Malcolm ZoppiSun Oct 15 2023

How to Review a Share Purchase Agreement

Share Purchase Agreements are an essential document when buying or selling a company. Find out how to review one here!

How to Review a Share Purchase Agreement

A share purchase agreement (SPA) is a legal contract that outlines the terms and conditions related to the sale and purchase of shares in a company. It serves as a vital document for both the buyer and seller, detailing the transfer of ownership, obligations, warranties, and indemnities involved in the transaction. As it plays a crucial role in the successful execution of a business deal, it’s important for both parties to carefully review the contents of an SPA to ensure their interests are well-protected.

When reviewing a share purchase agreement, it is essential to have a clear understanding of the key elements such as the participating parties, the number of shares being bought, and the agreed-upon purchase price. Additional factors like due diligence, any confidentiality agreements, and non-disclosure clauses should also be taken into account before signing the agreement. Thoroughly examining an SPA helps prevent potential disputes and unforeseen legal or tax implications down the line.

Key Takeaways

  • A share purchase agreement is a vital legal contract in a business transaction involving the sale of shares in a company.
  • Reviewing the SPA carefully is crucial to protect the interests of both the buyer and the seller.
  • Key aspects to consider include the parties involved, purchase price, and due diligence, as well as legal and tax considerations.

Understanding Share Purchase Agreements

A Share Purchase Agreement (SPA) is a legal and legally binding contract between the buyer and seller of a company’s shares. This agreement sets out the terms and conditions relating to the sale and purchase of the shares, including the price, warranties, and ownership. It plays a crucial role in facilitating transactions in the market and ensuring the smooth transfer of shares between parties.

The price of the shares is one of the key considerations in a SPA. The agreement states the total number of shares to be sold and the agreed-upon price per share. In determining this price, both parties typically consider market conditions, the financial health of the company, and any potential risks or opportunities associated with owning the shares.

Warranties are another important component of a SPA. These are assurances or guarantees provided by the seller to the buyer about the company and its status. Warranties typically cover aspects such as the company’s financial statements, legal compliance, and disclosure of any potential liabilities. If a warranty is found to be false, the buyer may have the right to seek compensation from the seller.

The transfer of ownership is a central aspect of a SPA, which outlines the process and requirements for the buyer to become the new shareholder. This includes any necessary documentation, compliance with applicable laws, and registration with relevant authorities.

Understanding the market conditions and trends is essential when negotiating or reviewing a SPA. The current market landscape can significantly impact the value and attractiveness of the shares in question. Both parties should be well-versed in the market situation to ensure that the SPA is beneficial and fair for both sides.

The agreement also addresses the rights and obligations of the shareholders, which may include voting rights, dividends, and any restrictions on transferring the shares to other third parties. It is crucial for both parties to fully understand these aspects to prevent misunderstandings and potential disputes in the future.

The number of shares included in the transaction must be clearly specified in the agreement. This ensures both parties have a clear understanding of the percentage of ownership being transferred and the resulting changes to the company’s shareholder structure.

In summary, Share Purchase Agreements are essential contracts that set the terms and conditions for the sale and purchase of company shares. They cover crucial elements such as price, warranties, ownership, shareholder rights, and the number of shares being transferred. Careful review and understanding of these agreements are necessary to ensure a successful transaction and avoid potential disputes or complications.

Key Elements of a Share Purchase Agreement

A share purchase agreement (SPA) is a crucial legal document that outlines the terms and conditions of a transaction where a buyer acquires the ownership of a company’s shares from the seller. Here are some key elements typically found in a share purchase agreement:

  1. Parties: The agreement should clearly define the buyer(s) and seller(s), including their names, addresses, and contact information. This section establishes the entities involved in the transaction.
  2. Sale and Purchase of Shares: This element outlines the number of shares being sold, the type of shares, and the overall details of the transaction.
  3. Price: The purchase price of the shares should be clearly defined and agreed upon. This may include any payment terms, such as flexible or deferred payments and earn-out clauses.
  4. Conditions Precedent: These are conditions that must be satisfied before the completion of the transaction. Some common conditions precedent include regulatory approvals, third-party consents, and the fulfillment of certain obligations by the parties involved.
  5. Representations and Warranties: Both the buyer and the seller make statements (representations) and assurances (warranties) about various aspects of the company and the transaction. These may encompass the accuracy of financial information, legal and contractual obligations, assets, and overall business operations.
  6. Covenants: Covenants are the promises or obligations that the parties agree to adhere to both before and after the completion of the transaction. This may include preserving the company’s assets, satisfying regulatory requirements, or fulfilling contractual commitments.
  7. Indemnities: Indemnities are provisions that allow protection for parties against losses resulting from a specified event. These provisions outline the future responsibilities and potential liabilities arising from the transaction.
  8. Restrictive Covenants: These clauses limit the parties’ actions post-completion. Typical restrictive covenants may include non-competition and non-solicitation clauses, which aim to prevent the seller from engaging in a similar competing business or hiring employees from the acquired company.

