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Share Purchase Agreement: Importance and Key Contents in Drafting

Ashish M. Shaji

| Updated: Apr 24, 2020 | Category: Share purchase agreement

Share Purchase Agreement

Overview

An ever-growing business provides the opportunity to the new investors with an objective to raise the capital of the company. However, it is crucial to know that providing such opportunities to the new investors and empowering them with the right to vote in the key decision-making process of the company may leave the company vulnerable to threats. Therefore in such a situation, having a legal document can be highly effective. The legal document is not only an appropriate solution for the company but also for the new shareholders. This legal document is called the Share Purchase Agreement. The legal agreement that regulates the transaction between the company and the shareholder is known as the Share Purchase Agreement. In this article, we shall have a clear understanding of the various aspects of the Share Purchase Agreement.

Meaning of Share Purchase Agreement

A Share Purchase Agreement (SPA) is a legal document between the seller of shares, i.e., the company and its buyer, i.e., shareholder. The SPA specifies the terms and conditions that regulate the purchase of companies share between the company and the shareholders. It is a legal conveyance document. It also acts as evidence that determines the ownership of a shareholder of a specific number of shares in a company. It identifies the legal buyer of shares. Thus, when a company seeks to transfer its shares to someone, the parties enter into SPA.

In India, this type of agreement consist of several information related to the shares like the kind of share purchased, the share price, the number of purchased shares, the rights and the liabilities of the shareholder and the company. The main objective of this agreement is to make sure that the terms and conditions of the sale and purchase of the shares of a company are mutually agreed upon by both parties. Moreover, the shareholder under this agreement gets the right in the decision-making process of the company. 

When a share is transferred under the terms and conditions of this agreement, the ownership passes on to the buyer, and the buyer gets a particular amount of power and control in the business of the company. However, it is critical to know that despite the power and control to the buyer, the other components of the company are not altered. The transaction of a share doesn’t involve any third party, thereby maintaining its discreetness.

What is the importance of the Share Purchase Agreement?

A Share Purchase Agreement is a significant legal document that is essential to a business. It is a fundamental business process. The absence of such an agreement may lead to undesirable consequences to both parties and to the people who are connected with the transaction of shares. It may make the business vulnerable to legal threats; therefore, having such an agreement is indispensable to both parties.

The SPA document protects the parties and provides them with an opportunity to safeguard their interests prior to the exchange of shares. The entire part of the transaction is covered under the SPA document, and the parties must diligently and carefully go through every clause in the document in order to comprehend its importance.

If the agreement can be executed formally, then it shall make the transaction legally accurate and well ordered whilst specifying the expectations of the parties. Its significance can be deduced from the fact that the agreement covers all areas of transactions, which in turn minimizes the chances of confusion in the future. Such agreements allow the relevant authorities to keep a check on similar transactions. It helps the companies to keep a record of the shareholders and, most importantly, includes them in the decision making process.

Hence the SPA is instrumental in defending the interests of the parties involved in the transaction; therefore, utmost care must be exercised while drafting the document. It may help to avoid any future complications that may lead to arbitration, which shall ensure preserving time and money.

Parties to a Share Purchase Agreement

The need for a SPA arises when a company or an individual purchases or sells shares in the company with some other person or business. It is usually used by partnership firms when transferring shares between partners. It is also used by start-ups when issuing shares to investors for raising the capital.

SPA can be carried out between a buyer and a seller, or it may be executed between a seller and numerous buyers. Where there is more than a buyer and if the companies associated with it are instituted with the object of effecting a SPA then it is critical to make the heads of such companies guarantors or covenanters to safeguard the payment in cases of fraud or such contingencies and to ensure that the promises made in the agreement are fulfilled.

What are the key contents and how to draft a Share Purchase Agreement?

It is essential to know that a Share Purchase Agreement (SPA) document comprises information such as the buyer and the seller of shares, information regarding the shares being transferred, and the applicability of law on the agreement, kind of shares sold, price of the shares, etc. It also includes payment details and the date of closing the agreement.

The SPA must mention the kind of shares explicitly so that there is no confusion between the parties as there are mostly two classes of shares, one where the shareholders can give an opinion on the board of director’s decisions and policies and the other where the shareholders can’t cast a vote in the board of directors’ changes and policies. Therefore there must be clarity on the kind of shares.

It is highly recommended that when planning to draft a SPA, one must consult a skillful advocate who shall draft the agreement in such a way that it alleviates any chances of future contingencies. For a better understanding of a SPA, the key contents to be included in it are discussed below for your reference.

