Note: This article is not specifically on US Law, but is for an internationally wide audience. For the US version relating to purely a US legal system, visit our article on stock purchase agreement.
What is a Share Purchase Agreement
A share purchase agreement (SPA) is a contract between the seller and buyer of shares in a company. It sets out the terms on which the seller is selling his shares and the buyer is buying the shares.
This one is a pretty complicated contract, so you need to be aware of the basic elements required when drafting a contract. Getting it wrong can have some pretty negative effects for your business, so you better watch out!
The share purchase agreement (SPA) will describe the shareholding in terms of percentage ownership. In other words, it will specify how many shares you are buying, at what price per share and what percentage of voting rights this gives you against all other shareholders in the company.
A share purchase agreement is also used when a business acquires another business, that is, during a merger and acquisition and also for grant-options in case of executing advisory shares. It sets out the terms of the transaction, including how much the buyer is paying for the shares, how much will be paid on completion and what happens if the buyer defaults.
When is a Share Purchase Agreement Used
A share purchase agreement can be used for both friendly and hostile acquisitions. For a friendly acquisition, it sets out the terms on which you will acquire the shares from existing shareholders. For a hostile acquisition, it sets out your intentions with regard to acquiring control of the target company’s assets and asks for offers from shareholders at a price determined by you.
If a hostile bid fails or is withdrawn, this could negatively impact your relationship with management or other stakeholders in your target company.
The share purchase agreement outlines all parties’ rights and obligations during an acquisition process and will usually include:
1. The amount of money being paid for each share.
2. Who owns what percentage of shares in the target company.
3. What happens if one party defaults on their obligations under the contract (for example, failing to pay agreed sums), etc.
There are lots of other factors and constituents of a share purchase agreement as well, and we’ll look into them in detail in the section on the constituents of a share purchase agreement.
Instances when a Share Purchase Agreement is used
Share purchase agreements are used for all kinds of buyout transactions, but they’re especially useful for larger companies that wish to sell shares or assets. This includes private equity firms who invest in a company and buy out some of the shares or other assets, such as intellectual property.
These agreements are also used by investors who want to acquire a controlling interest in a company. Shareholders can use them to sell their shares to another party, while also maintaining some level of control over the company’s future direction.
Share purchase agreements are also used in a variety of other situations. They can be used to buy shares from an employee, from a shareholder who is leaving the company, or from a shareholder who wants to sell their shares.
The terms of the share purchase agreement can vary depending on the situation, but there are some general guidelines that should be followed when drafting an agreement. The following are some of the key points that should be included in any share purchase agreement:
- The price per share;
- The number of shares being sold;
- Whether there’s a minimum number of shares required for sale;
- How long it takes for payment;
- What happens if one party doesn’t sell their shares;
How to Draft a Share Purchase Agreement
The share purchase agreement is a critical document that is necessary before the transfer of shares takes place.
The buyer and the seller should agree on all the terms and conditions of the sale before drafting the share purchase agreement. Usually this is done by having the material terms and conditions listed down on a term sheet, and after an agreement is reached on the main points of the term sheet, both the parties proceed with the agreement.
The first step is to list down all of your assets and liabilities. Include all financial information about your business, including business model, revenue model, sales and profits, working capital etc. This will help you determine how much money you need to sell your business, or a certain percentage of your shares for.
Discuss with your lawyer about any legal concerns regarding tax implications of selling shares in a company. Make sure that they are qualified enough to answer any tax-related questions that you may have. They will also assist you with any other legal matters related to selling shares such as corporate law and tax laws, etc.
Drafting a share purchase agreement can be tricky if both parties don’t understand what each other wants out of this deal. It’s best if both parties sit down together and discuss their terms before making them official in writing.
That said, there are some essential terms that are often repeated in pretty much, every share purchase agreements. As such, you should take care in going through them more than once and analyzing how the terms affect your share sale or purchase decision.
Essential Terms and Clauses in a Share Purchase Agreement
- Relevant Read: 15 Essentials Your Contract Must Have: According to Experts
#1. Contracting Parties of the Share Purchase Agreement
It is essential to have a section on the contracting parties as this will identify who each party represents, what their roles are and where they are based. The contracting parties will be either an individual or a company. If it is an individual, then they should be named and their address stated so that there can be no confusion later down the line.
The same goes for companies, but in case of a company, the company identification number should be provided and the director who signs on the agreement on behalf of the company must provide his / her director identification number.
