Buying Shares in a Company: Legal Issues Australian Businesses Should Consider

Buying shares in a company can look straightforward on paper, especially when the deal is between founders, investors or existing shareholders who already know each other. But the purchase of company shares often goes wrong in very ordinary ways: buyers rely on a handshake instead of a proper share sale agreement, they assume the seller is free to sell without checking the constitution or shareholders agreement, or they focus on the price and ignore hidden liabilities sitting inside the company.

That matters because when you buy shares, you are usually stepping into ownership of the company as it stands, including its legal baggage, governance rules and internal restrictions. The risk is not just overpaying. You can also end up with a minority stake that gives you less control than expected, or a transaction that cannot be properly completed because approvals and paperwork were missed.

This guide explains what a purchase of company shares means in Australia, when these issues usually come up, what to review before you sign, and the practical mistakes business owners should avoid before they spend money on setup or commit to a deal.

Overview

A share purchase changes who owns the company, not the underlying contracts and assets held in the company’s name. That can make it simpler than an asset sale in some situations, but it also means the buyer takes on the company with its existing obligations, risks and records.

The legal work usually centres on ownership rights, transfer restrictions, due diligence and completion steps. A well-documented deal helps both sides confirm what is being sold, on what terms, and what happens if key assumptions turn out to be wrong.

• Confirm exactly which shares are being sold, and what rights attach to them
• Check the company constitution, shareholders agreement and any pre-emptive rights or approval requirements
• Review ASIC records, the share register and past share issues or transfers
• Assess company liabilities, key contracts, employment arrangements and any disputes
• Clarify whether the buyer is getting control, board rights, voting power or only an economic interest
• Use a written share sale agreement with warranties, indemnities and completion mechanics
• Make sure transfer forms, board resolutions, share certificates and register updates are completed properly
• Speak with an accountant or tax adviser about tax consequences and transaction structuring

What Purchase of Company Shares Means For Australian Businesses

A purchase of company shares means you are buying ownership in the company itself, usually from an existing shareholder, rather than buying the company’s assets one by one.

That distinction matters. If a company owns customer contracts, intellectual property, stock, software subscriptions, employment contracts and a commercial lease, those things usually stay where they are after a share sale because the company remains the same legal entity. What changes is who owns the shares in that company.

Share purchase versus asset purchase

In a share purchase, the buyer acquires some or all of the issued shares. In an asset purchase, the buyer acquires selected business assets and often leaves unwanted liabilities behind, subject to the terms of the deal and the law.

Founders often assume a share purchase is always easier because fewer individual assignments may be needed. Sometimes that is true. But the trade-off is that the buyer may inherit exposure to old problems already sitting inside the company.

Those problems can include:

• unpaid supplier debts
• employee underpayment issues
• defective contracts
• privacy compliance gaps
• trade mark ownership problems
• disputes between shareholders
• breaches of financing documents
• ASIC record-keeping issues

What rights are attached to the shares?

Not all shares are equal. Before you agree to a purchase of company shares, check the class of shares being sold and the rights attached to them.

Those rights may include:

• voting rights
• dividend rights
• rights on winding up
• rights to appoint a director
• preference rights over ordinary shareholders
• drag-along or tag-along rights in a future sale
• restrictions on transfer

This is where founders often get caught. A buyer may think they are acquiring meaningful influence, only to discover the shares are non-voting, heavily diluted, or subject to a shareholders agreement that gives control to someone else.

Minority stake versus control

Buying 10 percent of a company and buying 51 percent create very different legal and practical outcomes. A minority shareholder may have limited say over day-to-day decisions unless special rights have been negotiated.

Before you sign, ask direct questions about:

• who currently controls the board
• what decisions require shareholder approval
• whether there are reserved matters requiring unanimous consent
• whether new shares can be issued and dilute your interest
• whether existing investors have veto rights

The value of the deal is not just the percentage number. It is also the real level of control, protection and access that comes with that percentage.

Why documentation matters

A proper paper trail is not just a formality. It is how the parties confirm the price, payment timing, completion conditions, warranties about the company, restraint issues if the seller is leaving, and what happens if a problem is discovered later.

