How Does a Share Purchase Agreement Work?

A share purchase agreement (SPA) is an essential legal document in the process of buying and selling shares of a company. It outlines the terms and conditions of a transaction between the buyer and seller in detail, including the type of shares being sold, the total number of shares, and the agreed-upon price. The SPA serves to protect the interests of both parties, ensuring that the transaction adheres to applicable law and minimising the risk of misunderstandings and disputes.

To create an effective SPA, both parties must have a thorough understanding of the agreement and its provisions. This includes conducting due diligence on the target company and its financials, as well as evaluating any risks and potential liabilities associated with the transaction. In addition conditions relating to the share information and price determination, key provisions such as covenants, warranties, representations, and indemnities must be carefully negotiated, agreed upon, and documented to safeguard the interests of both the buyer and the seller.

Key Takeaways

• A share purchase agreement outlines the terms and conditions for buying and selling shares in a company.
• Due diligence plays a critical role in ensuring a successful transaction and minimising risks.
• Important provisions within the SPA safeguard the interests of both the buyer and the seller.

Understanding Share Purchase Agreements

A share purchase agreement (SPA) is a legal contract entered into by a buyer and seller for the sale of a company’s shares. The seller agrees to sell a specific number of shares to the buyer at a specified price. The SPA outlines the terms and conditions of the transaction, including what type of shares are being purchased, the total number of shares, the price, and any other relevant details.

Share purchase agreements are essential for both parties’ protection. They provide a clear understanding of the transaction and help avoid any future disputes by specifying the rights and responsibilities of each party. The agreements also define the timeline for completing the transaction, as well as any contingencies or conditions that need to be met.

Share purchase agreements are drafted by lawyers specialising in business transactions, ensuring that the document aligns with the parties’ intentions and adheres to legal requirements. In some jurisdictions, written consent is required by law when shares are being bought or sold for any dollar amount.

Parties to a SPA generally negotiate the provisions, including representations and warranties, indemnities, and covenants, to address potential risks and allocate liability between the parties. The agreement may also include deal-specific provisions such as non-compete clauses and other restrictive covenants to protect the buyer’s interests if the seller becomes a competitor or reveals confidential information.

In summary, a share purchase agreement is a vital tool in the successful transfer of ownership of a company’s shares. The SPA defines the terms and conditions of the transaction, addresses potential risks, and provides a legal framework for navigating the complex process of buying or selling shares.

Parties Involved in Share Purchase Agreements

It is crucial to understand the parties involved in such agreements, as they play a significant role in the overall transaction process. In this section, we’ll discuss the key entities typically involved in a share purchase agreement: the seller, the buyer (or purchaser), the shareholders and the company.

The Seller is the party that owns the shares and agrees to sell them to the buyer. In most cases, the seller can be an individual or an institution, such as a corporation or investment company. It is the seller’s responsibility to transfer with full title guarantee the ownership of the shares to the buyer and provide all relevant documents, such as share certificates and company records.

The Buyer, also known as the purchaser, is the entity acquiring the entire share capital from the seller. Like the seller, the buyer can be an individual or an institution. It is usually the buyer’s responsibility to draft the first version of the SPA. In an acquisition, the buyer purchases shares at a specified price, as detailed in the SPA. Once the transaction is complete, the buyer becomes a shareholder and assumes the rights and responsibilities associated with the acquired shares.

Shareholders are the current owners of the company’s shares. They may be individuals or institutions that hold an ownership stake in the company. In a share purchase agreement, the shareholders may be the sellers or third parties whose consent might be necessary for the transaction to proceed. In some cases, minority shareholders may have preemptive rights that allow them to purchase the shares being sold before they are offered to other parties, ensuring that their ownership stake does not get diluted.

The Company refers to the entity whose shares are being bought and whose share capital is being sold through the share purchase agreement. The company’s role in the process includes providing the requisite documentation and information related to its shares and business operations, such as financial statements and board meeting minutes. The company may also need to take specific actions to facilitate the transaction, such as issuing new shares or registering the change of ownership.

In summary, a share purchase agreement involves various parties with distinct responsibilities to ensure a smooth and legally compliant transaction. Each entity – the seller, buyer, shareholders, and company – plays a crucial role in the successful execution of the agreement.

Share Information and Price Determination

A share purchase agreement (SPA) involves the transfer of ownership of shares in a company from the seller to the buyer. This agreement outlines essential details such as the type of shares being sold, the number of shares involved, and the agreed-upon price for these shares.

Types of shares: There are different types of shares, such as ordinary shares and preferred shares. Each type of share has specific rights and advantages attached to it, such as voting rights and dividend preferences. When drafting a SPA, it is crucial to clearly mention the type of shares being transferred to avoid any confusion down the line.

Number of shares: The SPA must specify the exact number of shares being sold. This is important for both the buyer and the seller, as it helps them understand the extent of the transaction and its impact on the ownership structure of the company.

Price determination: The price at which the shares are being sold is a significant element of the SPA. This price is typically determined through negotiation between the buyer and the seller and may consider factors such as the current market price of the shares, the financial performance of the company, and any potential future growth prospects. The agreed-upon price should be explicitly stated in the SPA.

