Share Purchase Agreement- An Overview
A share purchase agreement sets out specific rights and liabilities related to the purchase and sale of shares in a particular entity. It is important to set out the requirements related to a share purchase agreement. Usually a share purchase agreement would be typically used in the mergers and acquisitions processes. A particular entity would purchase about 50% or more of the share capital of the target company.
If there is a complete sale of shares with respect to the target company, then a complete break even is established by the company. The parties of the share purchase agreement must ensure that specific contractual terms bind their relationship.
Usually there would be three parties in a share purchase agreement. These parties would usually be the buyer, the seller and the target company. In a typical share purchase agreement, the buyer would insist or require the seller to state some form of contractual liabilities related to the agreement. The seller would be liable to these contractual liabilities post closure of the agreement.
Who are the parties of a share purchase agreement?
As seen in the above the buyer would be acquiring a specific amount of share capital in the target company of the seller. If this is more than 50% of the share capital of the target then the whole amount of acquisition is carried out.
Hence it is important to set out the specific rights and liabilities related to the share purchase agreement.
What are the benefits of a Share Purchase Agreement?
The following benefits are present for the parties by utilising a share purchase agreement:
- Shares Specified- By entering into this form of agreement, there is a specific proportion of shares allocated to the buyer or the entity.
- Rights and Liabilities- The rights and liabilities of the parties are specifically drawn from this form of agreement. This would ensure that all the parties’ rights and liabilities arising out the agreement are covered. In case of any breaches, the parties’ first point of reference would be the SPA.
- Warranties- By entering into such an agreement the parties would be covered by specific warranties. Any party cannot escape the amount of any warranty which is arising from the share purchase agreement. All the parties would equally be covered by specific amount of warranties of the share purchase agreement.
- No Third-Party Involvement- As the contract has only specific amount of parties, there is no involvement of any other party or third-party.
What are the components of a Share Purchase Agreement?
The following are the components of a Share Purchase Agreement (SPA):
- Parties Involved
- Recitals of the Agreement
- Interpretation and Definition Clauses
- Sale of Sales
- Any Conditions Precedent to the Agreement
- Closing Conditions
- Representations made by Vendor
- Buyer’s Representations
- Data Protection and Confidentiality
- Clause relating to Indemnification
- Force Majure Clause
Usually the share purchase agreement would contain the rights and obligations of the parties that are entering into a typical merger and acquisition agreement. In an acquisition agreement, the buyer will acquire a specific portion of shares belonging to the seller. Acquiring such shares from the target company would be part of the SPA. The above terms have present in a typical share purchase agreement.
The parties involved in the share purchase agreement include the buyer, the seller and the target company. Usually these parties would only be negotiating the share purchase agreement. However, if the companies are not yet incorporated or they are merely shell companies which the founders are going to utilise, then it would be crucial to include a provision that the beneficiary should be considered as guarantors. Post completion all the guarantors would be paid all their respective rights and considerations.
Recitals of the Agreement-
The recitals of the agreement would indicate the primary relationship of the parties of the agreement. Apart from this the main objectives of the agreement would be stated in the recitals. The brief agreement objectives and what the parties are intending to achieve from the agreement. All the recitals in the agreement have to state in layman terms without any legal jargons.
Interpretation and Definition Clauses-
The next clause which has to be mentioned in a share purchase agreement would contain the interpretations and definitions utilised by the parties. This clause would ensure that any formal terms are pre-defined in the agreement. If the definitions are clearly stated and defined in the share purchase agreement, then it would be easy to interpret and understand. Usually the definitions would be capitalised in the share purchase agreement to avoid any form of confusions.
As per section 2(d) of the Indian Contract Act, 1872 consideration is a form of a promise to pay an individual or party a specific amount of sum. Hence the clause relating to consideration in a contract has to be mentioned in the SPA. Within this consideration clause, the amount of consideration has to be mentioned. The form of consideration also has to be specified by the party, whether the consideration is in shares or cash or mixture of both. Whether the consideration has some form of initial deposit also has to be mentioned in the share purchase agreement. If the payments are in specific tranches, then this must be mentioned in the SPA.
