Malcolm ZoppiSun Oct 15 2023

What is Share Purchase Agreement?

A Share Purchase Agreement is a vital document to facilitate the sale of a company. Now let’s delve a little deeper…

What is Share Purchase Agreement?

A share purchase agreement (SPA) is a vital legal document in the world of business transactions. It establishes the terms and conditions for the sale and purchase of shares in a company between the buyer and the seller. SPAs play a crucial role in providing legal protection and clarity to both parties involved, ensuring a smooth transaction while minimising potential disputes.

In a company acquisition, the buyer purchases shares in a target company from the existing shareholders. The SPA outlines critical information, such as the number of shares being bought and sold, the type of shares, the agreed-upon price per share, and any conditions or representations made by both parties. Moreover, it touches upon aspects like tax liabilities, intellectual property rights, and potential legal risks that could impact the transaction. By carefully drafting and finalising the agreement, parties can mitigate risks and safeguard their interests throughout the share purchasing process.

Key Takeaways

  • A share purchase agreement is a legal contract between a buyer and a seller to buy and sell shares in a company.
  • The agreement outlines essential terms, such as the number of shares, the type of shares, and the purchase price.
  • SPAs provide legal protection and clarity for both parties, addressing concerns related to tax, intellectual property, and potential legal risks.

Understanding Share Purchase Agreement

In an SPA, the seller could be a current shareholder of the company, while the buyer could be an investor or another shareholder. The primary goal of this agreement is to provide a clear understanding of the sale of shares and to set forth all necessary terms and conditions related to the transaction.

The Share Purchase Agreement typically contains various important clauses and provisions. These may cover things such as representations and warranties, conditions precedent, indemnities, and other essential details meant to protect the rights of both the buyer and the seller during the transaction process.

In some cases, the SPA may also address any necessary regulatory approvals or third-party consents required for the transaction to proceed. Moreover, it is not uncommon for a share purchase agreement to contain confidentiality clauses aimed at safeguarding sensitive company information and trade secrets during the negotiation and transaction process.

By specifying the details such as the type of shares being purchased, the total number of shares, the price, and the timing of the transaction, the agreement ensures a smooth and legally sound share transfer process. This legal contract is essential for both the buyer and the seller, as it provides them with confidence in the transaction and minimises the risk of disputes or misunderstandings.

In conclusion, a Share Purchase Agreement plays a crucial role in securing the interests of both the buyer and the seller during a share transaction. It is an essential legal document that helps to ensure a smooth and legally compliant share transfer process, benefiting all parties involved.

Types and Considerations

In this section, we will discuss various types and considerations to keep in mind when drafting or entering into an SPA.

First and foremost, it is essential to specify the number of shares being sold and purchased. This is a critical aspect of the agreement, as it directly affects the ownership and control of the company. The agreement should clearly state the number of shares involved in the transaction, as well as any adjustments that may be necessary due to changes in the company’s capital structure.

The price at which the shares are being sold is another important factor to consider. This often depends on several factors, including the financial health of the company, its growth potential, and any possible future risks. The SPA should specify the price per share, as well as the total amount to be paid by the buyer to the seller.

The parties involved in the transaction must be clearly identified within the agreement. This includes both the selling shareholder(s) and the buyer. The SPA should include each party’s full legal name, address, and other relevant contact information.

The type of shares being purchased is also a crucial consideration. There are different types of shares, such as ordinary shares and preference shares, each with their own set of rights and restrictions. The SPA should clearly outline the type of shares being sold and purchased, as well as any unique characteristics or conditions applicable to those specific shares.

Some shares may come with restrictions on their transfer, sale, or voting rights. These restrictions are usually put in place to protect the company’s interests or to maintain a certain level of control within the organisation. The SPA should discuss any such restrictions and outline the procedures to follow should the parties wish to modify or lift them.

In conclusion, a share purchase agreement is a vital tool in the sale and purchase of shares in a company. A well-structured SPA will cover the number of shares, price, involved parties, type of shares, and any restrictions that may apply, providing a clear and concise framework for the transaction.

