Share Purchase Agreement Singapore : 5 Key Legal Issues To Note

Share Purchase Agreement Singapore : Starting and growing a company is the dream of many an entrepreneur in Singapore but many at the point of selling their company (as a seller) are quite mystified with the legal concepts of a sale of shares.  This article tries to shed light on 3 key legal concepts that a seller of shares in a company needs to know before negotiating a sale of his company to a potential buyer.

Companies in Singapore come in many shapes and sizes and some are passive companies or more commonly known as investment holding companies which typically hold investments in shares or real estate and some are active operating companies which run business ventures.  This article will assume that we are talking about active operating companies which are running active business operations.

#1 Share Purchase Agreement Singapore : Stamp Duty and ACD (Additional Conveyance Duties)

Share transfers under the Stamp Duties Act attract stamp duty and such stamp duty is payable when you file the transfer of shares pursuant to the share transfer form with your company secretary.  The rate of stamp duty in Singapore for such share transfers is 0.2%.

Another recent development has been the imposition of ACD (Additional Conveyance Duties).  This is imposed on the transfer of shares where an entity has at least 50% (asset ratio) of its total assets being made of prescribed immovable properties in Singapore. 

PIP means any immovable property that is –

1. zoned or situated on land that is zoned “Residential”, “Commercial and Residential”, “Residential/Institution”, “Residential with Commercial at 1st Storey”, or “White”;
2. permitted to be used by a written permission given under section 14(4) of the Planning Act (not being one that is given for a period of 10 years or less) or notification given under section 21(6) of the Planning Act for solely residential purposes or for mixed purposes one of which is residential; or
3. used for solely residential purposes or for mixed purposes one of which is residential, in a case where the property was so used on 1 Feb 1960 and has not been put to any other use since that date, and where such use is not the subject of a written permission or notification mentioned in paragraph (b).

So if your company has such properties, do remember to check with your lawyers on whether ACD is applicable on the sale of the shares in your company in respect of such sale shares.

#2 Share Purchase Agreement Singapore:  Sales Price: Learn Financial Multiples

The sale price whilst just a clause in your sale and purchase agreement is usually calculated based on a certain financial multiple over either net profit/EDBITDA or revenue.  As a seller, do spend some time studying your sector so that you do not get short changed when selling the shares of your company. 

On the other hand, many sellers always imagine that their companies command very high multiples and as a result are unable to come to an agreed pricing with the potential buyer.  One rule of thumb is to cut the current public market price to earnings ratio by 50% for private companies.  As a seller, why should you do this?  This is to leave some meat on the table for the potential buyer.  If you are uncertain about what price to sell at, do engage a small accounting firm to do a desktop valuation for you.

 

#3 Share Purchase Agreement Singapore: Fewer representations and warranties better for a vendor in a Sale and Purchase Agreement

A quick legal tip for the seller.  Typically most sellers would want to give as few representations and warranties as possible.  The fewer your representations and warranties, the less likely you can be sued for breach under the sale and purchase agreement.  For real estate holding companies, usually the representations and warranties given are few and limited.

However, for operating companies especially if it’s a company that you did not start from day one but instead acquired previously, it is possible to negotiate with the buyer to limit your representations and warranties to the number of years that you have held the shares.

If you have any other questions on key legal issues arising from negotiating sale and purchase agreements, do leave a comment below or if you have transaction specific questions and do need a corporate lawyer to look at your contracts, do contact us.

#4 Share Purchase Agreement Singapore : Should you engage a corporate lawyer to review the sale and purchase agreement or can you rely on legal templates online?

Usually it depends on the value of the transaction.  If the sales consideration amount is less than S$1,000 you may make a commercial call to just look at the documentation yourself.  However, once the sales consideration for the sale of your company is in the millions, you would definitely engage a good corporate lawyer who is familiar with transactional work to advise you to look out for potential pitfalls in the transaction documentation that is detrimental to your position.

Some people have in recent years tried to save cost and relied on online template agreements.  Some of these agreements we agree may be somewhat useful but legal pitfalls can only be determined or discovered by a good corporate lawyer acting for you. 

The rule of thumb in transaction is this.  If you did not engage a corporate lawyer and such corporate lawyer is involved in the transaction, it would be highly likely that such lawyer is acting against you.

#5:  How to negotiate a higher selling price?

In most transactions, the seller always wants a higher price and the buyer wants the lowest price to close the deal.  So sometimes the parties reach a stalemate.  One way out of such stalemate is this, the buyer agrees to pay the higher price that the seller wants but divides the sales consideration into two payment tranches.  If the financials of the company hit the relevant financial matrix that the higher price requires, the second tranche of the sales consideration will be released to the seller.  Else the second tranche of the sales consideration may be forfeited.  In this way, the deal can close and both parties are happy at getting what they want in the transaction.

Unless you are in the business of investment and therefore are experienced in closing deals, most business owners do not negotiate the sale of their business on a routine basis.  This means that such business owners should always engage a good corporate lawyer to act for them such that any potential legal pitfalls are mitigated.

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