  • The details of the parties to the agreement must be clearly mentioned. The parties comprise of the seller and the buyer; however, at times, these parties are shell holding companies or are incorporated for SPA purpose only.
  • The facts pertaining to the transaction must be clearly spelled out in the agreement, and the relation between the parties and the objective of the transaction should be clear.
  • The meaning of certain words in the agreement and its interpretations of phrases used in the agreement is also important. For the ease of reference when a word is explained in the agreement, proper clause referencing must be done in the definitions section.
  • The information regarding the consideration and sale of shares should be made clear, including the deposit to be made at the time of execution. The various sums of the amount payable must be spelled out in the agreement under the exhaustive structure of payment. The information with respect to the price at which the shares are sold by the company must be included as well.
  • The agreement must state clearly about the authorizations, permissions, and the permits needed to be taken before the sale or the transfer of the shares by the shareholder. The person who is responsible for taking such permissions must also be clearly stated. Commonly a clause comprising the right of the buyer to waive a condition may also be included in order to ensure flexibility.
  • It would be appropriate to include a closing memorandum that enlists the action that must take place on the closing day along with the board resolution to be passed. A statement containing the condition upon which the closing would take place may also be mentioned.
  • If there are some conditions subsequent, then it must be included, though, preferably, there must not be any condition subsequent in a SPA. It is quite rare.
  • The status of the company and the goodwill in the market must be specified. The structure of the company, including the number of directors, and the number of shares belonging to the vendor, must be provided. The agreement may state about the right of the seller to sell and transfer the title to the shares to the buyer and that there is no agreement contrary to it.
  • The right to contract of the buyer and their various other important things like the ability to pay compensation and the right to enter into subsequent agreements may be included. If the buyer is a company, then the corporate status of the buyer shall be specified. 
  • The confidentiality clause is one of the important clauses to be included in the SPA. It must be stated that the terms and conditions of the agreement are confidential. It cannot be disclosed without the consent of the parties. This clause is essential in a SPA because the parties during the course of the business may exchange confidential information.
  • The indemnification clause provides for the reimbursement of claims, and it is often analysed intently in case of disputes. Therefore it must be ensured that the buyer is covered adequately in case any issue arises relating to the company.
  • The SPA must state the dispute resolution process to be followed in case a legal dispute arises. Arbitration is such an alternate means of dispute resolution that has been known for delays. The apex court in its ruling stated that if the parties to an agreement are based in India, then it shall be a domestic arbitration, and if minimum one party is foreign, then the parties may select an international forum for a quick resolution. This part of the agreement must be drafted with extra care. It must include the procedural law, number of arbitrators, language, and the disputes that will require arbitration for resolution after it is tried to be resolved among them.
  • The jurisdiction of the court in case of a legal dispute and the applicability of laws must be mentioned. Generally, the place where the registered office of the seller is situated shall have the jurisdiction to try the matter in case a legal dispute arises.

When is a Share Purchase Agreement enforced?

To enforce a Share Purchase Agreement, it does not need fulfilment of a complex process, but it only requires the fulfilment of two basic concepts that is the offer and the acceptance to the offer. This way, such agreements can be enforced legally. It is vital that these two concepts be established. However, it must be noted that there must be a properly drafted, written, and not merely a template SPA. The agreement must state all the relevant details comprising the company, shareholders, and shares.

Difference between a Shareholder’s Agreement and Share Purchase Agreement

Generally, a shareholder is considered the owner of the company. The agreement between the company and the shareholder specifying their obligations and rights is called the Shareholder’s agreement, whereas a SPA is an agreement between two parties where the seller or the company agrees to sell a particular number of shares to the buyer at a price. The main object of a Shareholder’s agreement is to tackle the dispute that takes place between the shareholders and the company. It further specifies the rules and regulations to be followed by the shareholders and the other parties. The shareholder’s agreement safeguards the company from the losses and serves the interests of the company.

Conclusion

The drafting of a Share Purchase Agreement requires a professional approach. The agreement must be holistic, covering all the important aspects of the transaction between the parties. The transaction is the ultimate thing that is governed by this agreement. Therefore, patience and legal knowledge is a must to draft such a corporate document. The SPA could be short, long, complex, or detailed, but what is more important is that the agreement must be balanced and enforceable. It is still difficult to execute an error-free document, but it can be achieved by not overlooking its essential principles.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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