Know the various facts about Share Purchase Agreement

LegalKart Editor

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Last Updated: Dec 2, 2024

The Importance Of Shares & Equity

Share (or equity) is a very important aspect in the working and functioning of a company. We can even say, it symbolizes the smallest structural and functional unit of a company. It can further be said that a share is the smallest unit of the ownership of a company.

The Significance Of Trading In Shares & Equity

As shares are crucial to the company, so are its sales and purchases. In fact, the buying and selling of shares decide the flow and destiny of any listed company. So, there are broad rules and guidelines that govern various aspects of share purchase.

What Is The Share Purchase Agreement?

A share purchase agreement is a legal contract between two parties: a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The contract is proof that the sale and the terms of it were mutually agreed upon.

You may also like to read Know About The Founders Agreement.

Contents of a Share Purchase Agreement

The agreement contains all the terms and conditions that are finalised when it comes to the sale and purchase of the shares of the company. The following are listed in a share purchase agreement:

Name of the company
Par value of shares
Name of purchaser
Warranties and representations made by seller and purchaser
Employee benefits and bonuses
Number of shares being sold
Details of the transaction

Also read about The Shop And Establishment Act.

Indemnification agreement for unforeseen costs

Before the finalisation of the agreement, a letter of intent will be formed. The buyer must perform due diligence to ensure that the purchase agreement and the letter of intent have the same terms. The seller must pay close attention to the sale and purchase section and the warranties and representations section.

The terms of sale and purchase should be the same as the letter of intent. Any discrepancies can result from buyer due diligence and need to be negotiated before the share purchase agreement is complete.

The warranties and representations need to be checked to make sure that there are no false statements. If this takes place and is discovered later, there could be legal action and recourse. There might be some purchase price adjustment that the seller has to reimburse in case of any misrepresentations.

Situations that warrant a Share Purchase Agreement

When a corporation or individual purchases or sells shares in another corporation or business, a share purchase agreement must be entered. For instance, in a partnership with two partners, if one partner quits the business, the other partner can acquire the shares by using a share purchase agreement.

You may also read Partnership Firms.

Drafting of a Share Purchase Agreement

There is no one-size-fits-all when it comes to the drafting of a Share Purchase Agreement (SPA). Therefore, despite the number of agreements executed over some time, there is no standard agreement format. The following table illustrates the essential features of a classic textbook SPA:

Content		Details
Parties to the agreement		The parties generally comprise the seller and the buyer. The exception being that sometimes the parties are companies that are incorporated only for executing the SPA. In these cases, the substantive entities’ principles need to be added as covenanters or guarantors to ensure commitment to the contract.
Recitals		The transaction facts must be spelt out in the recitals, and the relationships must be identified and laid down. The objective of the transaction and the role of the parties must also be stated.
Definitions and Interpretations		This is important as definitions provide a context and meaning to certain words and phrases used in the agreement.
Consideration and Sale of Shares		This section provides an exhaustive structure of payment needs The deposit to be given at the time of execution The sum that is payable on closing (pricing formula determined on a case to case basis) The sum held in escrow to be set off against indemnities and breaches of warranties and representations The amount payable in case any security is registered against any company If the payment is made in tranches, the details of the trigger for the payments should be spelt out.
Conditions Precedent		This clause needs to be exhaustive, providing for all authorisations, permissions and permits necessary (internal and external) and the person responsible for obtaining each of these. A clause that provides a right to waive any condition is also included to provide flexibility.
Closing		It is prudent to include a closing memorandum listing the actions that will occur on the closing day, including the board resolutions to be passed.
Conditions Subsequent		This clause is rare. However, there are some permits and obligations which are residuary in the conditions subsequent. Protection must be offered to the buyer in case any of the conditions subsequent are breached.
Covenants by the parties		Covenants provide comfort to both parties. The purchaser requires them from the seller with regard to the management of the company between signing and closing.
Vendor’s Representations and Warranties		This clause details the seller’s standing, market reputation, rights over the shares, capital structure of the company, list of directors, and the number of shares owned by the seller. It should also provide information on compliance with laws and any threatened litigation or dispute.
Buyers’ Representations and Warranties		All of the buyer’s rights, ability to pay the compensation and enter into subsequent agreements are included here. If the buyer is a corporate, then the corporate status is also highlighted.
Obligations pre and post-closing		This is similar to the representations and warranties clause, but it is included to protect the interests of the parties.
Confidentiality		This is the standard state of terms of the agreement It is important when confidential information has been exchanged and when the parties are listed companies. The validity of the clause is 18 months to 2 years.
Indemnification		This clause is highly negotiated. This clause also provides for the process of reimbursement of claims and often the most scrutinised clause. Particular attention must be paid to ensure that the buyer is adequately covered in cases of issues relating to the company before the transaction but emerge post-closing.
Notice		This clause is overlooked but is important. The location and how the notice must be dispatched and if the parties are ready for the electronic notices must be specified.
Force Majeure		This is a standard clause but can be strengthened by adding a clause about fluctuating market conditions, including the sudden financial crisis, pandemic conditions, etc.
Dispute Resolution and Arbitration		The Supreme Court has ruled that when both the parties are in India, the arbitration will be a domestic arbitration under the Arbitration and Conciliation Act.
Jurisdiction & General Clauses	The courts in the city of the registered office of the vendor will have jurisdiction. The emphasis must be on the assignment clauses and the relationship clauses that specify the relationship between the parties, which is not construed otherwise.