Table of Contents
Are you a business owner looking to acquire shares in another company? Or are you looking to sell shares in your business? If so, one of the critical documents of any share purchase is the share purchase agreement (‘SPA’). An SPA is the primary document that guides a share purchase. However, SPAs can include many different sections and appear quite complex. This article will explain the purpose of SPAs, their terms, and which party usually drafts the document.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Share Purchases vs Asset Purchases
SPAs govern share purchases. A share purchase is when a seller transfers shares to the buyer in exchange for consideration, such as cash. You can think of share purchases in contrast to asset purchases. In an asset purchase, the seller transfers the legal title in an asset (such as a fleet of cars) to the buyer in exchange for cash. Although it is possible to structure M&A deals as either a share or asset purchase, this article will focus on share purchases.
What is an SPA?
You do not buy a business just for the sake of holding its shares. Rather, you want the benefit that the shares confer. In other words, both the buyer and seller want to know:
- the assets that the business holds;
- the liabilities the business owes; and
- wider commercial considerations, such as the business’ forecasted performance, or if third party contracts can terminate their obligations if ownership in the business changes hands (a “change of control” clause).
An SPA is the primary document that guides a share purchase. Most SPAs seek to specify:
- how much the seller is paying for the business;
- which benefits and liabilities will transfer to the buyer and which will remain with the seller;
- the conditions that must be fulfilled for the transaction to complete; and
- special contractual terms called warranties and indemnities which allocate future risk.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
What is the Purpose of SPAs?
While transferring shares itself is simple, the underlying business itself rarely is. Consider the following example.
Nevertheless, the potential problems arising during and after a share transfer can be ameliorated by using a SPA. Depending on your SPA’s terms, you can better understand the benefits and liabilities you will take on during the share transfer. Additionally, you can account for any contractual terms that may enable third parties to end their contracts with the business following a change in ownership.
Common SPA Provisions
SPAs do not have to follow any particular form. However, for commercial reasons, most SPAs contain many of the same terms. Terms you may expect to find in an SPA include:
- who the buyer and seller are;
- the background of the transaction;
- definitions of important terms;
- the timeline of the transaction; and
- the price paid.
However, there are additional provisions you should consider.
Due Diligence
Due diligence involves extensive investigations into a company’s documents and affairs. Since it can be an expensive and arduous process, it is helpful to set out the extent of the due diligence process the buyer should undertake in the SPA.
Nevertheless, due diligence also gives the seller notice of your intent to undertake the share transfer. Consequently, due diligence can help ease the process.
Conditions Precedent
In many transactions, the agreement (exchange of contracts) and completion (payment) happen simultaneously. That is, you negotiate all the terms and conditions upfront, and once you agree, you pay the money and take ownership of the shares.
However, you may want to exchange in some cases before you complete. This is because you create a binding obligation on both parties to fulfil their obligations at the point of exchange. However, there may be several formalities that you and another party must complete before you can complete the transaction. Two common examples include:
- seeking shareholder and regulatory approval; and
- ensuring the material operations of the business have not changed.
Mitigating the Buyer’s Liability: Warranties and Indemnities
Commercial transactions operate on the legal principle of caveat emptor: buyer beware! In other words, absent fraud or misrepresentation, it is hard to claim against a seller because they did not inform you of some defect in the business you are buying. Therefore, it makes sense for the buyer to get the seller to:
- disclose all defects they are aware of in the business; and
- promise to reimburse the buyer if a defect later emerges.
A buyer could procure warranties from the seller. For example, say you ask the owners of a company if there were any change of control clauses in third-party contracts. If they say there are not aware, you can include a term in the SPA to this effect. That is to say, by signing the SPA, the owners promise they are not aware of any change of control clauses. If they breach this warranty, they would have to reimburse you for the money you lost.
On the other hand, say the owners did not know about the clauses. In this instance, your SPA can include an indemnification clause. For example, the provision might say “if a third party invokes a change of control provision that results in the business losing more than £5,000, the sellers will reimburse the buyer the full amount.” This indemnity creates an obligation to reimburse the other party if something (a change of control clause being invoked) happens.
Key Takeaways
Share purchase agreements exist to ensure both parties know early on in the transaction what each other’s expectations are. It also helps apportion risk, which is by default in favour of the seller. Finally, it can specify conditions that have to be met before the transaction is finalised. If these conditions are not met, either party can walk away. As with any commercial negotiation, the terms the SPA contains will depend on the parties’ agreement.
If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If you want to buy a company, you must acquire its shares. While buying the shares themselves is not difficult, the underlying business may have all sorts of stones that, if left unturned, might reveal things you did not expect. SPAs ensure both parties turn over the right stones, which encourages commercial certainty and minimises the risk of future disputes.
Aside from specifying how much the buyer will pay for the shares in the company, SPAs commonly include the expected timeline for the transaction, warranties and indemnities, conditions precedent and limitations of liability.
We appreciate your feedback – your submission has been successfully received.
