A share purchase agreement (sometimes called an SPA or Private Share Purchase Agreement) is a legal contract that outlines the terms and conditions of the sale and purchase of shares in a company. It is a crucial document in any share acquisition transaction, as it sets out the rights and obligations of both the buyer and the seller.
Below we outline the key elements of a 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.
What is a Share Purchase Agreement?
A share purchase agreement (sometimes called an SPA or a Private Share Purchase Agreement) is a legally binding contract between the buyer and the seller of shares in a company. It outlines the terms and conditions of the sale, including the number of shares being sold, the purchase price, and any other relevant details. The share purchase agreement is typically drafted by the buyer’s legal team and is subject to negotiation between the parties.
Why is a Share Purchase Agreement Important?
A share purchase agreement is important for several reasons:
- It outlines the terms and conditions of the sale, ensuring that both parties are on the same page and reducing the risk of misunderstandings or disputes.
- It provides legal protection for both the buyer and the seller, as it is a legally binding contract.
- It sets out the rights and obligations of both parties, ensuring that each party understands their responsibilities.
- It can include clauses that protect the interests of both parties, such as warranties and indemnities.
What is Included in a Share Purchase Agreement?
A share purchase agreement typically includes the following key elements:
Parties Involved
The SPA will identify the buyer and the seller, including their legal names and addresses. It is important to ensure that the correct legal entities are identified to avoid any confusion or disputes.
Shares Being Sold
The SPA will specify the number and type of shares being sold. This includes the class of shares, the number of shares, and any restrictions or limitations on the shares.
Purchase Price
The purchase price is a crucial element of the SPA. It will specify the total amount to be paid for the shares, as well as the payment terms and any conditions that must be met before the payment is made.
Representations and Warranties
Representations and warranties are statements made by the seller about the company and its shares. These statements are intended to provide the buyer with information about the company and its financial and legal status. If any of these statements are found to be untrue, the buyer may have the right to take legal action against the seller.
Conditions Precedent
Conditions precedent are conditions that must be met before the sale can be completed. These may include obtaining regulatory approvals, shareholder approvals, or the completion of due diligence.
Indemnities
Indemnities are clauses that protect the buyer from any losses or damages that may arise from the sale. For example, if the seller has made false representations or warranties, the buyer may be entitled to compensation.
Governing Law and Jurisdiction
The SPA will specify the governing law and jurisdiction for any business disputes that may arise. This is important as it determines which laws will apply and where any legal proceedings will take place.
Common Mistakes to Avoid in Share Purchase Agreements
Lack of Clarity in the Purchase Price
Lack of clarity in the purchase price is a common mistake to avoid in share purchase agreements. It is important to provide clear and unambiguous terms regarding the purchase price to avoid any misunderstandings or disputes in the future.
Inadequate Due Diligence
Inadequate due diligence is a crucial aspect to address in the share purchase agreement. Conducting thorough due diligence helps the buyer assess the risks and liabilities associated with the target company before finalising the purchase. It involves reviewing the company’s financial statements, contracts, legal documents, intellectual property and other relevant information. By performing comprehensive due diligence, the buyer can make informed decisions and negotiate the terms and conditions of the agreement more effectively.
Failure to Address Representations and Warranties
Failure to address representations and warranties in a share purchase agreement can lead to significant legal and financial consequences for both the buyer and the seller. Representations and warranties are statements made by the seller about the condition, status, and performance of the target company. These statements are crucial for the buyer as the buyer relies on them as well as on its due diligence to make informed decisions about further enquiries, whether to request indemnities or renegotiate the purchase price. If the agreement does not contain adequate representations and warranties, it may be difficult to hold the seller accountable for any problems with the target company’s business.
Inadequate Restrictive Covenants
Non-compete and non-solicitation clauses, which are often referred to as ‘restrictive covenants’ are important provisions in a share purchase agreement. These clauses are designed to protect the buyer from potential competition or solicitation by the seller after the completion of the share purchase.
A non-compete clause prohibits the seller from engaging in a similar business or competing with the buyer for a specified period of time and within a specific geographical area. This clause helps prevent the seller from using their knowledge of the business to create a competing venture that could harm the buyer’s interests.
A non-solicitation clause, on the other hand, restricts the seller from soliciting or poaching customers, clients, employees or suppliers of the target company. This clause aims to prevent the seller from taking advantage of their relationship with these stakeholders to divert business away from the buyer.
Inadequate restrictive covenants can leave the buyer vulnerable to competition and solicitation by the seller, which could negatively impact the value of the acquired shares. It is important for these clauses to be carefully drafted to ensure that they are enforceable and provide adequate protection for the buyer.
Indemnities and Limitation of Liability
Indemnities and limitation of liability are important provisions in a share purchase agreement. These clauses help protect the parties involved in the transaction from potential risks and liabilities.
Indemnities specify the obligations of the buyer and the seller regarding the indemnification of certain losses, claims or damages. They outline the scope of indemnification, the procedures for making a claim and the limitations on the indemnifying party’s liability. Indemnities are often included following due diligence to ensure that the buyer is protected against the financial consequences of certain risks or liabilities associated with the company or its business.
Limitation of liability clauses, on the other hand, aim to restrict the amount of liability one party can be held accountable for. They define the maximum amount that can be claimed by the other party in case of a claim under a warranty or other types of legal claims. These clauses are important for managing the financial risks associated with the transaction and can help provide a level of certainty and predictability for both parties, but particularly for the seller.
You may also be interested in…….
The Importance of a Private Share Purchase Agreement
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
