Malcolm ZoppiSun Oct 15 2023

When is a Share Purchase Agreement Needed?

A Share Purchase Agreement is a vital document in corporate procedure. Find out when one is needed here!

When is a Share Purchase Agreement Needed?

A share purchase agreement (SPA) is a crucial legally binding document in the world of business transactions, particularly when shares of a company are being bought or sold. It is a formal contract outlining the terms and conditions relating to the sale and purchase of shares between the buyer and the seller. The agreement specifies several details, such as the type of shares being purchased, the total number of shares, the release timeline, and the price of the shares.

Understanding when a share purchase agreement is needed is essential for both buyers and sellers, as it helps protect the interests of the two parties being involved and ensures a smooth transaction process. Generally, an SPA is necessary when a buyer is acquiring a certain percentage of shares or a controlling interest in a company from a seller. It is also required in situations where the buyer and seller need to establish the rights, responsibilities, and obligations of each party, as well as any other provisions related to the deal.

Key Takeaways

  • A share purchase agreement is a crucial document for transactions involving the sale and purchase of company shares.
  • It is necessary when acquiring a certain percentage of shares or a controlling interest in a company and for establishing the rights, responsibilities, and obligations of the parties involved in the deal.
  • A thorough understanding of the SPA helps protect parties’ interests and ensures a smooth transaction process.

When to Consider a Share Purchase Agreement

A Share Purchase Agreement (SPA) is a crucial document that helps to facilitate the smooth transfer of shares in a company. It is important to consider an SPA under the following circumstances:

  1. Buying or selling shares: When an investor is buying shares of a company, or when a shareholder wishes to sell their shares, an SPA is needed to define the terms and conditions of the sale. This includes the type of shares being transferred, the price per share, and the total number of shares involved in the transaction.
  2. Business expansion: As a company grows, it may need additional capital to fund operations or expand into new markets. Issuing shares to new investors can help raise the necessary capital, and an SPA will clearly outline the terms and conditions for these new shareholders.
  3. Ownership transition: During the life cycle of a business, there may be changes in ownership, such as when founders or key employees leave the company. An SPA provides a clear framework for the transfer of shares to new owners, ensuring a seamless transition.
  4. Estate planning: Shareholders may wish to include their shares as part of their estate planning. An SPA can help document the transfer of shares to beneficiaries, ensuring the process is done appropriately and according to the wishes of the shareholder.
  5. Employee incentives: Companies often offer share options or shares as part of employee compensation packages. An SPA is required to outline the terms and conditions under which employees can buy, sell, or exercise their share options.

In summary, a Share Purchase Agreement is essential in a variety of situations when it comes to the ownership and transfer of shares in a company. It provides a clear and legally binding framework that ensures the rights and obligations of both the buyer and seller are respected and followed. The careful consideration of an SPA contributes significantly to the successful transfer of shares, regardless of the company’s age or size.

Parties Involved in a Share Purchase Agreement

A Share Purchase Agreement (SPA) is a legal document that outlines the terms and conditions of transferring the ownership of a company’s shares from a seller to a buyer. In order for this transaction to occur, several parties are involved, each with distinct roles and responsibilities. This section will cover the main parties involved in an SPA: the seller, the buyer, and the existing shareholders.

The seller is the party who owns the shares of the target company and intends to sell them to the buyer. The seller could be an individual or a corporate entity and may be offering either a majority or minority stake in the company. The seller’s role is to negotiate the terms of the SPA, provide all required information about the buyer aware target company, and ensure that all representations and warranties made in the agreement are accurate.

The buyer is the party interested in acquiring the shares of the target company from the seller. The buyer could be an individual, a company looking to acquire or expand its business, or a private equity firm investing in new ventures. The buyer’s role in an SPA involves conducting due diligence to ensure they have a clear understanding of the value and potential risks of the shares being purchased. The buyer also negotiates the terms of the SPA, including the purchase price and any adjustments that may be required.

