Share Purchase Agreement

Share Purchase Agreements (SPA) are legally binding documents used in the sale of a company’s shares. They outline the terms and conditions of the sale and provide legal protection for both parties involved in the transaction.

What is a Share Purchase Agreement?

A share purchase agreement is a legal document used to transfer ownership of a company’s shares from the seller to the buyer. It is an important document that outlines the terms and conditions of the sale, including the purchase price, payment terms, and any warranties or representations made by the seller. The SPA is designed to protect the interests of both parties and ensure that the sale is conducted in a fair and transparent manner.

What Does a Share Purchase Agreement Cover?

Purchase Price: The price the buyer will pay for the shares.
Payment Terms: How and when the buyer will pay for the shares.
Representations and Warranties: Statements made by the seller about the company’s financial, legal, and operational status.
Covenants: Promises made by the seller to the buyer to perform certain actions or refrain from doing certain things.
Conditions Precedent: Conditions that must be met before the sale can be completed, such as obtaining regulatory approvals.
Indemnification: Provisions that protect the buyer in case the seller breaches the agreement.

Contents of a Share Purchase Agreement

The agreement contains all the terms and conditions that are finalised when it comes to the sale and purchase of the shares of the company. The following are listed in a share purchase agreement:

Name of the company
Par value of shares
Name of purchaser
Warranties and representations made by seller and purchaser
Employee benefits and bonuses
Number of shares being sold
Details of the transaction
Indemnification agreement for unforeseen costs

How is a Share Purchase Agreement Structured?

Introduction: This section outlines the purpose of the agreement and provides background information on the parties involved.
Definitions: This section defines key terms used in the agreement.
Sale of Shares: This section outlines the terms and conditions of the sale, including the purchase price, payment terms, and any conditions precedent.
Representations and Warranties: This section outlines the seller’s statements about the company’s financial, legal, and operational status.
Covenants: This section outlines the promises made by the seller to the buyer.
Indemnification: This section outlines the provisions that protect the buyer in case the seller breaches the agreement.
Miscellaneous Provisions: This section covers any other important provisions, such as the governing law and dispute resolution.

Drafting of a Share Purchase Agreement

Content	Details
Parties to the agreement	The parties generally comprise the seller and the buyer. The exception being that sometimes the parties are companies that are incorporated only for executing the SPA. In these cases, the substantive entities’ principles need to be added as covenanters or guarantors to ensure commitment to the contract.
Recitals	The transaction facts must be spelt out in the recitals, and the relationships must be identified and laid down. The objective of the transaction and the role of the parties must also be stated.
Definitions and Interpretations	This is important as definitions provide a context and meaning to certain words and phrases used in the agreement.
Consideration and Sale of Shares	This section provides an exhaustive structure of payment needs The deposit to be given at the time of execution The sum that is payable on closing (pricing formula determined on a case to case basis) The sum held in escrow to be set off against indemnities and breaches of warranties and representations The amount payable in case any security is registered against any company If the payment is made in tranches, the details of the trigger for the payments should be spelt out.
Conditions Precedent	This clause needs to be exhaustive, providing for all authorisations, permissions and permits necessary (internal and external) and the person responsible for obtaining each of these. A clause that provides a right to waive any condition is also included to provide flexibility.
Closing	It is prudent to include a closing memorandum listing the actions that will occur on the closing day, including the board resolutions to be passed.
Conditions Subsequent	This clause is rare. However, there are some permits and obligations which are residuary in the conditions subsequent. Protection must be offered to the buyer in case any of the conditions subsequent are breached.
Covenants by the parties	Covenants provide comfort to both parties. The purchaser requires them from the seller with regard to the management of the company between signing and closing.
Vendor’s Representations and Warranties	This clause details the seller’s standing, market reputation, rights over the shares, capital structure of the company, list of directors, and the number of shares owned by the seller. It should also provide information on compliance with laws and any threatened litigation or dispute.
Buyers’ Representations and Warranties	All of the buyer’s rights, ability to pay the compensation and enter into subsequent agreements are included here. If the buyer is a corporate, then the corporate status is also highlighted.
Obligations pre and post-closing	This is similar to the representations and warranties clause, but it is included to protect the interests of the parties.
Confidentiality	This is the standard state of terms of the agreement It is important when confidential information has been exchanged and when the parties are listed companies. The validity of the clause is 18 months to 2 years.
Indemnification	This clause is highly negotiated. This clause also provides for the process of reimbursement of claims and often the most scrutinised clause. Particular attention must be paid to ensure that the buyer is adequately covered in cases of issues relating to the company before the transaction but emerge post-closing.
Notice	This clause is overlooked but is important. The location and how the notice must be dispatched and if the parties are ready for the electronic notices must be specified.
Force Majeure	This is a standard clause but can be strengthened by adding a clause about fluctuating market conditions, including the sudden financial crisis, pandemic conditions, etc.
Dispute Resolution and Arbitration	The Supreme Court has ruled that when both the parties are in India, the arbitration will be a domestic arbitration under the Arbitration and Conciliation Act.
Jurisdiction & General Clauses	The courts in the city of the registered office of the vendor will have jurisdiction. The emphasis must be on the assignment clauses and the relationship clauses that specify the relationship between the parties, which is not construed otherwise.

FAQs

Do I need a lawyer to draft a share purchase agreement?

It is highly recommended that you seek legal advice when drafting a share purchase agreement. A lawyer can help you ensure that the agreement is legally binding and protects your interests.

What are the consequences of breaching a share purchase agreement?

Breaching a share purchase agreement can result in legal action and damages for the party that breached the agreement

Practice area's of B K Goyal & Co LLP

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