Considering purchase details: Once the type of shares, the number of shares, and the price have been determined, it’s essential to include additional information in the SPA, such as the total consideration for the transaction, the method of payment (cash, shares, or a combination of both), and the completion date for the transaction.

In summary, the Share Information and Price Determination section of a share purchase agreement should clearly lay out the crucial aspects of the transaction, including the type of shares being sold, the number of shares involved, the price per share, and any other relevant purchase details. This helps ensure that both parties have a clear understanding of the arrangement and its implications for the company’s own share ownership and structure.

Role of Due Diligence in SPAs

Due diligence is a crucial aspect of a Share Purchase Agreement. It is an essential step in an M&A transaction where the buyer conducts a comprehensive investigation of the target company. The purpose of this investigation is to identify potential risks, validate the company’s value, and ensure that the transaction is fair and well-informed.

During the due diligence phase, the buyer examines various aspects of the target company, such as its financials, legal status, governance structure, and operational policies. They also assess any existing liabilities, tax treatments, intellectual property rights, and other significant areas that may impact the business.

The findings of the due diligence process can greatly influence the SPA’s terms and conditions. For instance, if any legal issues, financial irregularities, or potential liabilities are uncovered, the buyer may negotiate for warranties or indemnities that provide protection against these risks. In some cases, the buyer might request a purchase price adjustment based on the findings, or may even decide to walk away from the transaction if the risks outweigh the benefits.

Due diligence also plays an essential role in determining representations and warranties, which are statements made by the seller about the target company’s operating business and status. If the buyer uncovers any misrepresentations, they can seek remedies such as indemnification, price reductions, or termination of the agreement.

To sum up, the role of due diligence in SPAs is to ensure that the buyer has a clear and accurate understanding of the target company’s current state and potential risks. This comprehensive investigation allows parties to negotiate and tailor the Share Purchase Agreement to provide adequate protection and allocate responsibilities, ultimately leading to a successful and well-informed transaction.

Important SPA Provisions

A Share Purchase Agreement (SPA) is a crucial document that outlines the terms and conditions when shares of a company are bought or sold. To ensure a clear and concise agreement, some important provisions should be included.

Warranties and Representations: These are statements made by the seller about the target company’s current status, financial condition, and legal standing. Warranties provide assurance to the buyer, allowing them to identify potential risks associated with the transaction and the target company’s operating business. It is essential to accurately outline warranties and representations in the SPA to avoid potential disputes between the parties.

Indemnification: Indemnity clauses serve as protection for the buyer against any losses incurred due to the seller’s breach of the warranties, representations, or other obligations within the SPA. This provision specifies the process for indemnification claims, such as providing notice of a claim and time limits for making claims. It is also common to include a separate tax indemnity. Clearly defining indemnification terms helps prevent future disagreements and promotes a smoother transaction process.

Liabilities: In an SPA, it’s crucial to clarify the extent of liabilities for each party. This may include outlining the obligations of the seller to indemnify the buyer in case of any pre-existing tax liabilities or due diligence issues that may arise after the transfer of ownership. Allocating liabilities ensures the buyer has a better understanding of what they are acquiring and minimises potential issues.

It is important to thoroughly consider these essential provisions when drafting a Share Purchase Agreement to create a well-structured, legally-binding document that protects all parties involved. Including complete and accurate information in these provisions will minimise issues during and after the transaction and pave the way for a successful transfer of ownership.

Litigation and Disputes

In the context of share purchase agreements (SPAs), litigation and disputes can arise due to various reasons, such as disagreements over price, transaction terms, or breaches of warranties and indemnities.

One of the primary causes of disputes in SPAs is the breach of warranties or representations. Warranties are statements made by the seller in the agreement, assuring the buyer of certain aspects of the business being sold. If a warranty turns out to be false, the buyer may have a claim for compensation. Indemnities, on the other hand, are promises by the seller to compensate the buyer in case of specific losses. If an indemnity is breached, the buyer may claim damages to recover their losses. The process of resolving such disputes typically involves negotiations, mediation, or arbitration, with litigation being the last resort.

Another potential trigger for disputes is the disagreement over the price paid or the value received in the transaction. This can happen when the value of the shares fluctuates during the negotiation or completion process, or when the parties disagree on the calculation of earnouts or deferred payments. Earnouts are future payments contingent upon the performance of the acquired business after the transaction. Disagreements can arise regarding the conditions, targets, or timelines for such payments, leading to conflict and potential litigation.

Confidentiality is another essential factor in share purchase agreements. Both parties are obligated to respect and maintain the confidentiality of sensitive information shared during the transaction. Breach of confidentiality can result in disputes and potential legal action, as the compromised information may cause significant harm to a party’s reputation or business interests.

To minimise the risk of disputes and litigation, parties to a share purchase agreement should ensure clear and precise drafting of the SPA terms and conditions, proper due diligence, and a thorough understanding of the transaction details. Additionally, implementing dispute resolution clauses, such as arbitration provisions, can help in addressing potential conflicts in a more efficient and cost-effective manner.