#2. Recitals – Having this section is considered a generally good practice
Recitals are the preamble of a document and they are used to introduce the parties involved, the subject matter and the purpose.
The recitals section is a place to set out background information that is not particularly relevant to the rest of the share purchase agreement.
The main purpose of this section is to put the rest of the document into context. Recitals allow you to explain why you are entering into the share purchase agreement, and why you want to buy or sell shares. They can help explain any unusual clauses in your share purchase agreement.
Recitals are not legally binding, but they should be accurate and complete. If they contain false statements, you may be liable for damages if those statements cause harm to someone else. They’re also important because they provide evidence if there’s ever a dispute over what was said or agreed at the time of signing.
The recitals in a share purchase agreement should include:
- The names of the buyer and seller:
- What is being sold;
- For what price;
- When payment should be made; and
- Other relevant information detailing the facts surrounding the transaction.
The following is a snippet of recitals look like, that you can include in your share purchase agreement:
The parties to the share purchase agreement have agreed to the following terms and conditions:This is an agreement between [buyer], who wishes to buy [number] ordinary shares of [company name] [at price], with registered office at [address], hereinafter referred to as ‘the buyer’, and [seller], who wishes to sell [number] ordinary shares of [company name] [at price], with registered office at [address], hereinafter referred to as ‘the seller’.The parties agree that this transaction will take place under English law, the jurisdiction where their respective businesses are based, but only if it would not force them into breach of other laws or regulations.
#3. Definitions and Interpretations Section on Terms used throughout the Agreement.
It is always a good idea to include a section on definitions and interpretations because it can help to avoid disputes later on when parties disagree about what certain terms mean.
A Definitions and Interpretations section provides clarity regarding ambiguous terminology used throughout an agreement. For example, if there was no definition or interpretation clause in a sales contract between an estate agent and a customer, then it could be unclear whether “as agreed” meant “subject to availability” or “without further reference”.
In such cases, it may make sense for both parties to define their terms in advance so that they are clear when reading through documents later down the line.
Definitions and interpretations section in a share purchase agreement is also important as it defines all of the key terms used throughout the document.
What are key terms in a Share Purchase Agreement?
Key terms are those words that have a special meaning within your contract. For example, if you have agreed to sell shares at $10 per share, then $10 would be one of your key terms (because it has a special meaning). The definition of this term should be included in your definitions and interpretations section.
Key terms should be defined clearly so that both parties understand their meanings; this will avoid any problems further down the line.
#4. Section on Sale of Shares and Consideration thereof in a Share Purchase Agreement
In the section on sale of shares and consideration, you will need to specify the number of shares you are selling and the price for which you are selling them.
The purchase price for the shares is one of the most important terms in a share purchase agreement. It’s also often one of the most complicated.
If one party agrees to pay cash for all or part of another party’s shares, then this is called “paying in cash”, otherwise often an exchange of shares are offered. The consideration must also be paid at closing, not before or after. This is usually done through a settlement agent who will then distribute funds as needed according to instructions from both sides.
The consideration can also be an obligation by one party not to enter into any transaction with another person for a specified period of time. In other words, non-compete obligations are allowed under law and they can be used as consideration for sale of shares.
This section should also contain provisions relating to any existing lock-up agreements entered into by the company/shareholders at the time of signing this agreement.
The following clauses should be included in this section:
- The number of shares being sold by each party;
- the amount which is paid by the purchaser to acquire the shares (to be determined via valuation);
- the date on which the payment is made;
- the manner of payment; and
- if applicable, any other terms relating to the issue or transfer of shares
- principles on escrow
An escrow agent is chosen to keep the transferring shareholdings and the sales price as collateral and to ensure that the parties’ obligations and commitments are performed. This is particularly essential when the purchase price fluctuates owing to modifications, earn-outs, and holdbacks.
Both parties sign into a separate agreement with an escrow agent, granting it the authority to carry out measures in the best interests of both parties and in accordance with the terms of the Share Purchase Agreement.
#5. Conditions Precedent and Closing Conditions in a Share Purchase Agreement
A condition precedent is something that must happen before an obligation can be enforced. In this case, it refers to a requirement that must be met by both parties before the share purchase can go ahead. It’s usually some kind of legal requirement or administrative process which must be completed first.