Without clear documents, disputes often arise over whether the shares were transferred, whether the seller disclosed key risks, and whether the buyer was promised management rights or future funding support.

When This Issue Comes Up

The purchase of company shares usually comes up when ownership is changing but the business itself will continue operating through the same company.

This can happen at very different stages of growth, from an early startup founder exit to a mature SME succession plan. The legal issues shift depending on who is buying, how much is being acquired, and whether control is changing hands.

Common founder and SME scenarios

Share sale issues commonly arise in situations such as:

• a co-founder wants to leave and sell their shares to the remaining founders
• an investor wants to buy into the company
• a business owner wants to acquire a competitor by buying the shares in its company
• family business ownership is being transferred to the next generation or to management
• one shareholder has triggered a buy-sell mechanism under a shareholders agreement
• a strategic partner wants equity as part of a broader commercial arrangement

Capital raising versus secondary sale

Businesses often confuse a capital raising with a share purchase from an existing shareholder. They are different transactions.

If the company issues new shares, the company receives the money. If one shareholder sells existing shares to another person, the selling shareholder usually receives the money instead. The legal documents, approvals and commercial consequences can differ significantly.

This matters because founders sometimes believe the business is getting fresh working capital when the transaction is really just a secondary sale between individuals.

Before a bigger transaction or restructure

Share purchases also come up before more complex steps, such as group restructures, investor onboarding, management buyouts or preparing a business for sale. In those cases, the share transaction may need to align with:

• existing finance arrangements
• commercial lease terms
• employee incentive plans
• intellectual property ownership
• privacy obligations where customer data is involved
• change of control clauses in key contracts

Even though the company remains the contracting party, some agreements still treat a major ownership change as a trigger event. Before you sign a contract for the share sale, check whether customers, suppliers, lenders or landlords have consent rights.

Practical Steps And Common Mistakes

The safest approach is to treat a share purchase like a legal and commercial investigation, not just a price negotiation.

Buyers should verify the company’s ownership records, legal obligations and internal governance before completion. Sellers should prepare clean records and accurate disclosures, because vague answers and missing documents can delay the deal or reduce the price.

1. Check the company rules before agreeing to the deal

The constitution and any shareholders agreement are often the first place a transaction gets stuck. These documents may say that existing shareholders get first right to buy the shares, or that directors must approve the transfer.

Check for:

• pre-emptive rights
• director approval requirements
• drag-along and tag-along clauses
• mandatory valuation mechanisms
• good leaver or bad leaver rules
• restrictions on transferring to competitors or unrelated parties

A common mistake is negotiating the commercial deal first and discovering later that another shareholder can block it or buy the shares instead.

2. Confirm that the seller actually owns what they say they own

You should not rely only on a cap table sent by email. The share register, ASIC records, past subscription documents and prior transfer paperwork should all line up.

Review:

• the current share register
• ASIC company extracts and lodged details
• share certificates, if issued
• board and shareholder resolutions for previous share issues
• any option, SAFE-style, convertible or employee equity arrangements that may affect dilution

If the records are inconsistent, fix that before completion. Messy share records can create real disputes about ownership and voting rights.

3. Do legal due diligence on the company, not just the seller

The buyer’s main risk is that the company has liabilities or weaknesses that were not obvious from the pitch deck or management conversations.

Due diligence often includes checking:

• key customer and supplier contracts
• loan agreements and security interests
• employment contracts, contractor arrangements and workplace policies
• intellectual property ownership, including trade marks, software and branding
• privacy compliance and handling of personal information
• website terms, app terms or customer terms if the business sells online
• commercial leases and occupancy arrangements
• current or threatened disputes, complaints or regulator issues
• corporate records, meeting minutes and ASIC compliance

For startups and digital businesses, intellectual property and privacy are often bigger value drivers than physical assets. If the code, brand or customer database is not properly owned by the company, the shares may be worth less than expected.

4. Use a share sale agreement with clear risk allocation

A handshake or short email chain is rarely enough. A written agreement should set out the core commercial terms and allocate risk if something goes wrong.

