A Private Share Purchase Agreement (often called an SPA or simply a Share Purchase Agreement) is a contract that sets out the terms of a share sale and purchase. The buyer and the seller negotiate the Private Share Purchase Agreement to protect their respective interests.
Below we outline the key elements of a Private Share Purchase Agreement but if you need this agreement the best place to start is to book a free introductory call with a commercial solicitor. The call will provide you with some initial advice and, on request, we will follow up with a written quote which is often a fixed fee.
Understanding Private Share Purchase Agreement
The Private Share Purchase Agreement is the agreement between the buyer and the seller about the number of shares being sold, the purchase price, the terms of payment and the warranties and any indemnities provided by the seller.
The Private Share Purchase Agreement provides the buyer with the right to make claims against the seller for breaches of the agreement, in particular the warranties and any indemnities. The agreement confirms the terms of payment to the seller and provides the seller with the right to make claims against the seller for failure to pay or late payment, and sets out the limits on the seller’s liability in the event of a claim under a warranty or other dispute.
The Private Share Purchase Agreement is a complex document that is often over 60 pages long for complex sales, and it is advisable to engage a commercial solicitor to draft or review the Private Share Purchase Agreement. It is standard practice that the buyer’s solicitors draft and the seller’s solicitors comment on the agreement. The seller’s solicitors will check that the Private Share Purchase Agreement reflects the main terms agreed in principle in the buyer’s offer letter and/or the heads of term sheet.
Key Components of a Private Share Purchase Agreement
A Private Share Purchase Agreement is divided into sections. Each section serves a specific purpose and contributes to the overall structure of the agreement.
The key sections include:
- Definitions and interpretations
- Any conditions to the purchase
- Obligation to pay and payment terms
- Mechanical aspects of completion of the sale and purchase
- Warranties and indemnities
- Limitation of the sellers liabilities
- Usually a tax covenant.
The Tax Covenant
The tax covenant is a promise by the seller to pay or reimburse unpaid tax payable in respect of the sellers period of ownership of the company.
It is paramount to the buyer and seller to protect their own interests. This is achieved through the allocation of risk via the negotiation of the warranties, any indemnities, the tax covenant, and the disclosure letter, in which the seller discloses matters that could, if not disclosed, be the basis of a claim that a warranty was untrue or inaccurate in a way that caused loss to the buyer. As the Private Share Purchase Agreement and the disclosure letter are negotiated, they allocate risks and liabilities as agreed between the buyer and the seller.
Warranties are statements made by the seller about the shares, the company its business, finances and tax liabilities. If a warranty proves to be untrue or misleading, the buyer may claim damages for breach of warranty unless there has been a clear disclosure of the matter that makes the warranty untrue or misleading in the disclosure letter. Drafting the disclosure letter is often time consuming for the seller as it involves reviewing all the warranties in detail.
Indemnities, on the other hand, are promises by the seller to reimburse the buyer for specific types of loss. They are often used to cover known risks or liabilities that have been identified by the buyer during commercial due diligence. Indemnities provide a more direct form of compensation than warranties, as they do not require the buyer to prove a loss.
Completion Mechanics and Post-Completion Considerations
The completion of a sale and purchase in accordance with the Private Share Purchase Agreement involves several steps. These include the transfer of shares by the signature of stock transfer forms, the payment of the purchase price, and the exchange of any other documentation required by the buyer. It is at this stage that ownership of the shares officially changes hands.
Post-Completion Adjustments and Disputes
After completion, there may be, depending on the structure of the payments, adjustments to the purchase price. Any adjustments are typically based on the company’s financial position at completion, as reflected in accounts made up as at the date of completion of the sale and purchase. The adjustments may result in either an additional payment by the buyer or a refund from the seller.
Post-completion disputes can arise in various areas, the main ones being:
- Breach of warranties or indemnities
- Disagreements over completion accounts
Such disputes can be costly and time-consuming. Therefore, it is important to invest sufficient time and attention to commercial due diligence and to the Private Share Purchase Agreement and disclosure letter to minimise the risk of post-completion disputes.
The Importance taking advice early.
The ideal time for a buyer or seller to instruct a solicitor is before an offer letter or heads of terms have been drafted. This is because clarity about the main terms of the deal in these preliminary documents reduces the risk of misunderstanding and attempted renegotiation when the Private Share Purchase Agreement stage is reached.
No Obligation, Introductory Call
Whether you are considering buying or selling a company, JPP Law can help you prepare for the transaction with a free introductory call with a commercial solicitor to discuss your requirements and, if required, we can provide you with a no obligation quote to support you through your share sale or purchase.
You may also be interested in……….
Selling a Business as a Going Concern: Be Ready for Commercial Due Diligence
What are Heads of Terms?
The Asset Purchase Agreement Explained
Asset Sale Vs Share Sale: What to Consider
10 Questions to Ask When Buying a Business
Legal Considerations When Buying Shares in a Business
Commercial Due Diligence in Business Acquisitions
