Buying Company Shares: What to Check to Avoid Hidden Debts and Risks

Buying the shares (participaciones sociales) of a company — just as with the purchase of shares in a public limited company (sociedad anónima) — can seem, at first glance, a straightforward transaction. The parties agree on a price, sign the contract, and the buyer becomes a shareholder of the company. However, from a legal standpoint, the reality is very different.

When you acquire shares in a company, you are not merely buying a percentage of its capital; you are also acquiring a company with its entire history. That history includes its contracts, its tax obligations, its employment relationships, its legal proceedings, its loans, its guarantees and, ultimately, all those risks that may surface even years after the purchase.

This issue becomes even more significant in small and medium-sized enterprises. In SMEs, it is common for the shareholder to also be the company’s director, to personally manage the business and to maintain a direct relationship with clients, suppliers, employees and financial institutions. That dual role means that certain liabilities do not disappear upon signing the share purchase agreement, but may instead fall upon those who managed the company beforehand.

For this reason, before acquiring shares it is essential to carry out a legal review of the company that goes well beyond an analysis of its annual accounts.

The balance sheet does not always reflect the company’s true risk

One of the most common mistakes is thinking that reviewing the accounts is sufficient to understand the financial position of a company.

Experience shows that many of the most serious problems do not appear in the balance sheet.

A tax inspection not yet initiated, outstanding contributions to the General Social Security Treasury (Tesorería General de la Seguridad Social), wage claims, legal proceedings, administrative penalties or potential liabilities arising from the conduct of the directors are all contingencies that can seriously affect the true value of a company without necessarily appearing in its financial statements.

For this reason, the preliminary analysis must extend to all areas that may give rise to future liabilities, particularly where the acquisition of shares takes place within a company that might be considered «problematic».

Particular attention to tax debts

What to check in the tax review

One of the first matters to review is the company’s tax position. It is not enough to confirm that the company files its tax returns. It is equally important to establish whether there are any open inspection proceedings, pending payment arrangements, debts in enforcement, or potential liability derivations — that is, any prior issue or contingency that, in the future and within the four-year limitation period, could give rise to a possible tax penalty.

In many cases, the financial consequences of a tax inspection do not materialise until several tax years after the underlying events occurred. It is therefore advisable to request certificates of being up to date with payments to the Spanish Tax Agency (Agencia Tributaria), to review the self-assessments for recent tax years, and to analyse whether any transactions may give rise to future tax adjustments.

Liability derivation under Article 43 of the General Tax Law

Where the seller has also held the position of director, it is advisable to assess the possible application of the liability derivation provisions set out in Article 43 of the Spanish General Tax Law (Ley General Tributaria).

Employment and Social Security obligations may arise years later

Another major source of risk lies in the employment sphere. A wage claim, discrepancies in social security contributions, reports from the Labour Inspectorate or dismissal proceedings can generate significant financial liabilities for the company.

It is also advisable to check whether there are any debts owed to the General Social Security Treasury or any collection proceedings under way, as well as to verify that contributions have been correctly paid.

Although the purchase concerns only the shares and not a transfer of the business activity itself, the company remains the same legal entity, meaning that all such obligations continue to be binding after the acquisition.

Legal proceedings are also part of the company

It is not unusual to find apparently sound companies that have ongoing legal proceedings whose outcome could completely alter the value of the transaction. Claims from clients, demands from suppliers, disputes with former employees or administrative penalty proceedings may ultimately result in significant financial liabilities.

For this reason, before closing the transaction it is important to be aware not only of proceedings currently under way, but also of disputes that may foreseeably lead to litigation.

The director’s liability does not disappear upon the sale

As already noted, in small companies the roles of shareholder and director often coincide. This aspect deserves particular attention.

The transfer of shares does not automatically extinguish the potential liabilities that may arise from the management carried out during the years prior to the sale.

If, following the transfer of shares, the Spanish Tax Authority initiates a liability derivation procedure, the General Social Security Treasury claims company debts, or a creditor brings an action against the former director, the sale of the shares will not prevent those claims from being directed, equally, against the person who was managing the company at the time the relevant events occurred — regardless of whether that director and shareholder is no longer part of the company when the potential claim is received. A thorough understanding of the limits of a director’s liability for company debts is key to assessing the true risk of the transaction.

The indemnity guarantee as protection

It is precisely for this reason that, in many transactions, regulating the obligations following completion is just as important as fixing the transaction price itself — for example, through an indemnity guarantee in favour of the selling party, particularly where the buyer is the shareholder or shareholders who were already part of the company prior to the transaction.

A good contract is no substitute for thorough prior due diligence

It is tempting to think that a sufficiently comprehensive share purchase agreement will resolve any future problem, but that is not the case. The contract serves to allocate risks between buyer and seller, but it does not prevent those risks from existing.

The best protection lies in identifying all material contingencies in advance, quantifying them where possible, and deciding whether they should be reflected in the price, covered by specific guarantees, or addressed through indemnity clauses that adequately protect one of the parties. That is why, before signing, it is advisable to instruct a commercial lawyer to carry out a thorough review of the transaction.

In short, a share purchase transaction should not be approached solely as a commercial operation. It is, above all, a legal operation in which it is essential to analyse the company’s tax, employment, corporate and administrative position, as well as the potential liabilities arising from the conduct of those who have managed it.

Only after that review will it be possible to determine whether the agreed price genuinely reflects the value of the company, or whether, on the contrary, the buyer is acquiring a business accompanied by hidden obligations that will ultimately turn what seemed like a sound investment into a significant financial burden.