Asset Purchase vs Share Purchase

An asset purchase refers to the acquisition of specific assets and liabilities of a target company. The buyer and seller agree on the assets to be transferred, which may include equipment, intellectual property, and customer lists. In an asset purchase, the buyer acquires the agreed-upon assets through an asset purchase agreement. The transaction structure offers flexibility, as the buyer can choose the assets it wants to acquire, mitigating potential risks associated with the target company’s liabilities.

In contrast, a share purchase involves the acquisition of the entire ownership stake in the target company. The buyer acquires ownership of the target company’s shares, typically through a share purchase agreement. In this case, the buyer obtains control over the entire company, including all assets and liabilities. This type of transaction may be advantageous when the target company has favourable tax attributes or valuable licenses that cannot be easily transferred in an asset purchase.

Both asset and share purchases have their own set of pros and cons. In an asset purchase, the buyer can:

• Select specific assets and liabilities to acquire
• Potentially negotiate a better price for the desired assets
• Minimise exposure to unknown or unwanted liabilities of the target company

However, an asset purchase also has some disadvantages:

• Significant due diligence is required to identify and value the specific assets and liabilities
• Third party involvement: the potential need for obtaining third-party consents for the transfer of certain assets or contracts
• The possible loss of non-transferable licenses, permits, and tax attributes

In a share purchase, the advantages include:

• Acquiring the entire business, including all assets, liabilities, and contractual relationships
• Streamlining the transaction process, as fewer third-party consents may be required, and fewer documents are required to facilitate the transfer (only one asset is transferred, the shares, via a stock transfer form)
• Preserving the target company’s tax attributes, licenses, and permits

The disadvantages of a share purchase include:

• Assuming all of the target company’s liabilities, including any undisclosed or contingent liabilities
• Potentially inheriting legal or tax issues present in the target company
• A potentially higher price point, as the buyer is acquiring the entire business

In summary, the choice between an asset purchase and a share purchase depends on the specific objectives and risk tolerance of the parties involved. Each option offers its own set of advantages and disadvantages that must be carefully considered during the transaction process.

SPA Terms and Definitions

This section will provide an overview of the key terms and definitions associated with SPAs.

Definitions: It is crucial to have clear definitions in an SPA to ensure that both parties have a common understanding of the terms being used. These definitions typically include the transaction’s parties, the target company, the shares being bought or sold, and material adverse change (MAC), among others.

Purchase Price: The SPA outlines the agreed-upon price for the shares being bought or sold. This price can be determined through various methods, such as a fixed price, a price based on earnings, or other valuation methodologies. The SPA should clearly state the agreed price and any adjustments that may be applicable, such as post-closing working capital adjustments.

Completion: The SPA defines when and how the transaction will close. This includes the completion date and any conditions that need to be fulfilled before the transaction can complete, such as regulatory approvals or third-party consents. The agreement may also include provisions for extending the completion date in case certain conditions are not met.

Representations and Warranties: Representations and warranties are statements made by the seller about the the target business or company’s condition and affairs. These may cover a range of topics, such as the target company’s financial position, ownership of assets, compliance with laws, and absence of material liabilities. The buyer relies on these representations and warranties in entering into the transaction, and any incorrect representation may lead to the right to indemnification or termination of the SPA.

Indemnification: The SPA typically includes provisions for indemnification, which protect the buyer from specified financial losses or non-compliance with covenants in the agreement. The indemnification provisions set forth the procedures for making claims, the time periods for making such claims, and any limitations on the seller’s liability.

Covenants: Covenants are promises or commitments made by the parties to the SPA. For example, they could relate to the parties’ conduct during the period from the signing of the agreement to the completion of the transaction. These may include obligations for the seller to maintain the target company’s business operations, or for the buyer to seek necessary regulatory approvals.

By understanding these key terms and definitions in a Share Purchase Agreement, parties can establish a clear and comprehensive agreement that ensures a smooth and successful transaction.

Finalising the SPA

A crucial aspect of a Share Purchase Agreement is finalising the document, which encompasses determining the completion date and the deposit in the transaction. The completion date, typically a mutually agreed-upon date by both parties, is when the seller officially transfers the shares to the buyer, and the buyer pays the purchase price. In this stage, both parties have the opportunity to review and finalise their respective obligations and ensure that the terms and conditions are acceptable.

Before the completion date, it’s common practice to have a deposit in place. A deposit serves as security and reassurance for both the buyer and the seller during the transaction process. It shows commitment from the buyer by providing an initial monetary investment. In most cases, the deposit is held in an escrow account until the completion date, when it is then applied towards the total purchase price.

During the finalisation of the SPA, parties need to ensure that all relevant conditions precedent are adequately addressed or fulfilled. A conditions precedent lists events or circumstances that must occur prior to the agreement becoming fully enforceable. Examples of conditions may include obtaining necessary regulatory approvals, third-party consents, or other critical documents and licenses. Should a condition not be met, either party may have the right to terminate the SPA.