The existing shareholders of the target company are the individuals or entities that already own shares in the company before the execution of the SPA. In some cases, the existing shareholders may also be the sellers if they decide to sell part or all of their shares. Their role in the SPA may include providing consent for the transaction, especially in cases where the target company’s bylaws or shareholders’ agreement require such consent. Existing shareholders may also be impacted by the SPA, as changes in the target company’s business or ownership structure could affect their rights and interests.

In summary, the parties involved in a Share Purchase Agreement include the seller, who is looking to sell their shares; the buyer, who wishes to acquire the shares; and the existing shareholders, who may be affected by the transaction. Each party has distinct roles and responsibilities, ensuring that the SPA process is conducted smoothly and efficiently.

Fundamental Elements of a Share Purchase Agreement

A share purchase agreement outlines the specific terms and conditions agreed upon by both the buyer and the seller, ensuring that each party’s rights, obligations, and liabilities are clearly spelled out. Let’s discuss the fundamental elements of a share purchase agreement.

Shares and Price: The main subject of a share purchase agreement is the specifics regarding the shares being sold. It should define the type and number of shares being purchased, along with details about the price per share and the total transaction amount. These elements are vital to facilitate the accurate transfer of ownership and prevent misunderstandings.

Payment Terms: The payment terms section of an SPA will address matters related to the method of payment, such as a cash payment, bank transfer, or another agreed-upon method. It may also outline the payment schedule and any payment contingencies or conditions that need to be fulfilled.

Conditions Precedent: These are the conditions that must be met before the completion of the share transfer can take place. They can include regulatory approvals, third-party consents, or any requirements that are specific to the industry or market sector in which the company operates.

Warranties and Representations: In this section, both the buyer and the seller provide assurances and declarations relating to the transaction. Such assurances can include the truthfulness of all information provided concerning the target company’s affairs, proper disclosure of any liabilities, and that the seller has the legal authority to sell the shares.

Indemnities: It’s common for a share purchase agreement to allocate the risk of certain liabilities to either the buyer or seller through indemnification provisions. This section specifies the extent of the indemnities, any limits or caps on indemnity obligations, and procedures for making indemnity claims.

Confidentiality: The SPA will usually contain confidentiality clauses that restrict the disclosure of sensitive or confidential information being exchanged during the negotiations and due diligence process. These provisions are essential to protect the parties’ interests and maintain the value of the company’s trade secrets and intellectual property.

Restrictive covenants: Often, the seller will be restricted by the SPA in the activities they can do post-completion. These restrictive covenants may include promising not to set up a competing business with the target company for a number of years after completion.

Dispute Resolution: In case any disputes arise from the interpretation or implementation of the SPA, a dispute resolution section will outline the agreed-upon process to resolve such issues, whether through negotiation, mediation, arbitration, or litigation.

By encompassing these crucial elements, a well-drafted share purchase agreement ensures that the sale and purchase of shares are properly executed, with each party’s rights and obligations clearly delineated.

The Role of Due Diligence

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Due diligence is a crucial step in the process of entering into a share purchase agreement (SPA). The process involves an investigation, verification, or audit of a potential investment opportunity or deal to confirm all relevant facts and financial information. The primary aim of due diligence is ensuring that the purchase meets the buyer’s needs and that they clearly understand the risks involved in the investment.

When it comes to a business or share sale, due diligence serves as an essential activity for both the buyer and seller. The process can be time-consuming and intensive. The seller is responsible for compiling information about the business, while the buyer must rigorously vet all the provided documents and data. This exercise not only verifies the accuracy of the seller’s claims but also helps the parties identify any potential issues that may arise in the future.

One of the main aspects of due diligence is assessing the assets and liabilities of the target company. This includes understanding the company’s financial position, evaluating its management team, scrutinising its legal and regulatory compliance, examining its intellectual property, and evaluating its customer base and market position. Due diligence can cover a wide range of topics, but it ultimately helps the buyer confirm that the target business is a sound investment.