Legal and Contractual Aspects

A share purchase agreement (SPA) is a legally binding contract between a buyer (purchaser) and a seller of a target company’s shares. The seller agrees to sell a specific number of shares to the buyer for a specified price. This agreement serves as a written manifestation of the mutual understanding of the sale terms and conditions.

Warranties are one of the key legal aspects that protect both the buyer and the seller. Warranties are assurances given by the seller about various aspects of the target company’s business, the company’s assets, liabilities, and financial health. If any warranties turn out to be false or misrepresented, the buyer may have the right to seek compensation from the seller.

Due diligence is another crucial element of the share purchase process. It involves a thorough investigation and assessment of the target company by the purchaser. This process helps to evaluate the company’s legal, financial, operational, and other aspects before finalising the transaction. It is essential for both parties to be fully informed about the company’s standing and mitigate potential risks.

In a SPA, the parties involved need to negotiate the terms and conditions of the agreement carefully. This may include the purchase price, warranties, indemnities, restrictive covenants, and other vital aspects. Proper negotiation ensures that both the buyer and the seller’s interests are fully protected.

Since a share purchase agreement constitutes a complex legal contract, disputes may arise between the parties during or after the completion of the transaction. In such cases, the agreement should contain provisions regarding the resolution of disputes, which may include negotiation, mediation, or arbitration.

In summary, the legal and contractual aspects of a share purchase agreement are critical to ensure a fair and well-informed transaction between the buyer and the seller. Both the parties must be vigilant about warranties, due diligence, negotiation, and dispute resolution to protect their interests and foster a seamless share transfer process.

Purchase Price and Payment

The purchase price in a share purchase agreement is the amount agreed upon by both the buyer and the seller for the transfer of a specific number of shares. Often, the purchase price is determined based on the value of the company or its assets, taking into consideration any liabilities or obligations the company may have.

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One essential aspect to clarify in a share purchase agreement is the method of payment. Parties can decide on various payment methods, such as cash, shares, or a combination of both. Payment details, including the schedule or any instalments, should be specified in the agreement to avoid misunderstandings between the buyer and the seller.

The consideration for the shares usually includes the purchase price and any other factors that the parties agree upon, such as the assumption of certain liabilities, the completion of specific contracts, or a guarantee of future performance. This broadens the scope of the transaction and allows for a more personalised agreement to suit the needs of both parties.

In summary, the purchase price and payment section of a share purchase agreement underlines the agreed-upon value of the shares, the method and details of payment, as well as any other consideration that both parties agree upon. By clearly defining these aspects, parties can avoid potential misunderstandings and ensure a fair and smooth transaction.

Ownership and Voting Rights

A share purchase agreement defines the terms and conditions related to the transfer of ownership of a company’s share capital. In this context, ownership refers to the legal rights that a shareholder gains by acquiring the shares of a company. Such rights often include voting shares, receiving dividends, and participating in company decisions. It is essential that the seller sells the shares with full title guarantee so that the buyer acquires full legal ownership, and the buyer should insist on this in the SPA.

Voting shares grant shareholders the ability to vote on various corporate matters, such as electing board members, approving mergers and acquisitions, and adopting changes in the company’s articles of association. The number of votes a shareholder has usually depends on the number of shares they own.

It is important to note that not all shares grant voting rights. Non-voting shares do not provide the shareholder with the ability to participate in decision-making processes. Instead, these shares might offer other benefits, such as higher dividend payments or preferential claims on company assets. These type of shares are often known as preference shares.

When drafting a share purchase agreement, parties should clearly specify the conditions and restrictions related to both ownership and voting rights. For example, they may include clauses on:

  • Pre-emptive rights: Ensuring existing shareholders have the first option to purchase new shares, thus maintaining their voting power.
  • Drag-along and tag-along rights: Stipulating the conditions for sale of shares to a third-party when majority shareholders decide to sell their stakes.
  • Voting agreements: Defining how shareholders will vote collectively on certain matters, thus minimising the risks of disputes.

With regards to conditions relating to litigation, disputes may arise between shareholders or between shareholders and the company. Such conflicts may involve violations of the share purchase agreement, disagreements on key company decisions, or issues related to minority shareholder protection. When entering a share purchase agreement, shareholders should be aware of the potential for such disputes and consider provisions that can help prevent or address them effectively.

