If you are planning to buy or sell shares, a correctly drafted share purchase agreement (SPA) is essential. An SPA is a legal document and it must therefore comply with legislation by providing either party in the transaction with accurate information.
This guide sets out the main elements of a share purchase agreement and explains why accurate information is important to both the buyer and the seller.
Although the content of this article provides a kind of template for an SPA, it’s important to take professional advice before committing to an agreement. The laws governing share transfer are strict — any errors by the seller could prove costly and potentially damaging, while oversights by a buyer could lead to unforeseen problems and liabilities.
That makes it important to decide who drafts the share purchase agreement. Generally, it’s the buyer in conjunction with a solicitor who draws up the agreement because it’s the buyer who is taking the greatest risk.
Before getting into detail, it’s important to understand what a share purchase agreement is and how it differs from other types of commercial agreement.
When a buyer purchases shares in a business, their aim is to gain partial or total control of the business. In that sense, an SPA is different from an agreement to purchase assets such as equipment, stock or property. An asset purchase does not give the buyer any form of control over the business.
The purpose of an SPA is to set out the scope and terms of the agreement, together with any necessary supporting information, to ensure that both parties understand their rights and liabilities resulting from a transfer of shares.
An SPA includes a number of essential elements, including:
SPAs contain many terms that have legal implications, so it is useful to include a ‘term sheet’ at the beginning of the document covering any legal terms that are possibly ambiguous, together with their definition.
This is a useful reference source that ensures both parties have a clear understanding of the terms and helps avoid any misunderstandings or future disputes.
In the simplest share purchase agreement (SPA), there are two parties – the buyer and the seller or sellers if the company is owned by a number of shareholders. However, there may be other parties who have an interest in the shares, such as banks, landlords or other companies within a group.
All parties must provide their addresses and registered offices, together with a declaration that they have the right to sell or buy the shares.
The sellers must also declare that they have either individual or joint responsibility for the full amount of any liabilities that are disclosed in the SPA.
This section provides the buyer with comprehensive information on the company whose shares are on offer. This could include information on:
This section provides the buyer with information on the number and class of shares available for purchase together with the seller’s indication of the price per share. It should also include information on the method and currency of payment, together with the timescale for settlement.
The seller may provide an initial price per share, but price and timescale for settlement may vary if the transaction is based on performance. In that case, payment will be made in stages and the price will be based on the seller’s performance against agreed targets.
In this section, the parties agree that the seller will sell the shares and the buyer will purchase them at the agreed price and timescale.
The seller should also declare that they own the shares and have the right to sell them, and that there are no restrictions on the transfer of the shares. This declaration is known as ‘full title guarantee’.
This means that, following completion, the buyer becomes the owner of the shares and has the right to dispose of them.
Generally, buyer and seller aim for completion of the agreement on the same day. The agreement is exchanged and signed by both parties, payment completed and share ownership is transferred to the buyer.
However, delays to completion may occur if either party has to meet certain obligations, such as:
If conditions like this are in place, it’s essential to agree a provisional schedule and cut-off date for completion as well as the mechanism for proving that the conditions have been met.
The purpose of warranties in a share purchase agreement is to protect the buyer against the risk of unexpected problems or liabilities following completion. For example, there may be upcoming litigation, an undisclosed tax liability or recent loss of a major customer which could impact the buyer’s liabilities as well as the value of the shares.
Although it is the buyer’s responsibility to be sure that the company’s affairs are in order before proceeding, the seller must make warranties about the accuracy of statements about the company’s affairs, its assets and its financial position.
If the warranties turn out to be untrue, the buyer can then make a claim for breach of contract and may recover some of the lost value.
However, if the seller has disclosed a potential risk, the buyer would not be able to claim breach of contract. Instead, they may try to renegotiate the purchase price to reflect the level of risk.
When a buyer has acquired shares in a company, they must be confident that the seller will not take any actions to damage the ‘new business.’ For example, the seller could set up another business to compete with the buyer, or approach former customers and suppliers to strengthen their new competing venture.
The share purchase agreement should therefore include restrictive covenants to cover this type of risk and both parties should agree to the restrictions. However, the restrictions should not be so far-reaching that they could be considered unreasonable in law.
The share purchase agreement should establish the guidelines for confidentiality about the transaction. This covers the disclosure and protection of confidential or commercial information between the parties as well as the risk of ‘leaks’ to third parties.
This is to ensure that neither of the parties or any of their competitors can take unfair advantage of the situation while the transaction is taking place.
The agreement should also stipulate when an announcement of the changes can be made.
As this outline of the SPA process indicates, the buyer must take many different factors into consideration before proceeding with a purchase. That means, they should carefully examine and evaluate all information and documentation provided by the seller, a process known as due diligence.
The due diligence process can be time-consuming for both parties, but it must be rigorous and should not be rushed. A careful due diligence reduces the buyer’s exposure to risk and unforeseen liabilities and forms the basis of a successful share transfer.
Preparing and completing a share purchase agreement and carrying out due diligence requires an understanding of company law as well as experience of the process of share transactions.
Here at Accounts & Legal, our experienced small business solicitors and lawyers can provide expert advice and guidance, as well as preparing the SPA for either buyers or sellers.
For more information, please contact us on 0207 043 4000 or info@accountsandlegal.co.uk.
In our Guide to Shares and Shareholders, we dive into some of the issues mentioned in this article in more detail.
