A share purchase/sale agreement (“SPA”) is the principal document entered into between Buyer(s) and Seller(s) when negotiating the sale and purchase of a target’s share capital.
An SPA is invariably a long and overwhelming document, however there are key clauses that appear on almost every one. Below is a brief summary of those key clauses and how they relate to the transaction as a whole.
Agreement to sell
It may be one of the shortest clauses in any SPA, but the ‘Agreement to Sell and Purchase’ is also the most fundamental, as it records the parties’ agreement to buy and sell the shares. The buyer will be concerned with acquiring proper title and ensuring the shares are transferred free of any rights attaching.
The price payable for the shares is often considered the most fundamental issue for both parties. The consideration is clause sets out the amount that will be paid for the shares, and seeks carefully to draft the mechanism by which the purchase price will be paid, what form consideration will take, when it must be paid, whether it is fixed or subject to an adjustment mechanism, and whether an element of the price is deferred.
The next most important clause sets out in detail the consideration to be paid for the shares, outlining how the price is to be paid. Consideration clauses can range from the very short, where a pre-agreed amount of cash consideration is to be paid on completion, to the more complex, such as a deferred consideration or earn-out
Warranties and Indemnities
On any share purchase the buyer is purchasing the target with all liabilities, past or present, known or unknown. Given the little protection afforded to buyers, they must rely on both due diligence and warranties of the seller in the SPA as an allocation of risk and as a tool to encourage disclosure of potential issues.
Warranties are statements of fact which, if later found untrue, can give rise to claim for damages. The Warranty Schedule is typically an important element of the SPA for both parties.
Differing slightly from warranties, an indemnity claim provides a remedy in which a claim can be brought on a pound-for pound basis, rather than a claim where the buyer must prove loss. The specific wording of situations covered by an indemnity claim is often subject to heavy negotiation, and the seller will usually resist including any indemnity protection at all.
Once the buyer purchases the entire issued share capital of the target, they’ll want to ensure that the seller(s) cannot immediately set up in competition or poach customers or staff. It’s typical for the seller(s) to provide restrictive covenants from engaging in specific activity for a period following completion. Such activities and periods will often be negotiated between the parties and depend on the bargaining position.
Limitation of liability
The seller will always seek to limit their liability under the warranties, and this can range from excluding liability for small claims, to drafting in money thresholds and specifying limitation periods on the buyer bringing a claim. A seller will seek to draft as wide as possible. Such limitations are usually located in a separate schedule.