The Share Purchase Agreement (sometimes called an SPA Agreement or a Private Share Purchase Agreement) is a legal document to govern the sale and purchase of company shares and it is the cornerstone of share purchase business transaction. Its role is to facilitate a smooth transaction whilst ensuring the interests of both buyers and sellers are protected.
The SPA Agreement is about negotiation and to effectively negotiate both sides need to understand the legal, financial and business aspects of the SPA transaction.
Understanding the other party’s motivations and objectives in addition to considering the broader business context, including market conditions and the competitive landscape can also help to guide your negotiation strategy.
An experienced commercial solicitor will help you to consider these factors and use them to negotiate favourable, or mutually beneficial, terms for their client.
In this article we explore the key components of an SPA Agreement, the importance of due diligence and how to negotiate indemnities and liability limitations to your advantage.
Understanding the SPA Agreement
A Share Purchase Agreement is a legal contract between a buyer and a seller.
The SPA Agreement is crucial for protecting the interests of both the buyer and the seller. It outlines the rights and responsibilities of each party, reducing the risk of disputes and misunderstandings.
The legal implications of SPAs are significant. A well-drafted SPA Agreement can protect both parties from potential legal issues, while a poorly drafted one can lead to disputes and legal challenges.
Key Components of the SPA Agreement
- Purchase Price: This is the amount the buyer agrees to pay for the shares. It may be subject to adjustments based on certain conditions.
- Representations and Warranties: These are statements made by the seller about the company and its operations. They provide the buyer with assurance about what they are purchasing.
- Indemnities: These are provisions that protect the buyer from potential losses arising from breaches of the agreement by the seller.
- Conditions Precedent: These are conditions that must be met before the transaction can be completed. They may include regulatory approvals, shareholder approvals and other necessary consents.
- Closing Arrangements: These detail the steps to be taken to complete the transaction, including the payment method and the transfer of share certificates.
Understanding these components and their legal implications is crucial for anyone involved in a share purchase transaction.
The Due Diligence Process
Commercial due diligence is a critical part of any share purchase transaction as it involves a thorough investigation of the target company by the buyer.
The goal is to verify the information provided by the seller. It also helps identify any potential risks or liabilities.
Due diligence covers various aspects of the company. These include its financials, operations, legal compliance and market position.
The findings from the due diligence process can significantly impact the terms of the SPA. They can influence the purchase price, representations and warranties and indemnities.
In essence, due diligence is the foundation upon which a successful SPA negotiation is built and findings from due diligence can range from minor issues to major red flags.
For instance, the buyer might discover undisclosed liabilities or regulatory violations. These could lead to a reduction in the purchase price or even a termination of the transaction.
If you are considering a share purchase, you may want to read: Commercial Due Diligence in Business Acquisitions
If you are selling a business, you may want to read: Selling a Business as a Going Concern: Be Ready for Due Diligence
Crafting and Negotiating Key Provisions
Crafting and negotiating key provisions will require careful consideration.
The buyer will want broad and detailed representations and warranties to minimise risk. They will also seek extensive indemnities to cover potential losses.
The seller, however, will aim to limit the scope of these provisions. They will want to cap their potential liability and exclude certain risks from indemnities.
The final terms will depend on the relative bargaining power of the parties and the findings from due diligence.
Limitations of Liability and Risk Allocation
Limitations of liability are often a contentious point in SPA negotiations.
The seller will typically seek to limit their liability to a certain amount or period. They may also try to exclude certain types of losses from indemnities.
The buyer, however, will want to maximise the seller’s liability to protect their investment.
The allocation of risk between the parties is a delicate balancing act. It requires careful negotiation and a clear understanding of the potential risks and rewards of the transaction.
Conditions Precedent
Conditions precedent are events or actions that must occur before the SPA can be completed. Conditions precedent can cover a wide range of issues and may include regulatory approvals, shareholder consents, intellectual property rights, non-compete clauses, employee matters, tax considerations, cross-border issues or the completion of certain business milestones.
Understanding and negotiating these conditions is a critical part of the SPA process which is when the expertise of a commercial solicitor can be invaluable.
For example, the purchase price in an SPA is not always a fixed amount. It can be subject to adjustments based on various factors. These may include the target company’s financial performance, changes in working capital, or the resolution of certain contingencies.
They serve to protect the buyer by ensuring that certain conditions are met before the transaction is finalised.
There are several mechanisms for adjusting the purchase price in an SPA. One common method is a working capital adjustment. This adjusts the price based on changes in the target company’s working capital between the signing and closing of the SPA.
Other Common Areas of Negotiation
- Intellectual Property Rights
The buyer will want assurances that they are acquiring all necessary IP rights, while the seller will want to protect their own interests.
- Non-Compete Clauses
Non-compete clauses can restrict the seller’s ability to compete with the target company after the sale, while employee matters can include issues such as employee retention and the transfer of employment contracts.
- Bridging Valuation Gaps with Earn-Outs
Earn-outs can be an effective tool for bridging valuation gaps between buyers and sellers. They involve additional payments to the seller if the company achieves certain financial targets post-sale.
- Employment Laws and Share Transfers
Employment laws can significantly impact SPA negotiations, particularly when transferring employees.
- Handling Post-Closing Liabilities
Post-closing liabilities can pose significant risks for buyers. Negotiating indemnification provisions can help protect against these risks, ensuring that the seller bears responsibility for any breaches of representations and warranties.
- Dispute Resolution Mechanisms
Dispute resolution mechanisms are a key component of any share purchase agreement. They provide a process for resolving potential disputes, helping to avoid costly and time-consuming litigation.
Closing the Deal: Post-Agreement Strategies
Once the SPA Agreement is signed, the focus shifts to closing the deal and fulfilling post-agreement obligations. This phase can be just as complex as the negotiation process, requiring careful planning and execution.
It’s crucial to manage post-closing obligations effectively to ensure a smooth transition and avoid disputes.
The use of Escrow arrangements, expert advice, and technology can greatly assist in this process.
These tools can help ensure that all obligations are met, disputes are resolved efficiently, and the deal is closed successfully.
The Art of Negotiating SPAs
It’s an art that involves strategic planning, effective communication, and a keen eye for detail. With the right approach and resources, both buyers and sellers can complete this process successfully, ensuring a fair deal that aligns with their business goals.
Taking legal advice during share purchase negotiations is highly recommended to ensure that all legal aspects of the transaction are properly addressed. Legal advisors can provide valuable insights into the terms of the Share Purchase Agreement (SPA) and help to identify potential risks. By seeking legal advice, buyers and sellers are more likely to negotiate a successful share purchase deal.
You may also be interested in…….
The Importance of a Private Share Purchase Agreement
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
