A share purchase agreement (SPA) is a formal agreement, or contract, that sets out the terms and conditions relating to the sale and purchase of shares in a company. A SPA is designed to transfer and assign shares of stock to the buyer, and therefore part or complete ownership.
The share purchase agreement represents the principal contract or transaction document in the context of a private sale of shares, where a company is sold by individual shareholders. The SPA should clearly set out what is being sold, to whom and for how much, as well as any obligations and liabilities as between the parties, both prior to and post-completion.
When are share purchase agreements used?
The disposal of a company can either be structured as an asset sale, where the company itself will be the seller of the business and the assets that it holds. In contrast, a share sale is where individual shareholders dispose of their shares in the corporate entity.
The main difference between the two types of sale structure is that a buyer of shares will purchase both the assets and liabilities of a company, while a buyer of assets will acquire only specific assets and liabilities. In this way, from the buyer’s point of view, there is usually less risk of hidden liabilities with an asset purchase than a share purchase. However, share sales are much simpler than asset sales. A share sale will also ensure that the day-to-day activities of the business continue, with minimal disruption to trade continuity, where employees, contracts and property will remain largely unaffected with any change in ownership.
Why are share purchase agreements needed?
As the principal transaction document when a company is partly or wholly sold, the share purchase agreement sets out in writing the agreed terms and conditions of the sale, including the respective obligations of the parties and various provisions designed to protect the interests of both the buyer and the seller. In this way, the parties have an agreed basis upon which to proceed, providing the legal framework for the transfer of ownership to take place.
Selling a company is not a simple sales transaction, even when structured as a share sale, where consideration must be given to a whole host of factors. For example, when someone sells their shares in a business, they often hope to achieve a clean break. However, since some company liabilities only come to light after the transaction has taken place, especially tax-related liabilities, buyers need to make sure that departing shareholders remain responsible.
The share purchase agreement is typically a long and detailed document, with multiple provisions that are often the subject of protracted negotiations between the parties following, or during the course of, due diligence inquiries relating to the assets and liabilities of the company. In addition to the main commercial terms of the transaction — including the identity of the buyer and seller, what shares are being sold, their sale price and payment terms — these provisions will inevitably focus on the respective obligations of the parties and what protections need to be put in place to protect their interests, including any conditions precedent prior to completion, and contractual assurances, to help mitigate any risks involved.
Are share purchase agreements legally binding?
Share transfers in private limited companies generally involve a two-step process. In the first instance, the buyer and seller will conclude a sales contract — otherwise known as the share purchase agreement — where they will agree on the price for which the shares are sold and all the other terms of the transfer. The second step is the transfer of the shares. At the end of this step, the buyer will become the owner of the shares in question.
However, once the agreed terms of a share purchase agreement have been finalised, and the SPA has been signed by the parties, contracts will be classed as exchanged. This means that the parties are committed to completing the transaction and the agreement is legally binding.
Very often, execution of the SPA completion and when the shares are transferred will take place simultaneously or in quick succession. This is where the share purchase agreement is signed by the parties, the purchase price paid and the shares transferred on the same day. There may, however, be a delay between signing and the deal going through, especially where there are conditions to be met before ownership can transfer to the buyer(s), such as the buyer obtaining licensing approvals to carry on the business or any necessary consents.
However, provided all conditions precedent are met, the agreement will trigger an automatic obligation on the parties to proceed to completion on a certain closing date.
How is a share purchase agreement drafted?
Share purchase agreements can be very complex, consisting of a main document and various schedules or annexes containing disclosures and details of the transaction. There can also be considerable variation in the provisions of a share purchase agreement, where every agreement should be tailored to the specific needs of the parties and the circumstances involved, providing sufficient protections to mitigate any risks on both sides.
While it is possible to modify a template SPA, the benefit of securing an experienced solicitor to draft and negotiate the terms of the agreement is that they can ensure that this reflects a fair and commercial distribution of the risks involved. By using a lawyer, this can also safeguard against hidden risks, such as any post-completion liabilities. The task of drafting a SPA usually falls to the buyer’s legal representatives, as it is the buyer who will be most concerned that the SPA protects them against hidden liabilities once the sale has concluded. However, the seller should also secure expert legal representation to protect their interests.
