Share Purchase Agreements
A Share Purchase Agreement (“SPA”) outlines the terms and conditions for buying and selling shares in a company and generally goes alongside other key documents such as a shareholder agreement.
SPA’s are primarily used in various business scenarios, including:
- Acquisitions: When one company buys another company by acquiring all of it’s shares.
- Investments: When an investor purchases shares in a company for an ownership stake. Different issues arise where an investor is taking a stake in a business, such as representation on the Board of Directors, other control or veto issues and commonly whether the investor demands preference shares or other specific benefits or protections going forward.
- Management Buyouts (MBOs): When the management team of a company buys out the existing shareholders.
- Employee Share Ownership Plans (ESOPs): When employees acquire shares in their company.
What Should an SPA Include?
A comprehensive SPA typically covers the following key elements:
- Purchase Price: Specifies the agreed-upon price for the shares, including payment terms and conditions. It is now increasingly common for payment to be deferred such as by way of earn out or payment may be in the form of loan notes.
- Representations and Warranties: Statements made by both parties about the accuracy and completeness of information provided, often with protections for breach. Warranties are often the most contentious part of negotiating the terms of an SPA>
- Conditions Precedent: Certain events or milestones that must be met before the sale can be completed.
- Covenants: restrictions which may apply such as departing shareholders not competing or approaching customers or staff for a fixed period post completion.
- Indemnities: Financial protection offered by one party to the other for potential losses resulting from breaches or misrepresentations.
- Termination: Defines the circumstances under which the agreement can be terminated and specifies the consequences.
- Dispute Resolution: Outlines the process for resolving disagreements arising from the agreement.
- Governing Law: Specifies the legal jurisdiction governing the interpretation and enforcement of the agreement.
Key Issues and Clauses to Consider
- Due Diligence: Both parties should conduct thorough due diligence to assess the financial health, legal status, and potential risks of the company and the transaction. Due diligence is a key part of the process and will invariably involve a close look at the business’ finances, key contract, management team capabilities and commitment to the company’s success.
- Intellectual Property: Provisions regarding ownership, access, and exploitation of intellectual property related to the company should be clearly defined.
- Tax Implications: Understanding the tax consequences for both parties is crucial to navigating legal obligations and optimizing tax efficiency.
- Representations and Warranties: Carefully review and negotiate these statements to ensure clarity and protection from false or misleading information.
- Indemnities: Negotiate the scope and limitations of indemnities to define financial liabilities arising from potential breaches or warranties.
- Dispute Resolution: Choose a preferred method for resolving disputes, such as mediation or arbitration, based on your needs and preferences.
An SPA is a complex legal document. Consulting with experienced legal professionals like ours at Wellers is crucial to ensure it protects your interests and addresses all relevant legal and commercial aspects of your specific share purchase transaction.