Answer By law4u team
A share purchase agreement (SPA) is a legal document used in transactions where a buyer acquires the shares or stock of a company from the seller. Through this agreement, the buyer purchases the ownership interest in the target company, including all of its assets, liabilities, and business operations, as opposed to an asset purchase where only specific assets are acquired.
Key Components of a Share Purchase Agreement:
Shares to Be Purchased:
Description: This section defines the specific shares the buyer will acquire, including the number of shares, their class (e.g., common or preferred stock), and the price per share.
Example: The buyer agrees to purchase 10,000 shares of Company X, at $50 per share, for a total purchase price of $500,000.
Purchase Price and Payment Terms:
Description: This clause specifies the total purchase price for the shares, how it will be paid (e.g., lump sum, installments, or escrow), and any adjustments based on factors like working capital or debts.
Example: The buyer agrees to pay $500,000 at closing, with an additional payment of $50,000 after 90 days, based on the target company's post-closing performance.
Representations and Warranties:
Description: Both the buyer and the seller make representations and warranties to protect each other. For example, the seller may represent that the shares are free of encumbrances, and the buyer may represent that they have the financial capacity to complete the transaction.
Example: The seller warrants that the company has no undisclosed liabilities or pending lawsuits.
Conditions Precedent:
Description: This section outlines the conditions that must be met before the deal can close. This may include regulatory approvals, shareholder consent, or other legal requirements.
Example: The transaction will not close until the buyer has secured regulatory approval and the seller provides financial statements from the last three years.
Closing Date and Procedure:
Description: The closing date is the day when the buyer pays the purchase price, and the seller transfers the shares to the buyer. The procedure section outlines the steps that both parties will take at closing to finalize the transaction.
Example: The transaction will close within 30 days of the agreement, with the buyer paying the purchase price in full and the seller delivering the stock certificates.
Post-Closing Adjustments:
Description: This section deals with any adjustments to the purchase price that may be required after the closing, typically based on the final financial condition of the target company.
Example: If the company's net working capital is below a certain threshold at closing, the buyer will pay a reduced purchase price.
Indemnification:
Description: This provision specifies how the parties will deal with claims, liabilities, or losses that arise after the transaction is complete. The seller may agree to indemnify the buyer for any claims related to pre-closing events.
Example: The seller agrees to indemnify the buyer for any legal claims that arise from contracts signed before the closing date.
Non-Compete and Non-Solicitation Clauses:
Description: In some cases, the buyer may require the seller to agree not to compete with the business or solicit employees for a certain period after the transaction closes.
Example: The seller agrees not to start a competing business for three years in the same geographic region after selling the shares.
Confidentiality:
Description: Both parties agree to keep sensitive business information confidential, including any details about the transaction, financials, and business operations.
Example: Both parties agree not to disclose any confidential information about the company or the transaction to third parties without prior consent.
Dispute Resolution:
Description: This clause specifies how disputes related to the agreement will be resolved, whether through mediation, arbitration, or litigation.
Example: Any disputes will be resolved through binding arbitration in the jurisdiction where the company is incorporated.
How a Share Purchase Agreement Differs from Other Agreements:
Share Purchase Agreement vs. Asset Purchase Agreement:
In an asset purchase, the buyer acquires specific assets and does not assume the target company’s liabilities unless agreed to. In a share purchase, the buyer acquires the shares of the target company, effectively gaining control over the entire business, including its assets, liabilities, contracts, and obligations.
Share Purchase Agreement vs. Merger Agreement:
In a merger, two companies combine into one, forming a new legal entity or one company absorbing the other. In a share purchase, the buyer directly acquires ownership of the target company’s shares, without forming a new entity.
Example:
Share Purchase Example: Company A (the buyer) agrees to purchase 100,000 shares of Company B (the seller) at $20 per share, for a total price of $2 million. The agreement specifies that the shares represent 100% of the company’s outstanding stock, and upon closing, Company A will assume full control of Company B’s assets and liabilities. The agreement also includes a clause where Company B guarantees there are no ongoing legal issues that would affect the purchase price.
Conclusion:
A share purchase agreement is a key legal document in business transactions where one company buys the shares of another company, thereby gaining full control over its operations, assets, and liabilities. It differs from other types of agreements, such as asset purchase agreements and merger agreements, in terms of the scope of the transaction and the parties' respective obligations. Understanding the key components of an SPA is crucial for both buyers and sellers in ensuring a successful and legally sound transaction.
