Understanding the Share Purchase Agreement: Main Elements & Benefits

A share purchase agreement (SPA) is a legally binding contract between a buyer and a seller that facilitates the purchase of a business (structured as a share purchase rather than asset purchase, more on this later) by setting out the terms of the sale. The main purpose of a SPA is to protect the interests of both parties involved in the transaction, but especially the buyer. If the target company is large, the seller will likely consist of multiple shareholders. Therefore, more interests are in need of protection, demonstrating the need for a document governing such an acquisition.

If you’re selling or buying shares in a private limited company, it’s important to have a SPA in place as it can help to protect you against any legal claims that may arise from the sale. A SPA can help to ensure that you get what you’ve paid for and that the seller can’t back out of the deal, or that you can claim against the seller if the business is not as represented. The SPA overall sets out the obligations and rights of both parties in relation to the share purchase. It may also set out any restrictions following completion, but this will be discussed later in the article.

What is a Share Purchase Agreement?

In short, a share purchase agreement is a contract between the buyer and the seller of a limited company. The buyer is buying a limited company via the purchase of the shares because ownership of the limited company is determined by the ownership of its shares.

It is not uncommon for the share purchase to be 50+ pages long, with the majority of the document consisting of warranties. Learn more about warranties further below.

Asset purchase or share purchase?

A share purchase agreement differs from that of an asset purchase agreement. An asset purchase agreement (APA) is typically used in transactions where the buyer is only interested in purchasing certain assets of the company, rather than the shares themselves. These assets could include things like property, equipment, or patents. On the other hand, under a SPA, the buyer will be acquiring all of the shares in a company as well as its assets. This means that the buyer will become a shareholder of the company and will be entitled to all of the rights that come with that status. In a share purchase, existing contracts remain intact, whereas in an asset purchase, they may need to be reassigned (for this, make sure to check for ‘rights of assignment’ clauses).

Depending on the property being sold under an APA, a seller could potentially be left with an empty shell of a company as a buyer may cherry-pick the assets they wish to purchase. This means any liabilities will be left with the seller despite the sale. Therefore, a SPA may be more attractive to clients who wish to sell their company in its entirety and walk away from the business completely.

The law guards both types of transfer differently and, as a result, both types of transactions have different tax liabilities. The legal implications of both types can be extreme, therefore it is important to seek specialist tax advice to choose the right transfer for you.

The main elements of a share purchase agreement

There are several key provisions that should be included in a share purchase agreement. These include the following elements:

1. The names and contact details of the respective parties;
2. A description of the shares being sold;
3. Details relating to the price of the shares;
4. The date of completion;
5. Warranties that the seller makes as to the state of the target company.
6. Any conditions attached to the sale (eg. board approval);
7. Tax covenant to ensure indemnity against undisclosed tax issues;
8. How the aggregate purchase price is adjusted.

The names and contact details of the respective parties

Generally, only two parties are involved in a share purchase. A buyer and a seller. Both parties should each list their full name and contact details in the SPA. If the transaction is quite large, there may be a team on either side supplying contact details to help facilitate the acquisition. This will ensure that both parties can be easily contacted if there are any questions or issues regarding the agreement.

A description of the shares being sold

The SPA should include provisions relating to the description of the shares being sold, including the class of shares and the number of shares being transferred. This will help to identify the shares that are being sold under the agreement. Additionally, the description should specify if the transaction involves the sale of the entire share capital of the company.

Details relating to the price of the shares

The purchase price of the shares should be clearly stated in the SPA. This will help to avoid any confusion or disagreement about the price at which the shares are being sold.

The date of completion

The SPA should include the date on which the shares will be transferred from the seller to the buyer. This is known as the completion date. It’s important to ensure that both parties are available on this date to sign the necessary paperwork and transfer the shares.

Warranties

The seller will give numerous warranties to the buyer. Warranties are like promises that the seller makes as to the state of the target company. More on these further below.

How the aggregate purchase price is adjusted

The purchase price in a share purchase acquisition may be adjusted in several different ways, including according to completion accounts. Learn more about purchase price adjustments by watching the below video.