A well-drafted share purchase agreement helps to ensure a smooth transaction by clearly defining the rights, responsibilities, and obligations of the parties involved. Being diligent in reviewing and understanding these key elements is vital to protect both the buyer and seller and facilitate the seamless transfer of shares.

Drafting And Executing a Share Purchase Agreement

When drafting and executing a Share Purchase Agreement (SPA), several key steps are integral to ensure a smooth and successful transaction. First, negotiation between the buyer and the seller is crucial to establish the terms and conditions of the SPA. Both parties should have a clear understanding of their respective rights and obligations. It is advisable for each party to involve their lawyers in this process, as they can provide valuable insights and help avoid potential pitfalls. The parties can then document an outline agreement in the form of Heads of Terms.

Before drafting the SPA, the buyer should conduct thorough due diligence on the target company to identify any issues or inconsistencies. This process can help reveal any material risks, liabilities, or potential disputes that may impact the transaction. The SPA should include appropriate representations, warranties, and indemnities to address these findings, which the lawyers on both sides can help negotiate.

Once the due diligence exercise is complete, the process of drafting the SPA begins. With the assistance of their respective lawyers, the buyer and seller should prepare a detailed legal document outlining the agreed terms and conditions for the transaction. This document should include:

  • Conditions precedent: A list of prerequisites or events that must occur before completion.
  • Consideration: The price and payment terms for the shares being acquired.
  • Warranties and indemnities: Protections for the buyer to cover potential risks and liabilities.
  • Restrictive covenants: Provisions to prevent the seller from engaging in certain activities that could harm the target company after the sale.
  • Governing law and jurisdiction: The legal system under which the SPA will be governed and any disputes resolved.

Once the SPA has been drafted and negotiated to the satisfaction of both parties, the next step is the execution of the SPA. Typically, this involves the buyer and seller physically signing the agreement and exchanging any required supporting documentation. If there are no conditions to be fulfilled, completion happens immediately on execution when the shares are transferred. If there is a split exchange and completion, then completion of the transaction occurs when all conditions precedent are satisfied and the shares are transferred to the buyer.

Finally, both parties should ensure that proper records of the transaction are maintained. This includes the SPA itself, as well as any ancillary legal documents used, such as board resolutions, shareholder consents, and notices. Keeping accurate records can help prevent future disputes and assist both parties with compliance and reporting requirements. These documents are often collated into what’s called a ‘Bible’.

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By adhering to these guidelines and working closely with their respective legal counsel, both the buyer and the seller can confidently navigate the drafting and execution of a Share Purchase Agreement.

The Role of Due Diligence

When considering a share purchase agreement, conducting due diligence is an essential step for the buyer. Due diligence is the process of thoroughly investigating all aspects of the target company in order to ascertain whether the investment is sound and to determine the risks involved. This process covers various aspects of the target company, including its assets, financials, legal compliance, and property.

From the buyer’s perspective, due diligence provides confidence in making informed decisions during the negotiation process. Analysing the target company’s financials allows the purchaser to ensure that the company’s value aligns with their expectations. Furthermore, reviewing the legal documentation, such as contracts, leases, and regulatory compliance, helps identify any potential liabilities or areas of concern.

To optimise the due diligence process, the buyer should prioritise key areas, including:

  • Assets: Verify the ownership, value and condition of the company’s assets. This may include tangible assets such as property and inventory, as well as intangible assets like intellectual property rights, goodwill, and customer relationships.
  • Financials: Assess the company’s financial position, including revenues, profits, cash flow, debt, and liabilities. This step requires a careful review of the financial statements, tax records, budgets, and projections.
  • Property: Confirm the titles, ownership, and terms of any real estate owned or leased by the company. This may require conducting a title search, reviewing lease agreements, and ensuring all property taxes and fees have been paid.
  • Legal and Regulatory Compliance: Ensure the company is in compliance with all relevant local and national regulations, as well as having the necessary permits and licenses. This aspect of due diligence may involve reviewing corporate records, contracts, and employment agreements.

The information gathered during the due diligence process will influence the terms of the share purchase agreement, highlighting areas that may require negotiation or additional protection for the buyer. By conducting a thorough review, the buyer can be confident in their decision, ultimately maximising the value of the transaction and minimising any potential risks associated with the investment. Ensuring you have experienced mergers and acquisition lawyers and accountants on side is essential during this process.

