What is Share Purchase Agreement? A Guide for Business Deals

Why is Share Purchase Agreement (SPA) such an important thing? Because when you purchase shares of a company, you're not merely receiving a piece of paper, you're becoming a part owner, with all the risks and benefits that ensue. That's why buyers must be certain of what they're in for, and sellers must insulate themselves against any potential surprise. 

Acquiring or disposing of a business is a big transaction, and one of the most significant documents making it happen is a Share Purchase Agreement (SPA). 
 
Here in this blog, we'll simplify what a Share Purchase Agreement is, why it matters, and what major points you need to watch out for. 
 
Whether you are a business owner, an investor, or simply someone interested in how businesses get sold, this guide will provide you with a clear picture. Let's get started!  

Key Takeaways 

• A Share Purchase Agreement is a binding contract regulating the sale of shares in a company. 

• It outlines the buyer's and seller's obligations, such as representations, warranties, and indemnities. 

• Due diligence is an important process in making a seamless share transaction. 

• An SPA is different from an Asset Purchase Agreement when it comes to liability assumption and transfer mechanics. 

• Reading and negotiating SPAs demand contract law and business transaction expertise. 

Understanding Share Purchase Agreements 

Imagine you’re buying a business, but instead of purchasing its office furniture, equipment, and brand name separately, you’re buying ownership in the company itself.  

That’s what happens in a Share Purchase Agreement (SPA), you’re acquiring shares, which means you’re taking control of the entire business, including its assets, debts, and legal obligations.  

Why is this important?  

Purchasing shares isn't merely a matter of ownership; it's a matter of assuming everything that goes with the company.

If the company has outstanding debts, lawsuits pending, or financial woes, those don't go away, they become yours as the new owner.  

That is why a SPA is so important; it lays out who is liable for what prior to and subsequent to the sale. 

This contract deals with specifics such as the amount of shares being offered, the price, payment terms, and conditions under which the deal can be concluded.  

It also provides safeguards for the buyer and seller, including warranties (guarantees regarding the health of the company) and indemnities (who pays if things go awry later). 

In short, an SPA guarantees that both parties are on the same page, limiting the potential for misunderstandings or unpleasant surprises post-deal. 

Main Elements of a Share Purchase Agreement  

A Share Purchase Agreement (SPA) may appear to be a lengthy, complex legal contract, but really it is just a contract that defines exactly how shares in a company are purchased and sold. 

In order to ensure both parties are aware of their commitments, the deal is stipulated in some core sections which dictate the specifics of the agreement, who is going to do what, and how it is addressed if there's an issue. 

Let's simplify it step by step.

All SPAs begin with the fundamentals: who is selling shares and who is purchasing them. This may seem elementary, but it helps to state it out loud so everyone knows what is going on. If the seller is more than one person and is instead a group of shareholders, the agreement must detail how much each one is selling.

Not all shares are identical. Some bear voting rights while others offer a dividend. Even some have additional privileges attached. The SPA is required to explain the number and type of shares being sold in order to detail what the purchaser is getting control over and potential benefits from when purchasing.

3. How Much & How Will It Be Paid? (Purchase Price & Payment Terms)

Money talks, and the SPA specifies the actual purchase price of the shares. But it's not always a matter of paying cash. Transactions can be arranged in various ways: 

• Full payment at closing – The buyer pays the full amount at closing. 

• Installments – The buyer pays in installments. 

• Earnouts – The seller receives extra cash later, depending on how well the company does in the future. 

There could be price readjustments also, if the company's finances are altered prior to completion of the deal. 

4. What Must Occur Prior to the Completion of the Transaction? (Conditions Precedent)

Certain conditions must be met prior to the closure of the transaction. For instance:  

• The seller may have to undertake due diligence to ensure all is well, i.e., there are no skeletons in the closet. 

• Certain regulatory approvals might be necessary, depending on which industries are being transacted in. 

• The seller may have to pay off obligations or obtain endorsement from major players. 

If they do not take place, then the transaction falls through.

5. What Are The Promises? (Representations & Warranties)

This section is all assurances. The seller guarantees that all they've represented about the company is true, such things as: 

• The financial records of the company are correct. 

• There are no hidden lawsuits or outstanding debts. 

• All contracts and business transactions are genuine. 

If any of these promises are not true, the buyer has the right to sue.

6. Who's Responsible for What? (Indemnities & Liabilities)

What if something goes wrong after the deal is signed? Let's say, for instance, the company is sued unexpectedly for something that occurred prior to the sale. Who's responsible for paying for that? That's where indemnities enter the picture. They decide whether the buyer or seller is liable for paying for unforeseen expenses that occur after the sale.

7. Any Special Rules? (Covenants & Restrictions)

In some cases, the seller has to abide by some rules even after the transaction is finalized. For example: 

• Non-compete clauses – The seller promises not to open a competing business for a specified time. 

• Non-solicitation clauses – The seller cannot steal employees or customers from the firm after selling it. 

These provisions safeguard the buyer against unfair competition.

8. What Happens at Closing? (Completion of Sale)

Closing is the last stage where the ownership of shares actually transfers hands. The SPA will detail all that needs to be signed and transferred during this process, such as: 

• Share transfer documents 

• Payment confirmations 

• Resignation letters (if company leadership is changing) 

Then the buyer takes up the reins, and it's done!

9. What Happens After the Sale? (Post-Completion Obligations)

Even after the sale is completed, there could be follow-up actions. The seller may have to assist in the transition of the business smoothly or offer support for a specified duration. The contract could also have confidentiality terms to safeguard confidential business details. 

Share Purchase Agreement vs. Asset Purchase Agreement 

Common Clauses in SPAs 

SPAs also contain various standard legal provisions to facilitate the smooth implementation of the agreement. They are: 

• Confidentiality Clause: Bars each party from divulging confidential company information. 

• Non-Compete & Non-Solicitation Clauses: Forbid the seller from opening a competing venture or hiring employees away. 

• Dispute Resolution Mechanism: Specifies if disputes will be resolved through arbitration, mediation, or litigation. 

• Governing Law Clause: Specifies which country's laws shall govern in case of disputes. 

The Importance of Legal Counsel in SPAs 

SPAs are legally sophisticated and need professional advice. 

A skilled contract lawyer ensures that the contract is foolproof and that the interests of both parties are safeguarded. 

They also facilitate negotiations, identification of risks, and preparation of indemnity clauses to avoid future conflicts. 

The Role of Due Diligence in SPAs 

Buyers first look at the company's accounts to make sure there are no hidden debts or cash flow issues. 

Then, they look at legal papers, such as agreements with employees, suppliers, and customers, to identify any possible problems. 

They also look for outstanding lawsuits, regulatory issues, or tax debt, because after the deal is sealed, those might become the buyer's headache. 

Due diligence is not merely risk avoidance; it also helps in negotiation. 

If a buyer discovers something that is of concern, such as an undisclosed liability or a weak contract, they can renegotiate the deal, request a discount, or demand that the seller correct the problem prior to closing. 

A good due diligence process ensures buyers are making well-informed decisions and are not left to fend for themselves with surprises after they have bought. 

Managing Share Purchase Agreements with Microsoft 365 

With SharePoint, Teams, and Power Automate, companies can store SPAs securely, work in real-time, and automate critical workflows such as approvals and signatures. 

In an even more efficient way, Dock 365 elevates contract management to the next level. 

Built on Microsoft 365, Dock 365 helps companies create, review, and manage Share Purchase Agreements with ease. 

Watch Dock 365 in action. Get a free demo today and see a smarter way to deal with Share Purchase Agreements. 

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