Another important aspect of due diligence in a SPA is the inclusion of warranties. These are statements made by the seller about the state, condition, and performance of the business. Warranties can cover various aspects of the company, such as financial information, legal compliance, or contracts held with suppliers and customers. In case any of the seller’s warranties turn out to be false or inaccurate, the buyer can seek compensation for any losses incurred due to the breach.

In conclusion, due diligence plays a vital role in all business sales and SPAs by providing information that enables the buyer to make an informed decision about the business or share purchase. Moreover, it protects both parties from potential issues during the transaction and ensures that all possible risks are accounted for. Due diligence is a necessary process in any SPA, helping build trust, transparency, and confidence between the buyer and seller.

Legal Framework and Compliance

A Share Purchase Agreement (SPA) is a legally binding contract between a buyer and the shareholders of a company, wherein the shareholders agree to sell their shares to the buyer. The legal framework and compliance requirements for a SPA arise from different legislations and regulatory bodies, usually depending on the jurisdiction the company operates in and the type of shares being sold.

In the United Kingdom, the Companies Act 2006 is the main legislative framework that governs company procedure. In addition, the company’s articles of association and any shareholder agreements must also be complied with to ensure a legal and effective transfer. These documents may contain provisions that govern the sale of shares, such as pre-emption rights or rights of first refusal. Non-compliance with these provisions can lead to legal disputes and may impede the successful completion of a share purchase transaction.

As for the buyer, due diligence is a crucial aspect of ensuring compliance with the legal framework. The buyer must verify the accuracy of the information provided by the shareholders and conduct an extensive review of the target company’s financial, legal, and operational records. This process not only helps the buyer understand the risks associated with the transaction but also aids in drafting suitable representations and warranties that safeguard the buyer’s interests.

In conclusion, understanding the legal framework and compliance requirements in a share purchase agreement is vital for both the buyer and the shareholder. Compliance with relevant laws, regulations, and internal agreements helps in ensuring a smooth transaction and mitigates the risks of disputes.

The Transaction Process

During a share purchase transaction, both buyer and seller go through a systematic process that ensures a mutually beneficial outcome. The transaction typically begins with a negotiation where the parties discuss the terms of the sale, including the number of shares to be sold, the price per share, and other essential conditions for closing the deal.

Once the negotiation is complete, the parties may move to a more formal agreement, often beginning with a letter of intent (LOI) or Heads of Terms. This document outlines the critical terms and conditions the buyer and seller have agreed upon, serving as the foundation for the subsequent share purchase agreement.

The share purchase agreement specifies the type of shares being purchased, the number of shares, the completion date, the price per share, and any conditions or provisions related to the sale. Both parties should carefully review the SPA to ensure it aligns with their understanding of the LOI and the negotiated terms.

If there is a split exchange and completion then once the SPA is finalised and signed, the completion date will be determined, allowing both parties to make the necessary preparations. The buyer should conduct due diligence, examining the company’s financial records, operations, and other essential documents, to ensure the purchase is a sound investment. Meanwhile, the seller should prepare the necessary paperwork, including share transfer forms and other related documents, to facilitate a smooth transfer of ownership.

On the completion date, the transaction will take place, with the buyer providing the agreed-upon funds and the seller transferring the shares to the buyer. Any indemnification agreements or escrow arrangements may also be executed during this time to address unforeseen costs or liabilities. With the completion of these steps, the share purchase transaction is considered complete.

Financial Considerations

When contemplating a share purchase agreement, financial considerations play an undeniable role in the decision-making process. One of the primary factors that buyers and sellers must examine is the purchase price of the shares. The amount paid for the shares must take into account the fair market value of the target company’s shares, the number of shares being sold, and the overall financial stability of the organisation.