Understanding Warranties and Indemnities

Warranties in a share purchase agreement are statements or assurances that the seller provides to the buyer about the company, its assets, and operations, confirming their validity and accuracy. Breach of these warranties may result in the seller being liable to compensate the buyer for any loss arising from such a breach.

It is crucial that warranties given to the purchaser are not based on subjective factors, such as the seller’s knowledge or familiarity with applicable regulations. This ensures the potential for a successful claim. Careful drafting of these warranties is therefore essential.

Indemnities are contractual provisions that outline the responsibilities of each party to compensate the other for specific types of losses or liabilities. In a share purchase agreement, indemnities are often included to address liability for losses resulting from misrepresentations, breach of warranties, or non-compliance with covenants and agreements. They can be drafted as an exclusive or non-exclusive remedy to assert such claims.

Key factors to consider when reviewing warranties and indemnities in a share purchase agreement:

  1. Scope of warranties: Ensure that the warranties cover all material aspects of the company’s business, assets, and operations.
  2. Representation vs. warranty distinction: Understand the difference between representations and warranties, as representations refer to statements of fact made by the seller at the time of the agreement, while warranties are assurances of truth or accuracy.
  3. Caps and limitations: Look for any caps or limitations on the seller’s liability for breach of warranties or indemnities. These may take the form of monetary limits, time limits, or requiring a minimum amount of loss before a claim can be made (known as de minimis thresholds).
  4. Survival period: Inspect the duration for which warranties and indemnities will remain valid, as this may affect the buyer’s ability to make a claim. Often, warranties related to tax remain valid for a longer period since tax issues may become apparent later down the line as a result of HMRC’s investigative powers
  5. Disclosure schedule: Examine the seller’s disclosure schedule, which outlines exceptions or qualifications to the warranties. These exceptions should be reasonable and not undermine the buyer’s protections. If the seller has effectively disclosed against a warranty, this prevents the buyer from later bringing a claim against that warranty.

In some cases, warranty and indemnity insurance (W&I insurance) may be utilised to mitigate risks in share purchase agreements. The buyer may insist on the seller obtaining such insurance, particularly when there are limitations on the seller’s liability for breach of warranties or indemnities.

Legal and Tax Considerations

When reviewing a Share Purchase Agreement (SPA), it’s essential to consider the various legal implications and tax implications that might arise. This is because the SPA governs the process and conditions of a company’s share acquisition.

Firstly, it is crucial to ensure that the SPA complies with all relevant laws and regulations. This might involve checking whether the agreement adheres to securities laws, corporate governance rules, and any industry-specific regulations. Engaging the services of a legal expert can be invaluable in due diligence exercise this regard, as their wealth of experience and knowledge can help identify potential issues and ensure compliance with the law.

Another crucial aspect to consider is what law governs the jurisdiction in which the SPA is to be enforced. This is important because different countries have varying legal systems, enforcement mechanisms, and dispute resolution processes. It is vital to identify the governing law and jurisdiction specified in the agreement, and evaluate the implications and enforceability of the SPA in that jurisdiction.

In case of any disputes arising from the SPA, it’s important to identify the agreed dispute resolution mechanism specified in the agreement. This mechanism may include negotiation, mediation, arbitration, or litigation. Knowing the dispute resolution process will help parties be prepared, should conflicts occur.

Tax considerations also play a significant role when reviewing an SPA. Taxes can affect the overall acquisition cost, and specific clauses in the SPA may impact the tax liabilities of the parties involved. Usually, the buyer will pay stamp duty on the shares that it purchases, and the seller will be liable for capital gains tax (if an individual seller) or corporation tax (if a corporate seller). It is advisable to consult with a specialist tax lawyer or accountant to explore any tax reliefs that might be available. Key tax-related aspects to consider include:

  • Tax warranties and indemnities: These are provisions in the SPA that address the potential tax liabilities of the target company. Buyers should ensure that these clauses provide adequate protection against potential tax liabilities, while sellers should aim to limit their exposure to tax-related risks.
  • Tax representation: The parties involved in the transaction may need to make tax representations to one another, which can include statements about the target company’s tax status, historical tax filings, and potential tax liabilities. Ensure that these representations are accurate and complete to avoid potential issues after the acquisition.

By carefully considering the legal and tax implications of an SPA, parties can better understand their rights, obligations, and potential exposure to risks. This will enable them to protect their interests more effectively and ensure that the share purchase process unfolds smoothly and successfully.

Preventing and Managing Disputes

Preventing and managing disputes in share purchase agreements (SPAs) is crucial for both the buyer and the seller to ensure a smooth transaction and avoid potential litigation. Taking the following measures can help in minimising conflicts:

Firstly, clearly define terms and conditions in the SPA. Ambiguities in the contract may lead to misinterpretations, causing disputes between the buyer and the seller. Precisely outlining the obligations of each party, payment terms, and other relevant clauses will prevent misunderstandings.