Provisions providing extra protection

In addition to the above, there are a number of other clauses which may be included in a share purchase agreement. These will depend on the specific circumstances of the transaction and the negotiation between the parties. It is important to note that the presence of valuable consideration is essential for the clauses to be legally binding and enforceable. Some common clauses include:

1. Non-compete clause;
2. Confidentiality clause;
3. Choice of forum and law provisions;
4. Warranty and Indemnity;
5. Restrictive covenants;
6. Due diligence; and
7. Non-compete and confidentiality clauses.

Non-compete clause

A non-compete clause is a legal provision that can be used to protect your company from the risk of future competition after completion. This clause typically prohibits the buyer from competing with your business for a certain period of time following the completion of the sale. A non-compete agreement might, for example, prevent a business owner from starting a rival company and poaching clients and employees.

Confidentiality clause

Meanwhile, a confidentiality clause can help to protect any sensitive information that is exchanged during the transaction. An example of such sensitive information may include documents identifying specific employees or agreements created with any suppliers. Post-completion, it is likely that documents of such a private nature will be destroyed or returned to their respective parties.

Confidentiality agreements, and even non-compete agreements, help to protect your company’s key assets. As the buyer, you may want to ensure that any intellectual property remains with the target business after the sale has been completed. This is because IP may be a key asset to the target business and can help it thrive in the future.

It is therefore important to have robust non-compete and confidentiality clauses in place to protect your business both during and after a sale. When it comes to negotiating and drafting these clauses, it is important to seek legal advice from a solicitor or lawyer who understands the needs of the commercial world. This is because the laws surrounding these clauses can be complex, and the consequences of getting them wrong can be serious.

Warranties and indemnities

Warranties and indemnities are key components of share purchase agreements and are typically negotiated between the seller and buyer before the SPA is signed. They are used to protect the buyer from any potential risks associated with the acquisition as well as post-completion, and to ensure that the seller is held liable for any issues that may arise after the sale. The company’s articles of association typically define the legal framework for share transfers and highlight potential restrictions, which can affect the process of transferring ownership and the rights associated with shares.

Broadly, warranties and indemnities in a contract are intended to guard against problems such as:

– Misrepresentation

– Breach of contract

– Fraudulent misrepresentation

– Defects in title

– Environmental contamination

– Tax liabilities

– Pending litigation

The seller’s warranties will provide details about the business being sold, including its financials, compliance with laws and regulations, and contracts with third parties. They usually take the form of a representation that the business is tax-compliant and therefore would provide a reliable partner to a transaction. A buyer could sue for damages and set these off against the outstanding, deferred purchase price if they experience a loss because of a breach of warranty.

The buyer’s indemnities, on the other hand, will protect them from any losses relating to the sale. The seller would agree to compensate the buyer if any specified liabilities come up following completion of the sale.

Any buyer should be aware of the risks associated with their purchase, especially in the case of an expensive acquisition. Because of this, it’s critical to obtain legal advice before signing a share purchase agreement since several complex legal concerns must be addressed.

These measures help buyers avoid risks associated with the buy while also ensuring that the seller is held responsible for any issues that develop after the transaction is completed.  A law firm with experience in this sector can assist you during the negotiation and drafting of the SPA, ensuring that your interests are protected.

Choice of forum and law

Although only useful for deals occurring cross-jurisdictionally, this clause allows the parties to plan ahead by selecting the jurisdiction that will govern any legal disputes that may arise from the current contract. This means that, for example, a dispute would be resolved using English law if London was selected as the seat. This can save time and money if a dispute does occur, as the parties will already have agreed on the factors relating to how the dispute will be resolved and what law governs the contract.

Although a separate arbitration agreement would be a better document to contain such provisions, the courts can still use the content of the SPA to infer the party’s intentions when it comes to a dispute.

Restrictive covenants

A restrictive covenant in a SPA may act to restrict the actions of both parties before and after the closing of the contract. Restrictions placed on the activities of the buyer are designed to protect the seller’s business interests, while restrictions placed on the seller are designed to protect the buyer’s investment. They are typically included in the SPA to promote certainty and fairness in the transaction and protect each party’s interests.

The restrictions placed on the parties may include restrictions on the use of the other party’s intellectual property, restrictions on competition with the other party’s business, and restrictions on the solicitation of employees.

