal counsel. Only through personalized consultation can one receive advice tailored to their unique circumstances and ensure compliance with the latest legal regulations and requirements. Visit the Pivacy Policy and Disclaimer section of our website for more information.

About the Author:

Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.