Process and Procedures

The process and procedures involved in a share purchase agreement can be divided into a few key steps. It is advisable that both parties enlist the help of specialist mergers and acquisitions lawyers to protect their interests during the process.

First, the parties should agree the Heads of Terms. The Heads of Terms is a document which outlines the broad terms that the parties have agreed to in relation to the sale. It is sometimes known as a Letter of Intent or a Memorandum of Understanding. The document is not legally binding on either party (save for certain terms such as confidentiality provisions) which means that either party can walk away from the transaction even after having agreed the Heads of Terms, however it forms a solid grounding from which the parties agree to move forward with the transaction.

Having agreed the Heads of Terms, both parties then need to conduct due diligence, which involves thoroughly researching and evaluating the corporation, its financial records, and legal liabilities. This step ensures that potential risks are identified, and the investor can make an informed decision before proceeding with the transaction.

Next, the two parties being involved need to draft the share purchase agreement. The document typically includes critical information such as the names of the parties, the number of shares to be purchased, the price per share, payment terms, and any necessary deposit. It also outlines representations and warranties made by both the seller and the buyer, which are essentially statements asserting the truth of the facts presented.

Once the draft of the agreement has been prepared, both parties should review it carefully, negotiate any outstanding issues, and finalise the terms. At this stage, it’s crucial for both sides to ensure that they are comfortable with the arrangements outlined in the contract and that their legal representation has approved the document.

Upon finalising the agreement, the parties involved will proceed to the completion stage. During this phase, the buyer will make the payment as agreed, and the seller will transfer the shares to the buyer. It’s essential to ensure that all necessary paperwork and documentation, including share certificates and stock transfer form, are prepared and ready for completion.

Throughout the process, clear communication and maintaining confidentiality between parties is critical to ensure a smooth transaction. By following these procedures and adhering to the terms of the share purchase agreement, both the buyer and the seller can successfully complete the transaction with confidence and in a legally compliant manner.

Intellectual Property

In a share purchase, considerations related intellectual property play an important role.

Intellectual property (IP) rights are a critical part of any company. The target company’s intellectual property can have a significant impact on its valuation and attractiveness to potential buyers. Any intellectual property documents should clearly outline the ownership and rights associated with the intellectual property, such as patents, trademarks, copyrights, and trade secrets. These should be reviewed carefully by the buyer.

As these IP rights are often critical assets, the agreement should include representations and warranties from the seller regarding the validity, ownership, and non-infringement of the intellectual property. The buyer may also require that certain conditions precedent are met before the completion of the transaction. These conditions might relate to the proper registration and protection of the intellectual property, as well as regulatory approvals and taxation implications.

In conclusion, when drafting a share purchase agreement, it is crucial to address the rights and obligations in relation to intellectual property ownership to ensure a successful transaction for both parties.

Finalising the Agreement

When finalising a share purchase agreement,  it is imperative to ensure all aspects of the agreement are comprehensively covered and agreed upon by both parties.

The completion date is one of the most important aspects when finalising an SPA. It is the date on which the buyer purchases the shares, and ownership is transferred from the seller. Both parties should ensure that all other relevant transactions – such as those related to corporate procedural matters – are appropriately synchronised with this date.

Confidentiality plays a vital role in share purchase agreements. Both parties should ensure that sensitive information related to the transaction is protected from unauthorised access or disclosure. Confidentiality clauses in the SPA should detail the use and handling of such confidential information, as well as any consequences for the breach of confidentiality.

In addition to these key aspects, other essential components of an SPA include:

  • Purchase price: The agreement should clearly state the price at which shares are being sold, and the total value of the transaction.
  • Payment terms: The SPA should provide specific details on how and when the purchase price will be paid (e.g., in instalments or as a lump sum), and any conditions that may trigger adjustments to the purchase price.
  • Representations and warranties: Both the buyer and seller must make certain representations and warranties regarding the shares, the target company, and any related transactional matters. These assurances serve to protect both parties from potential legal issues or financial losses.
  • Conditions precedent: The SPA should specify any conditions that must be fulfilled before the transaction is completed, such as regulatory approvals or the occurrence of specific events.
  • Indemnities: In certain cases, the agreement may include indemnification provisions that provide financial protection to one party in the event that the other party breaches the agreement or representations and warranties prove to be inaccurate.