Sale of Shares-
As this is a Share purchase agreement; the sale of shares clause would be one of the most crucial in such an agreement. With the sale of shares, the period of sale of shares must also be mentioned. Here any specific form of rights related to the shares in the agreement should be mentioned. If the shares can be brought back by the seller or redeemed by the seller at a future period of time.
Any Conditions Precedent to the Agreement-
This clause would be included in the Share purchase agreement to state any form of consents or permission is required from the respective authority before going forward with the share purchase. The parties that are involved in securing such permission or consents also must be mentioned in the SPA. The time period for securing such permission from the respective departments must also be stipulated in the share purchase agreement.
Conditions related to closing the agreement should also be stipulated and mentioned in the share purchase agreement. All the conditions related to closing the SPA must be mentioned clearly. One of the steps for closing an agreement would deal with the situation related to the exchange of documents. Apart from this, the post completion formalities may also be mentioned in the Share Purchase Agreement.
Covenants are understood as specific obligations or promises which are undertaken by the parties of the share purchase agreement. The covenants of the contract or agreement must be specially mentioned. Covenants which are covered by the seller must also be stated in the agreement.
Representations Made by the Vendor-
Usually any representations made by the vendor would be required to be put in the form of writing. When any representation related to the financial standing and market presence of the seller is mentioned. Representations would have to cover the entire status of the company. This would include information on the assets, liabilities and the loans of the company. Apart from this information on the directors and shareholders of the company must also be specified. The clause must state the affirmative rights of the vendor that all the assets and title owned is the right to the buyer once the SPA is drafted.
Warranties is one of the most crucial clauses which have to be mentioned in a share purchase agreement. Warranties would protect the buyer from any form of misrepresentations made by the seller or the vendor. The buyer would have specific remedies in case there is a breach of the contract or agreement. The buyer or purchaser must ensure all particular assets are covered by the SPA.
Buyer’s representations are also known as the purchaser representations. This would include all the representations made by the purchaser or the buyer. If the representation is made by the buyer related to the purchase of the company, such has to be maintained. As the buyer or the purchaser is an entity, the status of the corporate must be highlighted to the seller. This would provide the seller with information that the company which is acquiring the target is credible.
Data Protection and Confidentiality-
There must be a clause dealing with specific provisions for data protection. Data protection provisions must be in accordance to GDPR and the Personal Data Protection Bill. As the parties would share information, there also has to be a clause dealing with confidentiality.
Clause relating to Indemnification-
This is one of the main clauses incorporated in a share purchase agreement. Indemnification is to give back a particular amount of money or service to reduce the loss caused to the suffering party. Indemnification will include the provision where the breaching party provides a specific amount of money percentage with the inclusion of percentage of interest. Apart from this, the terms related to the indemnification would also concentrate on providing the services of the contract.
If things do not go normally; the agreement would be subject to legal enforcement. Hence the court of competent jurisdiction must be mentioned by the parties. The jurisdiction should be either at the registered office of the seller or the purchaser. Another thing which would formulate from such clause is that the relationship shared between the buyer and seller is purely commercial.
Force Majeure Clause-
This clause is usually considered as an event of frustration. This situation would be when the contract is stopped or negated without any fault of any party of the share purchase agreement. Usually the events leading to force majeure must be noted in a typical SPA. If such situations are mentioned in the contract, then the parties would be devoid of any form of liability which is not in their control.
Another clause which would be suitable to consider in this agreement is the disputes and the mode of settlement of disputes. Disputes can be settled either through arbitration, dispute resolution or another system related to out of court settlement. If arbitration is the method for solving any disputes then the sitting of arbitration must be mentioned.