Share Transfers and Buying a Company - The Transaction Where You Buy What You Cannot See
Buying a company or a share differs from buying real estate in one way: you can inspect a flat, you cannot inspect a company. The buyer acquires a history: contracts, debts, tax risks, employees, lawsuits, part of which does not appear in the registry and which the seller does not even remember. Legal due diligence and contractual warranties are the tools that turn the invisible into the visible and into a price; without them the buyer pays the price "by the balance sheet" and pays for the risks later.
This page describes the full cycle of a share transaction from both sides: what due diligence checks and how its findings are reflected in the price, what a share purchase agreement must contain (warranties, escrow, adjustment) so that the buyer is protected and the seller is not left with unlimited liability, how the deal passes through pre-emption and consent stages, when the Competition Agency is needed, and how bringing in an investor by capital increase differs from an ordinary sale.
Updated · Practice area: Corporate lawyer
What You Are Really Buying - Shares, Assets, New Shares or an Option
The deal structure determines who takes the company's historical risks, how it is taxed and what consents are needed. Buyer and seller often prefer different structures.
A Share Transaction - From Intent to the Registry Entry
Letter of intent and exclusivity
The price range, structure, due diligence period, confidentiality and the seller's obligation not to negotiate with others during that period. Non-binding on price, binding on confidentiality and exclusivity; the lawyer carries that distinction precisely into the text.
Legal due diligence
Corporate documents and share history, contracts with clients and suppliers (change-of-control clauses!), loans and security, property and leases, employees and labour risks, licences, litigation, tax audits and risks, intellectual property. The output is a risk map with arguments on price, warranties and escrow.
Pre-emption and consents
Under the charter and shareholders' agreement: the other partners' pre-emption right and consent; the bank's consent under the loan agreement; a spouse's consent; notice to the Competition Agency above the threshold. One missed consent makes the deal contestable.
The share purchase agreement
Price and adjustment mechanism (by closing balance sheet, debt and cash), the seller's warranties on the company's condition, the indemnity rule and limits, escrow of part of the price for the warranty period, conditions precedent to closing, the seller's covenants between signing and closing, a non-compete for the seller.
Closing and registration
Verifying the conditions precedent, payment under the scheme (escrow, stages), registration of the shares in the registry (before registration the buyer is not a partner), change of director and representation, re-registration of bank signatories, handover of documents and passwords by act.
The post-closing period
The warranty period and claims procedure, release of escrow, final price adjustment, the seller's assistance with the transition. The lawyer turns risks discovered in this period into warranty claims, within the deadlines in the agreement.
The Seller's Warranties - The Buyer's Main Protection and the Seller's Main Risk
Warranties are the seller's statements about the company's condition: debts only as in the balance sheet, taxes paid, no litigation, contracts in force, no employee claims, intellectual property owned by the company. If a statement proves false, the buyer is entitled to indemnity, often from escrow and without court. "Handwritten" contracts have no warranties, and a buyer who discovers a tax assessment after the purchase is left with only the general defect rules, which work poorly for a company.
For the seller, warranties are a double-edged instrument: risks disclosed in due diligence are excluded from the warranties, since what is disclosed carries no liability; liability is capped (a percentage of the price), subject to a de minimis threshold (trivial claims are not considered) and time-limited (12-24 months, and for tax the tax limitation period). The lawyer's work for either side is negotiating exactly this balance: what is warranted, what is disclosed, how much and for how long.
Escrow makes this system real: 10-20% of the price stays with a third party for the warranty period, and a confirmed claim is paid from it. Without it the buyer chases the seller in court, often abroad or without assets by then. For the seller, escrow means part of the price is delayed, but it is often exactly what makes a higher price possible.
Bringing in an Investor - The Terms Founders and Investors Bargain Over
- Valuation and dilution
- The company's value before and after the investment, the investor's share and the founders' dilution. An employee option pool, before or after the investment, materially changes the shares.
- Liquidation preference
- On a sale of the company the investor first recovers their investment (or a multiple), then the rest is distributed. 1x non-participating is the fair standard; 2-3x participating is dangerous for founders.
- Veto and board
- The investor's consent on material matters (budget, borrowing, sale, a new round) and a board seat. The longer the veto list, the less the founder manages.