In addition to the purchase price, both parties must also deliberate over the company’s assets and liabilities. Assets are essential components that contribute to the company’s value and may include tangible items such as property, equipment, and inventory, as well as intangible assets like intellectual property, goodwill, and customer relationships. Appraising these assets accurately can help in determining the correct price for the shares and impact the overall transaction.

Liabilities, on the other hand, represent a company’s financial obligations, including debts, loans, and other types of liabilities that the buyer may inherit as part of the share purchase agreement. An evaluation of existing liabilities is crucial to understanding the full picture before acquiring any shares.

While determining the purchase price, the parties may also consider other financial aspects such as accounting principles. This can include identifying the suitable method of accounting for the transaction – cash or accrual, and ensuring that every element is correctly accounted for according to the relevant accounting standards.

Financing the transaction could entail various options, such as cash, share swaps, or a combination of both. Buyers and sellers must negotiate and agree on the ideal method to structure the transaction to suit their respective objectives.

Moreover, tax implications are yet another vital aspect of financial considerations. Both parties must evaluate the potential impact of various tax laws on the share purchase agreement, such as capital gains tax, stamp duty, and corporation taxes, to avoid unforeseen expenses and legal issues.

In conclusion, the financial considerations of a share purchase agreement encompass numerous entities and aspects. Understanding the purchase price, assets, liabilities, accounting, financing, and tax implications is crucial for both the buyer and the seller to make informed decisions and negotiate favourable terms in the agreement.

Resolutions and Disputes

In a share purchase agreement, both parties need to be prepared for potential disputes and have a predetermined method for resolving them. A well-drafted agreement should include provisions that outline the process for addressing disputes, reducing the risk of litigation and fostering a fair and efficient resolution.

One approach to resolving disputes is through arbitration. By opting for arbitration, parties to a share purchase agreement choose to use a private and confidential mechanism for the resolution of any future disputes which may arise. Arbitration can be a faster and more cost-effective alternative to litigation, as it avoids the lengthy court process and often results in a binding decision.

Another aspect to consider is the inclusion of dispute resolution clauses that set out the steps parties will take if a dispute arises. These may include negotiation, mediation, or expert determination. Taking this approach helps to ensure that both parties are committed to resolving disputes amicably and efficiently before resorting to court proceedings.

In some cases, litigation may be the only option to settle a dispute arising from a share purchase agreement. In such situations, it is crucial to consider the jurisdiction in which the legal proceedings will take place and to incorporate this choice of law and jurisdiction within the agreement. By agreeing on a specific jurisdiction, both parties can potentially save time and resources when dealing with litigation.

It is essential for parties to thoroughly review and understand the terms and conditions of the share purchase agreement and anticipate potential issues that might lead to disputes. By addressing these concerns in the contract drafting stage, parties can ensure a more cohesive relationship and minimise the risk of misunderstandings, disputes, and litigation.

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Asset Purchase Vs Share Purchase

An asset purchase and a share purchase are two common methods of buying or selling a business. In an asset purchase, the buyer acquires specific assets and liabilities of the company, whereas, in a share purchase, the buyer acquires the entire share capital of the company, including all assets, liabilities, and rights.

In an asset purchase, the buyer and the seller negotiate which particular assets and liabilities will be transferred. This enables the buyer to cherry-pick the assets they want and leave behind any unwanted liabilities. As a result, the buyer can benefit from a greater degree of control in the transaction. Additionally, an asset purchase may also have tax benefits in some jurisdictions, as the acquired assets have a step-up basis to fair market value. On the other hand, owners of the seller company may experience ‘double-taxation’ with an asset purchase: capital gains tax on the assets sold, then either income tax or corporation tax when they draw down the proceeds of sale.

However, an asset purchase can be more complex in terms of administration. Due to the transfer of individual assets, the buyer may need to obtain third-party consents, renegotiate contracts, and navigate other legal complexities involved in transferring assets.

On the other hand, a share purchase (SPA) involves acquiring all shares of the company. In this case, the buyer essentially steps into the shoes of the existing shareholders, taking over the entire company with all its assets, liabilities, and on-going contracts. A share purchase can be simpler to execute, as there might be fewer legal hurdles and the entire company changes ownership as a single entity.