By thoroughly addressing the legal implications of these entities and ensuring that the SPA is clear, mutually agreed upon, and accurately reflects the intent of both parties, the finalisation of the Share Purchase Agreement can confidently proceed.

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Potential Legal Risks

While SPAs aim to provide clarity and protection to both parties involved, several potential legal risks can arise if proper precautions are not taken.

Warranties: The seller’s warranties are crucial in a SPA, as they serve as assurances provided by the seller to the buyer. These assurances typically cover various aspects of the target company’s affairs, such as financial statements, assets, and legal compliance. However, if a warranty proves to be false or misleading, the buyer may face legal risks, such as financial loss or damage to their reputation.

Breach: A breach of a SPA can expose both parties to legal action. The buyer may claim damages for a seller’s breach of warranty or failure to fulfil other obligations. On the other hand, the buyer might face a breach of contract claim if the buyer fails to complete the transaction as agreed. In some cases, legal action could lead to lengthy and costly litigation.

Lawyers: Involvement of qualified legal professionals is essential for drafting and reviewing share purchase agreements. A poorly constructed SPA can expose both parties to legal risks and increase the likelihood of disputes. Moreover, lawyers can play a critical role in advising clients on various aspects of the transaction, from due diligence to negotiating terms. Be aware that legal fees can be substantial, particularly if using a large law firm, so it’s essential to budget appropriately.

Legal fees: As mentioned earlier, legal fees can be a significant expense when entering into a SPA. Both parties can incur costs associated with negotiating, drafting, and reviewing the agreement, as well as addressing post-closing issues such as indemnification claims or disputes. It is crucial to consider these potential expenses when determining the overall value of the transaction and negotiating the purchase price.

Legal action: If disputes arise in connection with a share purchase agreement, parties may resort to legal action to protect their interests. Lengthy legal battles can have a significant impact on the involved parties, both financially and to their reputation, and may even result in the failure of the transaction. Therefore, it is essential to minimise potential legal risks by adequately addressing critical issues during the negotiation, drafting, and execution of the SPA.

Frequently Asked Questions

What are essential clauses in an SPA?

An SPA includes the following essential clauses:

  • Purchase price and payment terms
  • Representations and warranties
  • Confidentiality
  • Indemnification
  • Conditions precedent

Each clause serves its own purpose and ensures both parties understand their obligations and liabilities.

Is a Share Purchase different from an Asset Purchase?

Yes, in some cases, a business acquisition my be structured as an asset purchase. This means that, instead of acquiring shares in the corporation, the investor may be buying specific assets owned by the corporation. In such cases, the draft of the agreement should clearly outline the assets included in the asset purchase transaction and any relevant purchase conditions.

How does an SPA differ for private companies?

An SPA for private companies differs primarily in the complexity and level of detail. Due to the lack of standardised public information on private companies, parties need to agree on each aspect of the transaction. Additionally, shares in private companies are less liquid compared to publicly traded ones, making the valuation and due diligence process more challenging.

What documents are required for a shareholder purchase?

When purchasing shares, the following documents are typically required:

  • Share Purchase Agreement
  • Shareholder resolution approving the transaction
  • Evidence of the transfer of shares
  • Board minutes for the buyer, seller and target company
  • Letters of appointment and resignation of directors

These documents ensure legal and regulatory compliance, protecting both the buyer and seller.

What are the key risks involved in an SPA?

The key risks involved in an SPA include:

  • Potential breaches of warranties and representations
  • Possible changes in the financial condition of the target company
  • Regulatory or compliance issues
  • Legal disputes arising from the transaction

It’s crucial for both parties to conduct thorough due diligence and negotiate clear and comprehensive terms in the SPA to mitigate these risks.

Are there alternative names for share purchase agreements?

Share Purchase Agreements may also be referred to as Stock Purchase Agreements or Shares Sale and Purchase Agreements. Despite the different names, the underlying concept and purpose remain the same – to facilitate the transfer of shares from one party to another.

Find out more!

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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 company. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person buying or selling a company.

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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