For example, your company might have to get its accounting records up to date before it can sell its shares. Or you might need to get your shareholders’ approval first (this will depend on how your company is structured). These are all examples of conditions precedent which must be met before any share purchase can take place.
On the other hand, the closing conditions refer to the obligations and commitments that must be completed on the day of the closing of the purchase by either parties (but usually it is the seller who undertakes the bulk of the obligations).
The section on Conditions Precedent and Closing Conditions in a Share Purchase Agreement is important as it is where the parties state the conditions that need to be met before the share purchase agreement can be concluded. For example:
1. The parties may wish to include a clause stating that the sale of shares will only take place if approved by the board of directors, or if there are no objections from any shareholder (such as a majority shareholder). This is done to ensure that all the relevant parties have agreed to the transaction.
2. The parties may also want to consider what happens if one party breaches its obligations under this share purchase agreement. What are the remedies available for such breach? What would it mean for the other party? This is important because if one party breaches its obligations under this share purchase agreement, it may jeopardize all of their other rights under this agreement.
3. Another clause that should be included in this section would be one providing for specific conditions precedent needed prior to closing date (such as obtaining all necessary approvals from shareholders).
#6. Section on Covenants
A covenant is an agreement between two parties that the first party (the covenantor) will not do something. For example, in a share purchase agreement, the seller may be prohibited from competing with the company for a period of time after the transaction closes. This is known as a non-compete covenant. If the seller breaches this covenant, then the buyer can sue for damages.
The most common clauses in this section are:
Non-compete agreements – these prevent sellers from competing with the company or from starting a similar business in the same market for a defined period of time after they leave their role as directors or officers of the company.
Some agreements also include non-solicitation clauses which prevent former employees from soliciting clients and customers for their new companies while they are still employed by another company.
Confidentiality provisions – these prevent former employees from using confidential information belonging to their ex-employer if they join a competitor or start their own business in competition with an ex-employer.
Non-disclosure provisions – these prevent former employees from disclosing confidential information about their ex-employer if they join a competitor or start their own business in competition with an ex-employer.
Non-Solicitation Clauses – This clause prevents either party from soliciting business from each other’s customers during or after termination of this agreement (or even before termination if you believe such solicitation might interfere with performance).
However, these can be included as separate provisions in the agreement as well. And, we shall discuss more about them, in-depth.
#7. Representations and Warranties by both Parties to the Agreement
When you buy a company, it’s important to have a clear understanding of what you are buying. You want to know what assets the company owns, which liabilities it has and how much cash is available for distribution to shareholders.
A section on Representations and Warranties in a Share Purchase Agreement explains what you’re buying and what type of assurances exist that the seller has not overstated any facts or understated any liabilities.
This section usually contains statements about the seller’s ownership of all assets, including intellectual property and trademarks. It also includes information regarding business relationships that exist between the company and third parties, as well as any legal challenges or disputes that could arise in the future.
The representations and warranties clause in a share purchase agreement is a provision that states that each party is making certain statements about their business with the intent to be legally binding on both parties. These statements are called representations and warranties.
If one of these representations turns out to be false, there may be legal consequences for both parties involved in the transaction.
The purpose of this section is to ensure that both parties have all relevant information about each other before entering into an agreement. It also protects both sides from being misled by false claims or misrepresentations made during negotiations or after signing but before closing on the deal.
The Representations and Warranties section of a Share Purchase Agreement should include:
- The identities of the parties involved in the transaction;
- The nature of their relationship;
- The subject matter of the transaction;
- Any relevant background information regarding the transaction and its subject matter;
- Any material facts or circumstances relating to this transaction which are known at this point in time (i.e., not after signing but before closing);
#8. Section on Confidentiality and Non-Compete
A Section on Confidentiality and Non-Compete is important because it protects the seller’s trade secrets and other confidential information from being used by the purchaser after the sale.
The following are the constituents of a Section on Confidentiality and Non-Compete in a share purchase agreement:
1. Definition of Confidential Information: A definition of what constitutes confidential information should be included in this section. The definition should be broad enough to cover all types of confidential information that may be disclosed during negotiations.
2. Obligation to Maintain Confidentiality: The buyer is obligated under this section to maintain the confidentiality of any confidential information disclosed to him by the seller during negotiations or after signing of the share purchase agreement.
3. Obligation Not to Use or Disclose Confidential Information: This obligation prohibits use or disclosure of any confidential information received from the seller in breach of confidence except as necessary for performance under this agreement or with prior written consent from the seller.
