{"id":31317,"date":"2020-04-24T19:17:01","date_gmt":"2020-04-24T13:47:01","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=31317"},"modified":"2022-09-13T16:20:13","modified_gmt":"2022-09-13T10:50:13","slug":"share-purchase-agreement-importance-and-key-contents-in-drafting","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/share-purchase-agreement-importance-and-key-contents-in-drafting\/","title":{"rendered":"Share Purchase Agreement: Importance and Key Contents in Drafting"},"content":{"rendered":"

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<\/em><\/a><\/strong>. The legal agreement that regulates the transaction between the company and the shareholder<\/a> 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.<\/p>\n\n\n\n

Meaning of Share Purchase\nAgreement<\/h2>\n\n\n\n

A Share\nPurchase Agreement (SPA) is a legal document between the seller of shares,\ni.e., the company and its buyer, i.e., shareholder<\/strong>. The SPA specifies the terms and\nconditions that regulate the purchase of companies share between the company\nand the shareholders. It is a legal conveyance document. It also acts as evidence\nthat determines the ownership of a shareholder of a specific number of shares\nin a company. It identifies the legal buyer of shares. Thus, when a company\nseeks to transfer its shares to someone, the parties enter into SPA. <\/p>\n\n\n\n

In India, this type of agreement\nconsist of several information related to the shares like the kind of share\npurchased, the share price, the number of purchased shares, the rights and the\nliabilities of the shareholder and the company. The main objective of this agreement is to make sure that the terms and\nconditions of the sale and purchase of the shares of a company are mutually\nagreed upon by both parties. <\/strong>Moreover, the shareholder under this agreement\ngets the right in the decision-making process of the company.  <\/p>\n\n\n\n

When a share is transferred under the\nterms and conditions of this agreement, the ownership passes on to the buyer,\nand the buyer gets a particular amount of power and control in the business of\nthe company. However, it is critical to know that despite the power and control\nto the buyer, the other components of the company are not altered. The\ntransaction of a share doesn’t involve any third party, thereby maintaining its\ndiscreetness.<\/p>\n\n\n\n

What is the importance of the\nShare Purchase Agreement?<\/h2>\n\n\n\n

A Share Purchase Agreement is a\nsignificant legal document that is essential to a business. It is a fundamental\nbusiness process. The absence of such an agreement may lead to undesirable\nconsequences to both parties and to the people who are connected with the\ntransaction of shares. It may make the business vulnerable to legal threats;\ntherefore, having such an agreement is indispensable to both parties.<\/p>\n\n\n\n

The SPA\ndocument protects the parties and provides them with an opportunity to\nsafeguard their interests prior to the exchange of shares<\/strong>. The entire part of the\ntransaction is covered under the SPA document, and the parties must diligently\nand carefully go through every clause in the document in order to comprehend\nits importance.<\/p>\n\n\n\n

If the agreement can be executed\nformally, then it shall make the transaction legally accurate and well ordered\nwhilst specifying the expectations of the parties. Its significance can be\ndeduced from the fact that the agreement covers all areas of transactions,\nwhich in turn minimizes the chances of confusion in the future. Such agreements\nallow the relevant authorities to keep a check on similar transactions. It\nhelps the companies to keep a record of the shareholders and, most importantly,\nincludes them in the decision making process.<\/p>\n\n\n\n

Hence the SPA is instrumental in\ndefending the interests of the parties involved in the transaction; therefore,\nutmost care must be exercised while drafting the document. It may help to avoid\nany future complications that may lead to arbitration, which shall ensure\npreserving time and money.<\/p>\n\n\n\n

Parties to a Share Purchase\nAgreement<\/h2>\n\n\n\n

The need for a SPA arises when a\ncompany or an individual purchases or sells shares in the company with some\nother person or business. It is usually used by partnership firms when\ntransferring shares between partners. It is also used by start-ups when issuing\nshares to investors for raising the capital. <\/p>\n\n\n\n

SPA can be carried out between a\nbuyer and a seller, or it may be executed between a seller and numerous buyers.\nWhere there is more than a buyer and if the companies associated with it are\ninstituted with the object of effecting a SPA then it is critical to make the\nheads of such companies guarantors or covenanters to safeguard the payment in\ncases of fraud or such contingencies and to ensure that the promises made in\nthe agreement are fulfilled. <\/p>\n\n\n\n

See, Also:<\/b> Sample Format of Share Purchase Agreement (SPA)<\/a><\/mark>.<\/p><\/div>\n\n\n\n

What are the key contents and\nhow to draft a Share Purchase Agreement?<\/h2>\n\n\n\n

It is essential to know that a Share Purchase\nAgreement (SPA) document comprises information such as the buyer and the seller\nof shares, information regarding the shares being transferred, and the\napplicability of law on the agreement, kind of shares sold, price of the\nshares, etc. It also includes payment details and the date of closing the\nagreement. <\/p>\n\n\n\n

The SPA must mention the kind of\nshares explicitly so that there is no confusion between the parties as there\nare mostly two classes of shares, one where the shareholders can give an\nopinion on the board of director’s decisions and policies and the other where\nthe shareholders can’t cast a vote in the board of directors’ changes and\npolicies. Therefore there must be clarity on the kind of shares. <\/p>\n\n\n\n

It is highly recommended that when\nplanning to draft a SPA, one must consult a skillful advocate who shall draft\nthe agreement in such a way that it alleviates any chances of future\ncontingencies. For a better understanding of a SPA, the key contents to be included in it<\/strong> are discussed below for your\nreference.<\/p>\n\n\n\n