Share Purchase Agreement - overview

Thu 28 December 2023

What is a Share Purchase Agreement?

A Share Purchase Agreement ("SPA") will be 1 of a number of key documents in a share sale transaction. Many key terms (see below) will apply regardless of the type of underlying transaction but there will be differences depending on whether the transaction is :-

Sale of the entire share capital - i.e the company is being sold.
Acquisition of a controlling interest in the company.
Purchase of a minority interest

Key terms in all types of Share Purchase Agreement

Purchase price and payment terms - establishes the agreed-upon price for the shares and outlines the payment schedule.
Warranties and indemnities - legally binding assurances, typically about the accuracy of information provided, finances and other important issues and, with a full share sale, probably indemnities in favour of the buyer against specific potential future liabilities.
Conditions precedent - specific events that must occur before the agreement is finalized, such as regulatory approvals or financial audits.
Post-completion restrictions and covenants - restrictions and obligations given by departing shareholders, such as non-compete agreements, confidentiality and information sharing clauses.
Termination provisions - circumstances under which either party can terminate the agreement before completion.

Potential risks, negotiating points and Issues

Navigating an SPA requires awareness of potential risks :-

Minority shareholder rights - When acquiring a non-controlling stake, consider voting rights, dividend distributions, drag-along and tag-along rights, Board representation (board seats or observer rights), possible different classes of preference shares with enhanced voting and/or other rights
Breach of warranty - If a seller's warranty proves inaccurate, the buyer may claim damages but successful recovery of losses is always uncertain.
Tax implications - understanding tax consequences for both parties is crucial.
Change of circumstances - unforeseen events like market downturns or regulatory changes can impact the transaction.

Deferred Consideration

In many full company sales, the buyer will seek to agree that part of the purchase price is deferred. If agreed, this will deferred payment is often in the form of an earn out where part of the purchase price may be tied to the company's future performance, aligning buyer and seller interests and incentivizing post-closing value creation.

Another potential funding method with private equity investments is convertible loan notes. There are considerable risks for remaining shareholders