4. Term: The duration for which this obligation remains in force should also be stated here so as to avoid any potential ambiguity at a later stage when either party may seek damages for breach by another party.
5. The exceptions to confidentiality obligations: There may be some exceptions under which a party may be allowed to disclose confidential information without breaching its confidentiality obligations under the agreement, such as if it was required by law or court order or if it was necessary for proper management of the company in which case the party needs to provide notice beforehand and allow time for remedial action by the other party before disclosing such information etc.
#9. Section on Indemnification
Section on indemnification is one of the most important sections in a share purchase agreement. It deals with the implications of the seller’s obligation to indemnify or protect the buyer.
The seller may be required by law to indemnify or protect the buyer against any loss, cost or damage that may be caused by the seller’s actions or failure to act. The seller’s obligation to indemnify or protect the buyer against any third party claims such as for patent infringement is usually included in this section.
The constituents of a Section on indemnification in a share purchase agreement are:
- The scope of indemnity and what can be indemnified;
- The period for which the indemnity will extend;
- The extent of the seller’s liability; and
- The seller’s obligation to pay reasonable costs for defending or settling any claim.
- The maximum amount of compensation which can be claimed under it. (This is known as indemnity cap)
#10. Section on Dispute Resolution and Arbitration
A Section on Dispute Resolution and Arbitration is one of the most important sections in any share purchase agreement. It deals with the dispute resolution mechanism for the parties to a share purchase agreement.
The constituents of a Section on Dispute Resolution and Arbitration include:
1. The arbitration clause itself: This is where the parties agree to resolve their disputes through arbitration instead of litigation in court.
2. The venue for arbitration: this will be either Singapore or Malaysia depending on where the company is incorporated and where the shareholders reside.
3. The language of arbitration
4. The number of arbitrators: usually one or three arbitrators are appointed by both parties, depending on what they agree to in their share purchase agreement.
5. How much an arbitrator is paid: this will depend on whether it is an ad hoc or institutional arbitration and also how many days are required for each hearing session.
6. The time limit for filing a complaint with the mediator or arbitrator.
7. The procedure for filing a complaint with the mediator or arbitrator.
8. The procedure for filing an appeal against an award made by the mediator or arbitrator.
- Related Read: Should Your Business go for Arbitration in the US?
#11, Section on Force Majeure
A Section on Force Majeure is one of the most important sections in a share purchase agreement. This section defines what will happen if you are unable to fulfill your obligations under the agreement due to an event beyond your control.
Usually, when you buy shares from someone, there is an assumption that you will be able to pay for them or buy the company at some point in the future and that you will be able to meet your other obligations under the share purchase agreement. However, what happens if something goes wrong?
What if you cannot pay for the shares because your bank account has been frozen due to fraud? What if you cannot pay because your business has gone bankrupt and you don’t have any money left? What if you are unable to buy the company because there is a law prohibiting it? What if there is no way around these issues?
Obviously, these situations are not good for either party and can have very negative consequences. That’s why it’s important to have a Section on Force Majeure in your share purchase agreement so that both parties know what will happen should one or both of these situations occur.
Section on Force Majeure in a Share Purchase Agreement: Constituents
A Section on Force Majeure should include the following constituents:
1. Definition of Force Majeure: A Section on Force Majeure needs to define what constitutes a force majeure event. It should be clearly defined and include specific examples to avoid any confusion.
For example, if the definition of force majeure includes natural disasters such as floods or earthquakes, then it is important to specify that only natural disasters that affect both parties equally should be considered as force majeure events. Therefore, it is wise to broaden the definition as much as possible.
2. Conditions for Termination by one Party: It is important to specify whether one party can terminate the transaction if they are affected by a force majeure event and how long this will take. This gives certainty to both parties about when they can terminate their obligations under the share purchase agreement in case of a force majeure event.
3. Conditions for Termination by Both Parties: In case both parties are affected by a force majeure event, then the section should provide for termination of the contract or segments of the contract.
Wrapping it Up
These elements will help provide you with a rock-solid share transfer agreement. However, the agreement is pretty nuanced and can still vary depending on your business, local and applicable laws. Therefore, it is important you get it drafted or reviewed by a lawyer so as to prevent any nasty surprises from cropping up in the future.
That said, if you need any help, let us know. You can leave a comment or even send us an email and we’ll get back to you!