Share Purchase Agreement

Share Purchase Agreement

A Share Purchase Agreement (SPA) is one of the most fundamental documents involved in the sale of a target company’s shares, offering key protection for both the buyer and seller. Such documents can however, be complex and challenging to comprehend. 

You will need to seek legal advice on the terms of an SPA and Berry Smith can provide specialist help and guidance in relation to this.

What is a SPA?

The SPA is the contract by which the seller agrees to sell, and the buyer agrees to buy, the shares in the company. The purpose of the SPA is to set out the shares being sold, the consideration to be received from the sale, how the purchase price will be paid and any post-completion obligations.

Therefore, the main body of the SPA is comprised of a number of clauses which set out the principal commercial terms of the buyer and seller’s respective contractual rights, obligations and liabilities. 

When a seller is selling shares in a target company, there is not necessarily a clean break on the completion of the sale. Some company liabilities, for example, in relation to tax,  may only come to light after the transaction. Therefore, the buyer will want to ensure that the seller retains some responsibility for certain liabilities but the seller will want to limit such liability as much as possible. Moreover, the buyers will often want warranties from the sellers in relation to, for example, the accounting position of the target company, and the buyers will want to limit the scope of such warranties. This is where the SPA comes in to make sure such elements are dealt with appropriately.  

It is normal in practice for the buyer’s solicitors to prepare the first draft but that doesn’t mean to say that the seller’s solicitor can’t take the first steps to draft the first copy.

Key clauses in a SPA

SPAs are usually made up of numerous pages of clauses. However, the key clauses to include are:

• Restrictive Covenants – a buyer will be keen to restrict the seller from establishing a competitive company post completion and it is expected that covenants containing these restrictions would be seen in most SPAs. Common restrictions will generally be included to prevent the seller from 1) poaching company customers; 2) using company secrets of the target company; 3) poaching current employees; and 4) representing that it was still carrying on the company of the target company. Restrictive covenants do have to be reasonable and go no further than what is necessary in order to protect the buyer.
• Warranties – these are contractual statements in the SPA which take the form of assurances from the seller as to the condition of the company and any existing liabilities. For the buyer, these are their protection and they are considered to be key terms of the SPA and may in reality account for almost half, if not more, of the SPA. The purpose of these is to provide the buyer with a remedy if the statements given by the seller are incorrect thus reducing the value of the company. It also encourages the seller to disclose any known problems to the buyer.
• Indemnities – these are promises to reimburse the buyer in respect of a particular type of liability, should it arise. It provides a guaranteed remedy in the event that something goes wrong. Usually they cover specific risks which are of concern to a buyer.
• Limitation of Liability – this is considered to be one of the most important clauses for the seller as they will always want to limit their liability towards the buyer. This can be done in a number of ways, common examples being 1) excluding small claims; 2) setting a minimum threshold; 3) specifying expiry dates; 4) putting a cap on the total amount of liability; and 5) preventing double recovery. Buyers will want these limitations to apply to just the warranties whereas the Seller is more likely to want it to cover the entire agreement.
• Purchase price/ consideration – the consideration for the shares is of course, a key issue for both parties. This clause should adequately set out the amount that will be paid for the shares, what form the consideration will take, when the price must be paid (for example, whether the full amount will be paid on completion or if there will be a part payment on completion followed by further deferred payments), whether the price is a fixed sum or subject to a price adjustment mechanism (such as a completion accounts adjustment or an earn-out). If the full purchase price will not be paid in full at completion, the buyer will likely seek some sort of security (such as a legal charge over the company shares) to ensure that the buyer will receive payment.