A share sale agreement commonly covers:

• the number and class of shares being sold
• the purchase price and payment method
• completion conditions and timing
• warranties given by the seller about the company and the shares
• specific indemnities for identified risks
• restraints, confidentiality and non-disparagement obligations where relevant
• what documents must be delivered at completion
• what happens if a party defaults

Warranties are especially important because they create a clear statement of fact the buyer can rely on, such as that the seller owns the shares free from encumbrances, or that there is no undisclosed litigation. The wording matters, and broad assumptions can create expensive disputes later.

5. Think carefully about consent and change of control issues

Some contracts are sensitive to ownership changes even where the contracting company remains the same. Lenders, franchise groups, software licensors, government counterparties and landlords may all have specific clauses dealing with changes in control.

Before you spend money on setup or integration planning, identify whether the deal requires any third party notice or consent. Missing a consent requirement can put key contracts at risk right after completion.

6. Do not forget board process and completion mechanics

Completion is not finished just because money has changed hands. The company still needs to process the transfer properly.

That may involve:

• signed share transfer forms
• board resolutions approving the transfer, if required
• updating the share register
• cancelling and issuing share certificates where relevant
• notifying ASIC of officeholder changes if the board composition also changes
• obtaining deed accessions if the buyer must join an existing shareholders agreement

This is a common operational gap in small companies. The deal is done commercially, but the company records are never cleaned up. That creates confusion later when the business raises capital, sells again or has an internal dispute.

7. Be realistic about tax and structure issues

The legal structure of the transaction can affect outcomes for both buyer and seller. That might include whether the buyer purchases personally or through another entity, whether the sale is staged, and whether there are earn-out arrangements.

You should speak with an accountant or tax adviser about tax consequences. Legal documents should line up with that advice, but they do not replace it.

Common mistakes businesses make

The most frequent problems are not exotic. They are ordinary shortcuts taken under time pressure.

• agreeing a deal before reading the constitution or shareholders agreement
• assuming all ordinary shares carry the same practical value
• failing to investigate company liabilities
• using vague heads of agreement as if they are final documents
• forgetting consent requirements in finance, lease or customer contracts
• not documenting director appointments, resignations or board rights tied to the sale
• leaving ASIC and share register updates until much later
• confusing a new share issue with a purchase from an existing shareholder

When a deal has already become emotional, especially between founders, these mistakes become harder to fix. Early legal review usually costs less than unwinding a disputed transfer later.

FAQs

Do I need a share sale agreement to buy shares in a company?

In most business purchases, yes. A written agreement helps confirm the terms, risk allocation, warranties and completion steps. Without one, there is much more room for dispute about what was promised and what was disclosed.

Can a shareholder sell their shares to anyone they want?

Not always. The company constitution, shareholders agreement or the Corporations Act position applying to the company may restrict transfers. Existing shareholders may have pre-emptive rights or the board may need to approve the transfer.

When I buy shares, do I also take on the company’s liabilities?

Indirectly, yes in many cases. The company remains responsible for its own liabilities, but as the new owner you bear the commercial impact of those liabilities because you now own the company that carries them.

Is buying shares the same as investing new money into the company?

No. If you buy existing shares from a current shareholder, the sale proceeds usually go to that shareholder. If the company issues new shares to you, the company usually receives the investment funds.

Should I check trade marks, privacy and online terms in a share purchase?

Yes, especially for startups and online businesses. Brand ownership, software rights, customer data handling and website or app terms can all affect value and risk, even though they are not always obvious from the financials.

Key Takeaways

• A purchase of company shares means buying ownership in the company, not simply picking up selected assets
• The buyer should review the constitution, shareholders agreement and any transfer restrictions before signing
• Due diligence should cover company liabilities, contracts, employment, intellectual property, privacy and online trading arrangements
• The rights attached to the shares matter just as much as the percentage being acquired
• A written share sale agreement should address price, warranties, indemnities, completion mechanics and any post-sale obligations
• Company records, the share register and ASIC details should be updated properly once the transaction completes
• Tax and transaction structure issues should be discussed with an accountant or tax adviser alongside legal review

If your business is dealing with purchase of company shares and wants help with share sale agreements, legal due diligence, shareholders agreement issues, company record updates, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.