What should a share purchase agreement include?
A share purchase agreement will contain multiple clauses. Below we set out some of the main provisions that a SPA will include:
Parties to the agreement
At the beginning of the SPA, the identity of the seller(s) and buyer(s) is described, including their addresses and registered offices if they are a company or other legal body. Where the company is owned by more than one shareholder, it is important that the agreement sets out how any liability between individual sellers will be distributed, or whether this is to be dealt with on a joint and several liability basis.
Definitions & interpretation
Any major terms or legal jargon used in the overall body of the agreement must be clearly defined from the outset, in this way providing the parties with clarification and minimising the risk of any misunderstandings. For example, what is meant by ‘due diligence’, ‘restrictive covenants’ or ‘conditions precedent’.
Sale and Purchase of Shares
The entire foundation of the SPA is based on the agreement that the seller will sell, and the buyer will purchase, the shares of the target company. The seller also agrees to sell the shares with what’s known as ’full title guarantee’. This essentially means that the seller owns the shares outright, that they have the right to dispose of them and that the shares are not subject to any third-party rights or restrictions. The clause relating to the agreement to sell and to purchase the shares is normally very short, but it is necessary to protect the buyer’s interests.
Purchase price & consideration
The agreement should specify the sale price for the shares, together with auxiliary issues such as when and how payment will be made, and whether the price is a fixed sum or subject to a price adjustment mechanism. For example, with flexible or deferred payments, the final sale price may depend on the performance of the company, or be paid over a period of time and by instalments. Payment under a SPA is usually made in cash, although sometimes the buyer may offer the seller some of its own shares. In some cases, the buyer may even issue loan notes to the seller.
Conditions precedent
In some cases, it may be necessary for certain conditions to be met before a share sale can complete. Some typical conditions precedent in a SPA include where the buyer needs regulatory or licensing approval, for example, if the business operates in a highly regulated sector such as banking or insurance, or if the buyer needs third-party consents, for example, from a landlord to ensure that the premises lease remains in place.
Warranties & indemnities
In order to protect the buyer against any unexpected liabilities post-completion, the seller can be asked to provide contractual assurances, in the form of warranties, in respect of areas of concern regarding the state of the company’s affairs. This can include indemnities in the buyer’s favour by which they may recoup any losses from the seller if a warranty turns out to be incorrect. The buyer can then bring a breach of contract claim against the seller to recoup a portion of the purchase price. Warranties can cover all kinds of issues, including company accounts, contracts, litigation, debt, tax, staff, property and intellectual property. However, a buyer will not be able to claim for breach, even if warranties are in place, if the seller has specifically disclosed specific areas of risk in writing. Typically, these disclosures will instead enable the buyer to evaluate the nature of the risk and adjust the purchase price to reflect this.
Restrictive covenants
These are clauses designed to prevent or restrict a seller from setting up in competition against the company for a period of time after the sale, or from soliciting its staff, clients, customers and suppliers. A non-compete clause may include wording that prevents the seller from operating in the same sector or geographical area, while a non-solicitation clause will stop them from approaching the buyer’s employees, as well as their clients, customers and suppliers to do business with them. These restrictive covenants provide an important insurance for the buyer, although they must be carefully worded and not too wide, otherwise risk being unenforceable.
Communications & confidentiality
As a private transaction, a share purchase agreement will usually contain provisions restricting the flow of confidential information disclosed during the course of negotiations, and preventing the buyer and seller from communicating details of the deal to third parties. In most transactions, confidential information will be disclosed by both parties, where confidentiality clauses can help to ensure that neither party, or any of their competitors, can take unfair advantage of the situation while the transaction is taking place. The SPA may also contain a clause describing how, where and when announcements about the share sale transaction may be made public.
Completion
The SPA will need to describe in detail what happens on completion, including when and where completion will take place, the exact procedure and actions, and what is to be delivered, such as stock transfer forms, share certificates and the company’s statutory books. The SPA should also set out what happens if completion fails to take place.
Governing Law and Jurisdiction: even with a clearly drafted agreement, misunderstandings and disputes can still arise, where the agreement must set out the governing law applicable to the contract, typically the law of England and Wales.
Share purchase agreement FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
