How To Draft A Share Purchase Agreement
A Share purchase agreement (SPA) is an agreement that sets the terms and conditions related to the sale and purchase of shares in a company. It’s an agreement where the purchase and sales of share constitute. Basically, its an agreement between purchaser and seller of the shares of a company with few terms and conditions. These kind of transactions are very common in day to day operating business of a company. The share purchase agreement can be done with a single buyer or multiple. There are no such fixed terms and conditions to follow set rules while doing SPA. It can be long, detailed, short, conditional, complicated, two-party, or multi-party. There are certain fundamentals of the transactions which should be kept in mind while drafting Share Purchase Agreements.
Who Needs a Share Purchase Agreement?
Everyone who is purchasing or selling shares in the company with another person or corporation, then they should do proper legal SPA. It’s necessary to draft a share purchase agreement to avoid any complications in the future regarding terms and conditions. In case of any dispute, and to say evidence in the court share purchase agreement plays an important role.
Types of Shares and information in a Share Purchase Agreement
A share purchase agreement contains all the information about the shares which were transferred, the details of seller and purchaser, laws related to the agreement, the kind of shares being sold, and a number of shared sold and consideration. The agreement also contained the details of how much payment has been made and what is pending.
There are two kinds of 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.
Advantages of SPAs
There are certain advantages of Share -Purchase Agreement:
- The buyer will have to interact with the seller of shares of the company. Company other employees, shareholders, or directors remain unaffected with that step. So, a share sale can be completed without any involvement of the third party.
- Once the share of a company has been sold by the seller, he will have no liabilities regarding the business, and it will become responsibilities of a new owner
- It helps in executing and formalizing the share sales in a legal and organized way.
- Share Purchase Agreement cover a detailed explanation about the transaction, which helps to avoid any unnecessary confusion.
- It protects the sellers by doing everything legally, in case they are cheated or duped.
- It helps authorities in the maintenance of track of all such transactions and therefore enforcing them.
- It also helps companies to keep track of shareholders so; then they can include them in their decision-making process.
Disadvantages of SPAs
- The buyer will have to deal with all problems like payment of outstanding tax bills etc. which was due on the part of the seller.
- Purchasing of seller involves great risk. Warranties shall be mentioned in the agreement to protect the buyer.
How to draft a share-Purchase agreement:
These are the following points which need to be kept in mind while drafting a Share Purchase Agreement:
- Detail about the Parties In agreement, its necessary to provide details of the parties whether it’s between companies or individual Parties to the agreement
- Recitals The background of the transaction should be mentioned clearly in the recitals with no defect to identify and set the relationship between the parties, the purpose of the transaction, and the role of the parties.
- Definitions and Interpretation: Whatever terms are mentioned in the Share Purchase Agreement, it should be defined at the beginning of the agreement only. So, definitions and interpretations are a very important part of the share purchase agreement.
- Consideration: Consideration for selling of share must be mentioned in the Share Purchase Agreement. And it is also necessary to mention that whether all payment has been done or anything pending. What was the mode of payment, etc.
- Conditions Precedent: The conditions precedent clause shall be exhaustive, providing for all permissions, authorizations which are necessary. It should contain all the representations, warranties, execution of agreements, obligations, etc..
- Closing: The Closing date should also be mentioned regarding all the dates for the exchange of documents, listing of actions, a board of resolution, etc..
- Covenants by the parties: Covenants can be negative or positive, and it provides a comfort level to each of the parties on their past and proposed actions regarding the SPA. It is required to manage the company.
- Vendor’s Representations and Warranties: The status of the company in the market needs to be clearly mentioned. The capital structure of the company, including a list of directors, shareholders list should be mention. In addition to this, it also provides all the requisites detail regarding the seller title, disputes, financial, etc..
- Obligations pre and post-closing: This clause protects the interest of the parties. Few warranties end after closing, but few continue to post-closing even.
- Confidentiality: This clause is very important, especially when parties exchanged confidential information. It’s also necessary to mention that all terms of an agreement are confidential, and all data exchanged during this transaction are confidential and cannot be revealed without any prior consent, and it’s applicable to both the parties.
- Indemnification: Indemnification clauses can be negotiated regarding the limit on a claim, subject matter, time period, tax disputes. It also provides reimbursement claim process
- Notice: The notice clause is generally ignored, but it’s important. Location and the manner in which notice can be sent should be mentioned. The complete address is necessary.
- Force Majeure: it’s a standard clause and usually put in every agreement that what kind of action can be taken during the sudden financial crisis or other problems.
- Dispute Resolution and Arbitration Arbitration is the first choice for any dispute resolution in India under the Arbitration and Conciliation Act. The language can be chosen for arbitration. Place of seating can also be chosen in the agreement.
- Jurisdiction & General Clauses: Jurisdiction of the court shall be mentioned in the case of any dispute arises in the future related to the agreement. Its always better to clarify in the beginning only.
Following steps both parties should take to validate the agreement: completion (singing of the agreement), there are a few steps the buyer will need to take:
- Stamp duty shall be paid for the agreement. payment of stamp duty
- All the notices of secretaries, auditors, directors, appointment & resignation at Companies House, and
- Target company integration
- After completion, the seller of the shares must handover share signed transfer form to the buyer and receipt of the consideration received.
- The company requires to give a new share certificate to the buyer as per new shareholding and shall cancel the old share certificate of the seller.
- A letter of resignation must be hand over to the buyer if the seller resigned from the company.
A Share purchase agreement is a private document. The drafting of a share purchase agreement shall be done by an expert lawyer who has good understanding of agreements. It can be modified as per requirements. Agreement shall must be stamped and signed by both the parties.
Download Share Purchase Agreement FormatDownload-Share-Purchase-Agreement-Format