- Anti-dilution
- If the next round is at a lower valuation, the investor's share is adjusted. A "full ratchet" destroys founders; "weighted average" is the market standard.
- Founder vesting
- The investor requires the founders' shares to be "earned" over years; a departing founder loses shares. For the founder: the vesting period, "good leaver" terms, acceleration on a sale of the company.
- Drag, tag and exit rights
- The investor's right, after a set period, to demand a sale of the company or a buy-back of their shares. The founder bargains over that period and its terms; it is the boundary of their control.
What the Buyer's Lawyer Requests From the Seller - The Minimum Due Diligence List
- Corporate: charter, shareholders' agreement, meeting minutes, share history from the registry, the director's authority, related-party transactions.
- Financial and tax: 3 years of accounts, tax returns, tax audit reports and pending disputes, debts and security, bank agreements with change-of-control clauses.
- Contracts: major clients and suppliers, terms, termination and change-of-control clauses, exclusivity, penalties.
- Property and IP: real estate and leases, equipment, trademarks and domains in the company's name, software rights assigned by employees and contractors.
- Employment: contracts, bonus and compensation obligations, non-competes, pending labour disputes, the risk of reclassifying "service contract" workers.
- Licences, permits, regulatory compliance, personal data protection, court and administrative disputes, pending and expected.
Three Share Transactions
A company with a "clean balance sheet" and a tax assessment
The buyer bought an LLC under a one-page contract; 5 months later the tax authority assessed 180,000 lari for the previous 3 years. Lawyer for the buyer: with no warranties, only the general defect rules and proof of deceit (the seller knew of the audit). Partial recovery in court after 2 years. Due diligence and escrow in the contract would have settled this in 5 months.
A seller asked for "unlimited" warranties
The buyer's draft had warranties with no term, cap or disclosure, and a 40% escrow for three years. Lawyer for the seller: a list of risks disclosed in due diligence excluded from the warranties, a cap of 25% of the price, an 18-month term (tax to the limitation period), a 15% escrow for 18 months. The price stayed unchanged.
An investor with a 3x liquidation preference
An investor offered a startup 300,000 for 25% with a 3x participating preference and a full ratchet. Lawyer for the founders: modelling showed that on a 2 million sale the founders would be left with almost nothing; negotiation to a 1x non-participating preference and weighted-average anti-dilution. The investor agreed; the round closed.
Questions About Share Transactions
I am buying a business: should I buy the shares or the assets?
Assets, if the value is in the property and the history is risky (debts, tax, disputes): a clean start, but with re-documentation of licences, contracts and employees and tax on every asset. Shares, if the value is in contracts, licences and the team, which cannot be re-documented or would be expensive to: with due diligence, warranties and escrow. The lawyer models both options including tax.
My partner sold his share to a third party bypassing my pre-emption right. What do I do?
A transaction in breach of pre-emption gives a claim for the buyer's rights and obligations to be transferred to you, that is, for you to receive the share at the same price. The period is short and runs from learning of the transaction; evidence is the registry entry, the contract (from the registry) and the charter clause. Contact a lawyer immediately.
When is notice to the Competition Agency needed?
Prior notice of a concentration (acquisition of a company or of control) is mandatory when the parties' turnover exceeds the statutory threshold. A deal closed without notice risks a fine and voidness. The lawyer calculates the threshold before the deal and plans the notice around the agency's timelines; this changes the closing calendar.
The investor says these are "standard terms". Really?
A standard exists, but it is a range, not a single price: a 1x non-participating preference, weighted-average anti-dilution, a veto over a limited list, 4-year vesting with a one-year cliff are typical market points. A 3x preference, a full ratchet and a veto over everything are not. The lawyer shows the terms by modelling what is left for the founder in different sale scenarios.
I sold shares, the buyer is not paying the balance, and he is already in the registry. What leverage do I have?
If the balance was not secured in the contract by a pledge over the shares or a right of rescission, an ordinary claim for the balance with a penalty and attachment of the buyer's assets, including the shares themselves. A properly drafted contract ties registration of the shares to full payment or to registration of a pledge; the lawyer always insists on this for the seller.
Lawyers for Share Transactions
A share transaction is won with due diligence, a balance of warranties and a flawless closing procedure, along different lines for the buyer and the seller. Within 15 minutes the coordinator connects you with a lawyer who handles company sales and investment rounds.
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