Key Takeaways

  • A share purchase agreement outlines the sale terms of company shares between a buyer and seller.
  • It differs from an asset purchase agreement, which transfers company assets, not shares.
  • SPAs cover representations, warranties, indemnities, purchase terms, and more.
  • Both public and private share transfers may require tailored clauses.
  • SPAs often include conditions precedent, restrictive covenants, and post-completion obligations.
  • Due diligence and accuracy of disclosures are critical in finalizing the agreement.
  • Seeking legal review is strongly advised for such transactions.

A share purchase agreement is defined as a legal contract between a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The specific number of shares are listed in the contract at the stated price. This agreement proves that the sale and the terms of it were agreed upon mutually.

Stock Purchase Agreement

The stock purchase agreement is an agreement in which all terms and conditions are finalized when it comes to the sales and the purchase of the shares of the company. This isn't the same as an asset purchase agreement, where the assets are bought and sold instead of the shares. The following items are listed in a stock purchase agreement:

  • Name of company.
  • Par value of shares.
  • Name of purchaser.
  • Warranties and representations made by the seller and purchaser.
  • Possible employee issues such as benefits and bonuses.
  • How many shares are being sold.
  • Where and when the transaction takes place.
  • Indemnification agreement over costs that are unforeseen.

A letter of intent is formed before the agreement is finalized to explain the proposed sale. A buyer needs to have due diligence and should make sure the purchase agreement and the letter of intent have the same terms. The seller should specifically look at the sale and purchase section and the warranties and representations section. The sale and purchase section should have the exact same terms that the letter of intent has. If any differences are found, this is probably due to buyer due diligence and needs to be negotiated before the share purchase agreement is complete.

The warranties and responsibilities need to be checked to make sure there is not any statement that's untrue. If this happens and is found later, there will be possible legal action and recourse. There may be a purchase price adjustment after the transaction where the seller has to reimburse the buyer if there are misrepresentations.

Differences Between Share and Asset Purchase Agreements

While both share purchase agreements (SPAs) and asset purchase agreements facilitate business transactions, they differ in structure and legal impact. A share purchase agreement transfers ownership of shares in a company, meaning the buyer acquires an interest in the company itself—including all its assets, liabilities, contracts, and obligations. In contrast, an asset purchase agreement transfers only specific assets and liabilities, allowing the buyer to select which parts of the business they want to acquire.

This distinction matters for tax treatment, liability assumption, and operational continuity. Buyers using an SPA step into the shoes of the shareholders and inherit both the benefits and risks of the existing entity, whereas asset deals can isolate the buyer from unwanted liabilities.

Who Needs a Share Purchase Agreement?

If a corporation or individual is purchasing or selling shares in the company with another business or person, they should use a share purchase agreement. As an example, if a business has two partners who have equal shares and one leaves the partnership, a share purchase agreement can be used to buy their stocks in the business. When all of the shares are purchased, a purchase of business agreement can be used instead.

What Information and Types of Shares are in a Share Purchase Agreement?

A share purchase agreement has information about the company that the shares are being transferred for, the seller and purchaser of shares, what law covers the agreement, the type of shares being sold, and how many shares are being sold and at what price. This agreement also has payment details, including if a deposit is necessary, when the complete payment is due, and the closing date of the agreement

There are usually two types of classes and shares that define shares. The main ones are voting and non-voting. Voting shares let the shareholder voice an opinion on the board of director's decisions and on corporate policy. Non-voting shareholders are not able to vote on board of director changes or on corporate policies.

Common Clauses in a Share Purchase Agreement

Share purchase agreements typically contain several standard clauses to ensure clarity and legal protection. These may include:

  • Conditions Precedent: Actions or events that must occur before the transaction is completed, such as obtaining regulatory approval or third-party consents.
  • Purchase Price and Adjustments: Details about the pricing, how it is calculated, and any adjustments based on working capital or net debt at closing.
  • Representations and Warranties: Statements made by both parties about the company’s financials, assets, liabilities, and legal compliance. These serve to reduce risk and provide grounds for post-sale remedies if false.
  • Covenants: Promises about how the business will be operated between signing and closing. This can include non-compete clauses, confidentiality obligations, and conduct of business provisions.
  • Indemnification: Outlines how either party will compensate the other for losses resulting from breaches of warranties or undisclosed liabilities.
  • Boilerplate Clauses: These include dispute resolution mechanisms, governing law, assignment rights, and entire agreement provisions.

These clauses help define responsibilities, manage risks, and provide remedies in case of breach or post-sale disputes.

What Does a Stock Purchase Agreement Cover?

Interpretation is covered in the stock purchase agreement, which gives the definitions for all terms used in the agreement. The sale and purchase of stock is also listed, which covers adjustments in purchase prices, itemizes the purchase price, and how to resolve disputes. The warranties and representations of the buyer and seller give all the statements that the buyer and seller sign and claim to be true. Anything related to employees is also covered, including what the terms of their benefits are and how accrued bonuses are handled.

The details on any indemnifications that will be provided by the buyer or seller will also be listed, which covers any costs that may happen after the transaction due to conditions that were present before the deal closed. Special tax treatment that the buyer or seller might be entitled to is also listed in the agreement.

Post-Completion Obligations

Once the share purchase is completed, parties may still have obligations under the SPA. These can include:

  • Deferred Payments or Earn-Outs: Sellers may receive additional compensation based on future performance metrics.
  • Transition Support: Sellers may be required to assist in the transition of business operations.
  • Regulatory Filings: Notifications to tax authorities, regulatory bodies, or stock exchanges may be necessary.
  • Transfer of Records and Assets: Though shares are transferred, supporting records such as corporate books, customer contracts, and IP registrations must be handed over.

Clearly defining these post-completion terms in the SPA helps prevent misunderstandings and ensures smoother integration.

Disclosures and Due Diligence

Before a share purchase agreement is finalized, the buyer typically conducts due diligence to verify financial, legal, operational, and tax-related matters. The seller provides disclosures in a disclosure letter, which details exceptions to the warranties made in the agreement.

Buyers should carefully review this information to ensure that no material issues are concealed. Inaccurate disclosures or omissions can lead to claims under indemnity provisions. For this reason, sellers often negotiate to limit their liability, both in amount and duration, through caps and time limits in the agreement.

Due diligence is essential not just for risk mitigation, but also for negotiating favorable deal terms based on the company’s condition.

Frequently Asked Questions

  1. What is a share purchase agreement?
    A share purchase agreement is a legally binding contract that sets out the terms under which shares in a company are sold from a seller to a buyer.
  2. Who prepares a share purchase agreement?
    Typically, the buyer’s legal team drafts the initial version, but both parties often negotiate the terms before finalization.
  3. Is due diligence required before signing an SPA?
    Yes. Buyers usually perform legal, financial, and tax due diligence to verify the accuracy of the seller’s representations and to assess risks.
  4. Can a share purchase agreement be used for partial ownership?
    Yes, SPAs can be structured for full or partial share transfers, depending on what percentage of ownership is being acquired.
  5. What happens if the seller breaches the agreement?
    If warranties or covenants are breached, the buyer may seek compensation through indemnification clauses, or potentially sue for damages depending on the terms of the SPA.

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