Share Purchase Agreements Explained: What Founders Need to Know

When it comes to business transactions, clarity and protection are critical, and this is no less true when it comes to the exchange of company shares. This is where share purchase agreements come into play. Leveraged during the sale of company shares, these legally binding contracts not only define the terms of the deal but also safeguard the interests of both the buyer and the seller. A well-drafted share purchase agreement should cut through ambiguity, clearly define the roles and expectations of all parties involved, and forge a smoother route to success overall.

In this article, we explore the core components of share purchase agreements, tackling:

• What are share purchase agreements?
• How do share purchase agreements work?
• What are the key features of a share purchase agreement?
• When to use a share purchase agreement?

What are share purchase agreements?

A share purchase agreement - sometimes abbreviated to SPA - is a go-to document that spells out every nitty-gritty detail of a share purchase transaction, from the number of shares being acquired to the price that will be paid, and all the other requirements that need to be met in order for the transaction to close.

An SPA isn't just about numbers. It addresses responsibilities and liabilities, helping all parties to understand who’s accountable if something doesn't go as planned. It's best considered as a safety net, designed to ensure both parties are clear on their roles, expectations, and any potential roadblocks. 

How do share purchase agreements work? 

An SPA specifically outlines the shares to be transferred, the purchase amount, conditions precedent, and the timeline for payment, making what's often a complex transaction significantly clearer. It's effectively the blueprint for the deal, ensuring everyone involved knows their rights and responsibilities. 

During the drafting process, precise attention to detail is, therefore, crucial. The agreement must cover all elements, from defining the sale price to the intended date of transfer. Clauses are typically included to handle unexpected events and outline the liabilities each party assumes. These clauses might cover indemnities, representations, warranties, and disclosures, all aiming at ensuring a fair transaction.

Ultimately, a well-constructed SPA should offer a clear path to closing the deal efficiently while reducing risk for both buyers and sellers. By codifying every agreed-upon term, these agreements mitigate disputes and provide an agreed-upon approach for resolving potential disputes. In a nutshell, a carefully crafted SPA not only facilitates smooth transactions but also fortifies the foundation of a company's future success.

What are the key features of a share purchase agreement?

A share purchase agreement is designed to ensure all parties are protected and the transaction is handled smoothly. Let's explore the core features you should be aware of: 

• Purchase Price: The agreement explicitly specifies the amount the buyer will pay for the shares, which can be structured as a fixed sum or determined based on certain metrics or adjustments.
  
  
• Payment Terms: This section outlines how and when the payment will be made. It might include upfront payments, instalment schedules, or conditions that need to be satisfied before the full amount is paid.
  
  
• Representations and Warranties: These are statements of facts provided by both parties regarding the status of the company and its shares. They serve to reduce risks by ensuring that both sides are transparent about relevant facts concerning the business.
  
  
• Covenants: These are agreements or promises made by either party. They often involve which actions must be taken or refrained from before closing of the transaction.
  
  
• Conditions Precedent: These are specific conditions that must be fulfilled before the sale can be completed. They might include obtaining necessary approvals or ensuring certain financial thresholds are met.
  
  
• Indemnification: This section outlines the responsibilities regarding losses that might arise post-transaction. It’s a safety net for parties involved, allowing them to claim damages if any promises aren’t upheld. 

When to use a share purchase agreement

SPA's are typically used when acquiring shares in an existing company, whether purchasing all shares or just a portion. It's a must-have when the transaction involves transferring significant interests or control in a business, providing both parties with a formal framework for negotiations and agreements. 

A Share Purchase Agreement (SPA) isn’t just useful in complex deals—it’s essential in any transaction involving the sale and purchase of shares. Like any contract of real value, an SPA ensures clarity, mitigates risk, and safeguards the interests of all parties. Whether the shares are part of a broader corporate structure or the transaction is subject to conditions such as regulatory approvals, financing arrangements, or specific performance milestones, having a well-drafted SPA provides certainty and enforceability. Without one, buyers and sellers expose themselves to unnecessary legal and financial risk.

Additionally, a share purchase agreement is essential when either party needs specific assurances or warranties, for instance, the buyer needs confirmation of the financial health and operational status of the company. Likewise, sellers may seek out assurances regarding a purchaser's ability to pay or comply with transaction terms. However, representations and warranties cannot be made lightly; they carry significant legal and financial implications. This is why having experienced lawyers is crucial—they can help draft, assess, and negotiate these provisions, ensuring that disclosures are properly prepared and that neither party takes on undue risk.

Best practice tips for share purchase agreements

Taking a strategic approach to negotiating and drafting a share purchase agreement is essential for both buyers and sellers aiming for a successful transaction. Here are some best practice tips to guide you through the process: 

• Thorough Due Diligence: Conduct comprehensive due diligence before finalising the agreement. This helps identify potential risks and ensures that all necessary information is on the table, providing a clear picture of the investment. For sellers, this means having their corporate governance in order and preparing a well-structured data room. A properly organised data room streamlines the due diligence process, reducing delays and increasing buyer confidence by demonstrating transparency and readiness.
  
  
• Clear Definitions: Define key terms and conditions clearly to prevent future misunderstandings. This ensures that both parties have a mutual understanding of the obligations and expectations involved.
  
  
• Tailor the Agreement: Adapt the agreement to suit the specific transaction. Avoid using generic templates that might not cover unique aspects of your deal. Given their importance, general guidance points to enlisting the support of an experienced lawyer.
  
  
• Outline Representations and Warranties: Clearly spell out representations and warranties. These serve as assurances regarding the company's current state and help in risk allocation between parties.
  
  
• Consider Future Obligations: Include covenants or agreements on future behaviour, such as non-compete clauses, that might impact the ongoing relationship post-transaction.
  
  
• Plan for Dispute Resolution: Include a dispute resolution mechanism to address any potential conflicts effectively and ensure smooth handling of disagreements.

Conclusion

Understanding and properly implementing share purchase agreements is crucial for anyone involved in buying or selling shares. By recognising the key features and knowing when to use them, you position yourself to make informed decisions that protect your interests while ensuring a smooth transaction process.

Remember, each step - from thoroughly reviewing all terms and conditions to seeking professional advice - helps ensure a successful agreement.

With these best practices in hand, you're well-equipped to navigate share purchase agreements with confidence. And, if you need a helping hand, you can always reach out to us for support.