Published Thu, 20 Apr 2023
An agreement known as a share purchase agreement (SPA) specifies the terms and circumstances governing the sale and purchase of shares in a company. The main goal of SPA is to clearly define the terms of the agreement and provide any relevant supporting data so that the parties to the agreement are aware of their rights and responsibilities in the event that shares are transferred.
Typical agreements will have particular clauses that outline the criteria and terms pertaining to buying shares. This might include stipulations relating to pricing and payment, pre-sale conditions, completion agreements, warranties, restrictions, and other clauses (such as indemnity clauses, tax provisions or confidentiality agreements).
In share purchase agreements, the buyer is expected to take over all or most of the company's obligations. In this scenario, the buyer would be taking on both the company's obligations and assets. Therefore, before entering into such a purchase, any prospective buyer must thoroughly evaluate the company. Before actually establishing a share purchase agreement, the parties should first discuss and create a term sheet describing its key clauses. This would simplify the formulation and negotiation of the share purchase agreement because all crucial points would already have been agreed upon by the parties.
Clarity of Transaction- By entering into this form of agreement, there remains clarity in transaction and respective proportion of shares allocated to the buyer or the entity.
Rights and Liabilities- The rights and liabilities of the parties are legally prescribed under such an agreement. This would ensure that the parties’ roles and responsibilities arising out the agreement are specified in detail.
Warranties -All parties to SPA are equally covered by specific warranties specified in the agreement.
No Third-Party Involvement- SPA is a legal contract that is executed between specific parties, hence, there is no scope of involvement of any other third party.
First Point of Reference: SPA serves as the first point of reference, in case of any breaches or any misunderstanding arising between the parties in near future.
The parties to the agreement: Parties to the agreement generally comprise the seller, the purchaser and the Company whose shares are being transferred. In SPA, such parties are referred as covenanters/guarantors/releasors etc at various point in time depending upon the situation.
Background :The factual background of the transaction should be clearly given out in the recitals with no errors and ambiguity in identifying and laying down the relationship between the parties, the objective of the transaction, the number and amount of shares being transferred and the role of each of the parties
Consideration and sale of shares: At the time of execution of the agreement a detailed structure of sale consideration needs to be mentioned including the, number of shares, the value of shares, the sum that is payable on closing and if applicable, the amount payable in case any security is registered against the company and the pricing formula used for determining the value on case to case basis. If the payments are to be done in tranches, the details of the trigger for the payments should be mentioned in the agreement beforehand.
Conditions Precedent and Subsequent: The conditions precedent and subsequent clause should be exhaustively provided for all approvals, authorizations, permissions and permits which are necessary before and after execution of the transaction. The conditions precedent clause should also provide for fulfilling all the representations, warranties, obligations, execution of agreements and covenants specified under the agreement. However, protection must be provided to the purchaser in case any of the conditions subsequent are breached.
Closing: The Closing Mechanism should establish the time frame and include a closing memorandum listing the actions that are to take place on closing day including the board resolutions to be passed. A particular line clearly stating that the closing should take place on satisfaction of condition precedents is also recommend.
Covenants by the parties: Covenants may be negative or positive and provide a level of security to each of the parties on their past and proposed actions regarding the SPA. Covenants are also required by the purchaser from the seller regarding interim management of the company.
Representations and Warranties: Representations in SPA captures the capital structure of the company including the list of directors and the number of shares and the title of the shares under transaction, the purchaser’s right to contract, purchase and ability to pay the compensation and enter into subsequent agreements, etc should be provided. In addition, this clause contains an affirmation regarding the status of the parties to the agreement. This would ensure the credibility of the information provided from either party's end.
Confidentiality: It is recommended to provide that parties who receive confidential information about the company or other parties to the agreement keep such information confidential, and to provide that they cannot use the information for any purpose that may be prejudicial to the company or the other shareholders.
Indemnification: Indemnification clause provides for the limits of liability and the process for reimbursement of indemnity claims and is considered as the most scrutinized clause in case of disputes, therefore, attention has to be paid to ensure that the parties is adequately covered in case of issues relating to the transactions emerge.
Dispute Resolution and Arbitration: A share purchase agreement should set out the process for the resolution of any disputes between the parties to the shareholder’s agreement. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.
The main purpose of the share purchase agreement is to demonstrate that all terms and conditions were mutually agreed upon by the parties and to specify how many shares will be transferred from the seller to the buyer and at what price. Additionally, it covers numerous details about the business whose shares are being bought as well as the benefits that the buyer would receive as a result. The type of shares transferred from the seller to the buyer is one of the most crucial details covered by this agreement.