Secondly, include warranties and representations from both the buyer and the seller. These statements ascertain the accuracy of specific information related to the transaction. For instance, the seller’s warranties might warrant the accuracy of the company’s financial statements, while the buyer could confirm their ability to make the required payments. This clarity can prevent potential disputes arising from a party’s misrepresentation.

Another important aspect is the dispute resolution mechanism. Clearly specifying the method of resolving conflicts, whether through arbitration, mediation, or litigation, helps in streamlining the process in case disputes arise. Both parties should agree on this mechanism beforehand and include it in the SPA.

Additionally, building trust and open communication between the parties is essential. Regularly discussing the progress of the transaction and addressing any concerns or misunderstandings as they arise can help in managing disputes effectively.

Lastly, seeking professional advice from lawyers and financial advisors is crucial in reviewing the SPA and identifying any potential issues that may cause disputes. This expertise can help both the buyer and the seller in minimising risks and ensuring a successful transaction.

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Confidentiality and Non-Disclosure

Non-disclosure agreements (NDAs) are a crucial aspect of share purchase agreements, as they help protect sensitive information from becoming public knowledge. They play a vital role in ensuring the confidentiality and protection of trade secrets, employees, property, and loans related to the share purchase transaction.

Confidentiality is a key element of NDAs, as it restricts the sharing of information between parties. These agreements define the scope and nature of confidential information, which may include details about employees, business operations, intellectual property, and loans. It is essential for parties involved in a share purchase agreement to agree on what information is considered confidential and how it is handled.

Employees are often subject to NDAs, as they have access to sensitive company information that could be valuable to competitors. Employers must ensure that their employees understand their obligations under the NDA and are aware of the consequences should they breach these requirements. Conversely, employees should review the terms of the agreement and confirm that their rights are not unduly restricted.

Property, such as intellectual property rights, can also be covered by non-disclosure agreements in share purchase agreements. Protecting proprietary information like patents, trademarks, and copyrights is crucial to maintaining a company’s competitive edge. Parties should clearly define which property is subject to confidentiality in the agreement and outline any permitted use or necessary restrictions.

Loans and other financial information related to a business may require protection as well. For example, information about the company’s financing arrangements could be sensitive and should be safeguarded from unauthorised disclosure. An effective NDA should address any confidentiality concerns related to loans and other financial matters.

In summary, a well-drafted Confidentiality and Non-Disclosure section in a share purchase agreement is essential for protecting sensitive information and maintaining trust between parties. This ensures the protection of trade secrets, employees, property, and loans relevant to the transaction. Remember to ensure that any NDA is tailored to the specific requirements of the share purchase agreement and involves the input of both parties to address their respective concerns.

Frequently Asked Questions

What are the key clauses to examine?

When reviewing a Share Purchase Agreement (SPA), some of the key clauses to examine include:

  • The parties to the transaction
  • The number and type of shares being sold
  • The purchase price and any adjustments
  • Representations and warranties of both parties
  • Indemnities and liabilities
  • Restrictions post completion
  • Conditions precedent to completion
  • The completion process
  • Dispute resolution and governing law

Carefully scrutinise these clauses to ensure that they accurately reflect the agreed-upon terms of the transaction.

How can I identify potential liabilities?

To identify potential liabilities, focus on the representations and warranties, indemnification provisions, and any conditions precedent. Each party should carefully review these sections, as they outline the parties’ respective obligations and potential liabilities, as well as any limitations and exclusions.

What warranties should be included?

Typical warranties in a SPA include:

  • Authority to enter into and perform the transaction by both parties
  • Validity and completeness of the company’s financial statements
  • Accuracy of information provided during due diligence
  • Absence of material adverse changes
  • Compliance with applicable laws and regulations

These warranties serve to provide assurances to the buyer about the state of the company and protect their interests in the transaction.

How is the share price determined?

The share price is usually determined through negotiation between the parties, sometimes based on a formula or a benchmark such as the company’s net asset value or earnings. It may also involve a professional valuation or assessment of the company’s financial health and future prospects.

What are the payment terms?

Payment terms in a SPA outline when and how the purchase price will be paid. This can include an upfront payment, and further installments or deferred payments linked to milestones or targets being met by the company after the transaction. The payment terms may also include provisions for price adjustments or an escrow arrangement.

How is the transfer of shares executed?

The transfer of shares is generally executed through the endorsement of share certificates and updating of the company’s register of shareholders. In some jurisdictions, specific registration processes or regulatory approvals may be required. The SPA should also include provisions addressing the transfer and any necessary filings or notifications.

This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should consult with appropriate professionals before buying or selling a business. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person buying or selling a business.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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