Nevertheless, a share purchase might not be the most favourable option if the target company has significant undisclosed liabilities or other hidden issues, as the buyer would acquire these alongside the shares. In addition, the buyer might not enjoy the same tax benefits as those in an asset purchase, since there is no step-up basis for the assets acquired.

Understanding the main differences between an asset purchase and a share purchase is crucial when deciding the most suitable method to acquire a business. Both options have their unique advantages and disadvantages, which will depend on the specific circumstances of the transaction.

Role of Legal Practitioners

In the context of share purchase agreements, legal practitioners, often referred to as mergers & acquisitions lawyers, hold a significant role in drafting, reviewing, and ensuring compliance with the legal requirements. Their expertise in law and contracts is essential to facilitate smooth transactions and avoid potential disputes.

Lawyers have the responsibility to ensure that the share purchase agreement accurately reflects the negotiated terms and conditions between the buyer and the seller. This legal document should specify the type, quantity, and price of the shares involved, as well as payment terms, conditions precedent, and warranties.

Working closely with their clients, legal practitioners help them understand the legal implications of the contract clauses during the negotiation process. They also collaborate with other professionals such as accountants, financial advisors, and business appraisers to oversee the due diligence process and verify the company’s financial standing, ensuring that the client is making an informed decision.

Moreover, lawyers assist parties with satisfying the conditions precedent specified in the share purchase agreement. These conditions are necessary steps that must be completed before the share transfer can occur. Typical conditions include obtaining regulatory approvals, disclosing relevant information to the parties, and resolving outstanding liabilities or legal matters.

Lastly, legal practitioners take part in completing the transaction by ensuring that all necessary paperwork, filings, and registrations are completed correctly. They may guide clients through the process of transferring shares, paying the agreed-upon amounts, and updating the company’s records. In case there are post-closing obligations or disputes, lawyers can provide legal advice and representation to protect their client’s interests.

In summary, the role of legal practitioners in share purchase agreements is crucial for a successful transaction, as they provide invaluable assistance in drafting, reviewing, negotiating, and closing the deal. Their expertise in contracts and law protects clients’ interests, minimising risks and potential conflicts. To learn more about legal fees involved and finding the right law firm, you can read our blog on the topic here.

Frequently Asked Questions

What are essential clauses in a SPA?

A Share Purchase Agreement (SPA) should include several crucial clauses to ensure a smooth transaction and protect both parties. Some essential clauses include:

  • Defining the type and number of shares being purchased
  • The purchase price and payment terms
  • Conditions precedent
  • Warranties and representations from both buyer and seller
  • Indemnification and liability provisions
  • Confidentiality and non-compete clauses
  • Restrictive covenants
  • Governing law and dispute resolution mechanisms

Do individuals need a unique agreement for share purchases?

It is essential to have a clear and tailored agreement for share purchases, as each transaction may differ in terms of the parties involved, the type of shares issued, or specific conditions. A customised agreement helps in addressing unique aspects and avoiding potential misunderstandings or disputes.

How does a share purchase agreement differ from an asset purchase?

A share purchase agreement involves the purchase of a company’s stock or shares, transferring the ownership of the company to the buyer. In contrast, an asset purchase agreement concerns the acquisition of specific assets or liabilities of a company, without necessarily affecting the ownership structure. The main difference lies in what is being transferred – company ownership versus specific assets and liabilities. In addition the sellers in each case may incur differing tax liabilities in respect of the transaction. It is therefore essential to seek legal advice before deciding which is the most suitable option.

Are share purchase agreements legally binding?

Yes, share purchase agreements are legally binding contracts between the buyer and the seller. Both parties must adhere to the agreed terms and conditions. Failure to comply with the agreement may result in legal consequences, such as damages, injunctions, or dispute resolution proceedings.

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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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