Due diligence

All purchases are made with a risk. The process of due diligence is vital as it allows a potential buyer to investigate the target company and the shares being purchased before committing to the deal. Solicitors and lawyers with the required commercial knowledge, will be given private access to the target company in order to investigate and identify any risks associated with the purchase to ensure that they are adequately addressed.

The due diligence process will vary depending on the industry and regulatory environment, but usually involves reviewing financial statements, interviewing management, talking to the company’s employees, and touring any facilities. Additionally, stock transfer forms are part of the necessary documentation required for the completion of a transaction.

The private access provided by the process can help uncover any issues related to the company, including fraud and tax evasion. Therefore, the findings of due diligence may affect the transaction price, whether warranties and indemnities are included, and whether a buyer decides to continue with or cancel the transaction.

Furthermore, due diligence allows for the reallocation of risk by providing the buyer with a means to elicit information from the seller.

If due diligence is not conducted properly, it can lead to the risk of overpaying the purchase price or the potential emergence of issues following completion. Although it can be a very lengthy process due to the vast amount of documents involved, it is extremely vital in the commercial world due to the potential risk of legal and reputational repercussions.

Our team are specialised in providing advice to you throughout your transaction. Contact us for a free legal advice call.

The benefits of a share purchase agreement

This part of the article aims to summarise the number of benefits that a share purchase agreement can provide to both the buyer and seller. As demonstrated above, a share purchase agreement (SPA) is a useful tool in setting out the obligations of the buyer and seller whilst ensuring that the deal abides by the law. SPA’s provide a variety of benefits, some of which include:

1. The protection of your interests in the event that something goes wrong with the transaction;
2. Protection from potential liabilities;
3. Prevents the seller from setting up a competing business (if a non-compete clause is included);
4. Ensure compliance with the Companies Act; and
5. Can help to minimise any disputes that may arise.

Additionally, share sale agreements define the terms of the transaction, outline responsibilities, and specify protective measures for both buyers and sellers.

The following section of this article will explore the primary benefits in greater depth.

Protection of party interests

A SPA can provide you with peace of mind and help to ensure that the transaction of the shares goes smoothly. It safeguards both parties whilst outlining their responsibilities.

Depending on the terms included, SPAs also provide protection to the party’s interests by placing legal restrictions on the parties that may extend to a period post-completion. These can act to prevent the setting up of a competing business, misrepresentation and the breach of any conditions relating to the sale. These inherently support the interests of each party respectively by preventing them from acting against each other.

Protection from potential liabilities

A warranty or indemnity in a SPA can transfer possible liabilities and the need to pay damages from one party to another. This inherently means that the SPA will help protect you and your company if an issue were to arise post-completion.

Ensure compliance with the Companies Act 2006

Watch this video to learn how to transfer shares in a private company.

When buying shares in a private company via a share purchase agreement, the contract will assist with ensuring that the legal requirements set out in the Companies Act 2006 are followed. Typically, the SPA would contain a schedule that lists what needs to be done on the day of completion, including what documents each of the parties need to deliver to the other.

Ensuring that proper ancillary (supplemental) documents are prepared is key to achieving compliance. We provide below a list of documents and actions typically required to be drafted/taken:

• Ancillary corporate procedure documents:
  • Buyer board minutes to approve the purchase;
  • Target board minutes to approve the sale;
  • Share certificate indemnities if the seller has lost their share certificates;
  • Stock transfer forms as instruments of transfer;
  • Person with Significant Control (PSC) cessation letters for out-going shareholder/s;
  • PSC notification letters for new shareholder/s;
  • Director resignation letters; and
  • New director’s consent to act letters.
• Post-completion procedural steps:
  • Updating internal statutory registers;
  • Cancelling old shares;
  • Issuing new shares;
  • Appointing new directors;
  • Removing previous directors; and
  • Filing forms at Companies House.

Should I involve a share purchase agreement in my transaction?

Overall, a share purchase agreement is a crucial document to have in place when selling or buying shares. It can provide a number of benefits for both the buyer and the seller, such as protection from potential liabilities, prevention of disputes and a clear understanding of obligations. In the context of a private company, SPAs are particularly significant as they illustrate the complexities involved in transactions that can encompass varying degrees of shareholding, from majority to minority interests. If you are thinking of selling or buying shares, it is important to seek legal advice from a law firm specialised in this area to ensure that your ideal SPA is put in place.