What Is a Share Purchase Agreement?

A Share Purchase Agreement (SPA) is a contract for the sale and purchase of company shares. It transfers ownership interests from seller to buyer. It establishes the transaction framework, ensuring clarity and enforceability. An SPA is central to mergers and acquisitions, facilitating the transfer of corporate control.

Understanding a Share Purchase Agreement

A Share Purchase Agreement is a legal instrument for acquiring company shares. It formalizes ownership transfer, detailing terms for buying and selling shares. The agreement establishes purchase price, payment structure, and transaction conditions. It allocates risks between buyer and seller, assuring the acquired company’s state.

SPAs are common when a buyer acquires an ownership stake, from minority to full control. It is preferred over an asset purchase when acquiring the company as a whole, including its legal structure, contracts, and liabilities. Purchasing shares means the buyer inherits the company’s historical obligations and benefits. The agreement defines these inherited responsibilities.

The main parties in an SPA are the buyer, seller, and target company. The buyer acquires shares, becoming the new owner. The seller divests their equity interest. Their role is to transfer clear title and provide company assurances.

The target company, while not always a signatory, is the entity whose shares are transferred. Its financial health, operations, and legal standing are scrutinized. The SPA obligates the target company to cooperate with due diligence and maintain operations until closing. These distinct roles ensure a clear and legally sound ownership transfer.

Key Components of a Share Purchase Agreement

The purchase price and payment terms are central to any Share Purchase Agreement, detailing the consideration exchanged for shares. Share valuation considers the company’s earnings and comparable transactions. Payment can be a lump sum, deferred payments, or earn-outs contingent on financial milestones. The payment structure can have significant tax implications for the seller, impacting whether proceeds are treated as ordinary income or capital gains.

Representations and warranties are the seller’s statements of fact about the target company. They cover financial statements, liabilities, legal compliance, and contract validity. Their purpose is to assure the buyer of the company’s condition and value. Untrue representations can trigger seller indemnification, allowing the buyer to recover losses.

Covenants are promises by the parties to perform or refrain from certain actions before and after closing. Pre-closing covenants often require the seller to operate the business in the ordinary course, avoid significant transactions, or obtain third-party consents. Post-closing covenants might include non-compete clauses, restricting the seller from similar businesses, or non-solicitation clauses preventing hiring former employees or customers.

Conditions precedent are events that must occur or be waived before the transaction can be completed. These conditions protect both buyer and seller by ensuring prerequisites are met before closing. Common conditions include regulatory approvals, third-party consents for contracts, or buyer financing. If a condition is not satisfied, either party may terminate the agreement without penalty.

Indemnification provisions outline when one party compensates the other for losses or damages. These clauses cover breaches of representations and warranties, non-fulfillment of covenants, or pre-existing liabilities identified during due diligence. The agreement often specifies limitations on indemnification, such as caps on recoverable amounts, or deductibles that must be exceeded before a claim.

Closing deliverables are documents and items exchanged at the formal completion of the transaction. These typically include:
Stock certificates representing transferred shares.
Resignations of the seller’s directors and officers from the target company’s board.
Corporate resolutions authorizing the transaction.
Legal opinions from counsel for both parties, affirming transaction validity and party authority.

The exchange of these deliverables ensures a clear and legally sound transfer of ownership and control.

General provisions, often called “boilerplate” clauses, are standard contractual terms governing the agreement’s interpretation and enforcement. These include:
Governing law clauses, specifying the applicable jurisdiction.
Dispute resolution clauses, outlining methods like mediation, arbitration, or litigation.
Confidentiality clauses, protecting sensitive information.
Assignment clauses, dictating transferability of rights and obligations.

The Share Purchase Process

The share purchase process begins with initial discussions between buyer and seller, leading to a preliminary agreement. This document, often a term sheet or letter of intent (LOI), outlines fundamental terms like purchase price, deal structure, and due diligence exclusivity. It establishes a framework for negotiations and demonstrates serious intent. This phase aligns expectations for a detailed examination.

Following the preliminary agreement, the buyer undertakes comprehensive due diligence. This involves investigating the target company’s financial, legal, operational, and environmental aspects. Financial due diligence examines statements, tax returns, and projections to verify health and identify discrepancies. Legal due diligence reviews contracts, litigation, intellectual property, and regulatory compliance. This phase is crucial for the buyer to confirm seller representations and uncover risks.

Based on due diligence findings, parties negotiate and draft the Share Purchase Agreement. This phase is iterative, involving discussions between legal and financial advisors. The SPA is drafted to reflect agreed terms, incorporate due diligence findings, and address risk. Every clause is reviewed and negotiated to protect each party’s interests.

Once SPA terms are finalized, all parties execute the document in the signing phase. Signing the SPA creates a binding commitment, but does not complete the transaction. Closing is contingent on satisfying conditions precedent specified in the agreement. This step signifies agreement and obligation to proceed, provided conditions are met.

Closing is the formal completion of the share purchase, transferring ownership from seller to buyer. At this stage, the purchase price is paid, and stock certificates are delivered. Other closing deliverables, like corporate resolutions, legal opinions, and director resignations, are exchanged. A detailed closing agenda ensures documents are executed and conditions satisfied, concluding the acquisition.

After closing, post-closing adjustments and integration activities commence. Adjustments often involve a true-up mechanism, where the final purchase price is adjusted based on the target company’s actual working capital. Earn-out payments, if stipulated, are disbursed as the target company meets performance metrics. The buyer then integrates the acquired company’s operations, systems, and personnel into its existing structure.

Additional Resources

For further information on Share Purchase Agreements and related topics, consider consulting reputable legal and financial resources. The Internal Revenue Service (IRS) provides guidance on the tax implications of business sales, including capital gains treatment for sellers. Additionally, legal databases and academic journals offer in-depth analyses of specific clauses and their enforceability within the context of M&A transactions. Consulting with experienced legal and financial professionals is advisable for any specific transaction.