Share purchase agreement: what it is, why the buyer drafts it and what to include

What is a share purchase agreement, and how do you use it? Put simply, it is the legally binding contract that records the transfer of shares in a company from the seller to the buyer. If you are buying a business by acquiring its shares, this is the document the whole deal turns on, and as the buyer you will usually be the one who drafts it first.

What is a share purchase agreement?

Take a local business owner who wants to buy another business to expand his operations. If he is buying the shares of that business, rather than its individual assets, he will use a share purchase agreement, commonly shortened to SPA.

A share purchase agreement is a legally binding contract that documents the transfer of shares from one party to another. It records who is selling, who is buying, what is being sold and on what terms. Once signed, it governs the rights and obligations of both sides, including what happens if something about the business turns out not to be as described.

Why is a share purchase agreement important?

The SPA matters for two reasons. The first is that it is the roadmap for the deal: everything that has been agreed about the purchase is captured in one place, and anything that is not in it is very hard to rely on later.

The second reason is about who holds the pen. As part of the process of buying a business, the buyer is normally the one who delivers the first draft of the contract. That is a significant advantage. Producing the first draft lets the buyer include warranties and indemnities, along with conditions for the purchase, all of which are aimed at minimising the buyer's risk. The seller then has to negotiate those protections down rather than the buyer having to negotiate them in.

What to include in a share purchase agreement

There are three main things a buyer should make sure are in the share purchase agreement.

• The parties, the shares and the price. Who is the buyer, who is the seller, what kind of shares are being sold, how many, and for how much. These are the core commercial details, and they need to be exactly right.
• Warranties and indemnities. The buyer in particular will want both. Warranties are the seller's promises about the state of the business. Indemnities are commitments by the seller to cover specific losses if particular things go wrong. Together they are the buyer's main protection against problems that were not visible before completion.
• The conditions of the sale. The terms on which the purchase goes ahead, including any conditions that must be satisfied before completion and how disputes between the parties will be resolved.

A share purchase agreement that covers these three areas properly gives the buyer a clear deal and a contractual route to compensation if the business is not what it was represented to be.

Next steps

If you are buying the shares of a company, make sure you take control of the first draft of the share purchase agreement and that it contains comprehensive warranties and indemnities alongside the commercial terms. Speak to a corporate solicitor before the draft goes to the seller, so the protections are built in from the start rather than added in a hurry later.