Share sale or business sale? 6: how to deal with business contracts
September 2025
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This is the sixth Guide in my series about the differences between share sales and business (asset) sales. You should ideally be aware of these if you are a business owner who might ever want to sell (or buy) a business (or a company…).
The previous Guide explained how you need to draft a business sale agreement carefully to ensure that the various different types of assets which the buyer has agreed to buy from the selling company end up being properly transferred. This Guide explains a bit further some of the problems that come with trying to transfer your business contracts, and gives some guidance on how they need to be dealt with in a business sale as opposed to a share sale.
The business of any company revolves around its contracts, of all sorts. They can be with customers, or suppliers, or licensors or distributors or joint venture partners or employees or consultants. They can be simple and short or complex and very long.
A contract is not a straightforward asset. It is not really an asset as such, although that is a subject for another day. Contracts can include a whole range of different provisions. Broadly these include a balance of benefits to be received (such as receipt of payments or goods or services) and obligations owed (such as to make payments or to deliver goods or services) by each party.
For both share sales and business sales the buyer needs to be very careful to check the terms and state of play of any contracts and to seek appropriate protections.
If you sell the shares in your company, the buyer gets the company warts and all – its assets, contracts and liabilities – and the company carries on business as usual. But on a business sale, if the buyer decides that it really does not like a particular contract (for example if it comes with unpleasantly onerous obligations or is loss-making) it can ask for that contract to be excluded from the sale so it stays with the selling company.
So on a business sale, how does a buyer take over any contract between the seller company and any third party, of whatever nature? This can be a particularly tricky aspect of any business sale and you can be tripped up if it is not dealt with properly.
The general law is that nothing is passed from a seller to a buyer unless they both agree. This includes the benefit of any contracts, any obligations under any contracts, and any related debts owed to or by the third party to a contract. So any business sale agreement needs to include carefully considered and negotiated provisions covering how all these things should be dealt with.
Benefits
The buyer can contractually agree with the seller to take over the seller’s benefits under a contract by way of assignment. This means for example that a seller can be legally obliged to pass on to the buyer any money it is entitled to receive from customers etc. And depending on legalities such as whether written notice of the assignment was given to the other party to the contract, the buyer can directly enforce the seller’s rights against the other party to the contract.
Obligations
The buyer can agree with the seller that it will perform the seller’s obligations and liabilities under a contract as the seller’s sub-contractor. But you cannot assign obligations under a contract (as opposed to benefits). So the other party to the contract still has all its rights against the seller, so for example can sue the seller if its obligations under the contract are not performed by the buyer. The sale agreement would therefore need to contain indemnities from the buyer to the seller to cover failures by the buyer to perform the seller’s obligations.
But some contracts say that a party cannot assign the benefit of a contract, or sub-contract its obligations, without the other party’s consent. If the seller purported to do so the other party could possibly terminate the whole contract as a consequence. So as part of any due diligence the parties need to work out whether any of the seller’s contracts contain any such restrictions, and then decide how to deal with things if there are any such restrictions. This might include making the whole deal conditional on any key third party consents being obtained. The same might apply on a share sale to a contract which has a change of control clause.
Most business sale agreements will have general wording to the effect that all contracts (other than any which are agreed not to be included in the sale) are to be treated as assigned where allowed, and that in the case of any contracts which need the other party’s consent to be assigned, the seller will hold the benefit of the contract on trust for the buyer. The parties can thereafter muddle on in the hope that third parties won’t cause a fuss and will just carry on business as usual dealing with the buyer rather than the seller.
The cleanest way to transfer a contract fully is to novate it. This needs the agreement of the other party to the contract. A novation is a three-way agreement whereby the buyer effectively replaces the seller company as a party to the contract and the seller and the third party release each other from past liabilities (although the extent of this depends on the specific terms that are negotiated and set out in the novation agreement).
Novations can be a pain to arrange, and often a seller and buyer will not try too hard to arrange for formal novations of most contracts.
As well as the logistics of transferring any rights and obligations, a business sale agreement needs to address how liabilities should be dealt with. As a general rule a buyer will not want to be responsible for taking over any contract liabilities which arose before completion, and a seller will not want to be accountable for any contract liabilities which arise after completion. The sale agreement will usually need to include carefully considered provisions, including appropriate indemnities, making clear which party should be responsible for what types of liabilities.
Share sales
Compare all this with a share sale. There is no change to any contracts, which remain (along with all their benefits, obligations and liabilities) with the target company. (This is subject to the important caveat below about change of control clauses). So the buyer will want to be comfortable with whatever it is getting and whatever risks might come along with this. It will need to do appropriate due diligence, and obtain appropriate legal protections from the seller in the sale agreement, such as warranties or tailored indemnities, to address any concerns. For example, have all parties performed all their obligations under each contract? Have there been any problems with any contracts, ort are any expected? These can be quite detailed, and tricky to negotiate.
On a share sale, the parties do need to check whether any contract contains clauses entitling the other party to terminate the contract if there is a change of control of the target company. The last thing a buyer wants if it thinks it is paying good money to acquire a company with long-term rights under an important contract is to discover that the other party to that contract can terminate it as soon as the buyer has bought the shares in the target company! I have seen deals (and owners’ retirement and exit plans) fall apart because the target company’s entire business revolves around key long-term licensing or distribution rights which happen to contain change of control restrictions.
The next Guide in this series will explain some of the differences between how share sale contracts and business sale contracts need to deal with working out the purchase price for what is being bought, and how and when it must be paid.
What next? Contact me for a complimentary business sale consultation.
If you would like to discuss any of the issues raised in this Guide or any other issues relating to the possible sale of your business (or company!) please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls to which you might otherwise be exposed, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.
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