Introduction
In mergers and acquisitions, ownership of a company is frequently transferred through a share sale rather than an asset sale. The Share Purchase Agreement (SPA) is the binding contract that formalizes this transfer. An SPA does more than record the purchase price—it carefully distributes risk, defines obligations, and sets out remedies if things go wrong. For both buyers and sellers, a well-drafted SPA is fundamental to protecting commercial interests and minimizing post-completion disputes.
What is a Share Purchase Agreement?
A Share Purchase Agreement is a legally enforceable contract under which a buyer acquires shares from an existing shareholder. By purchasing shares, the buyer obtains ownership of the company together with all its assets, liabilities, contractual rights, and regulatory obligations. Unlike an asset purchase, where only selected assets and liabilities are transferred, a share acquisition transfers the company as a whole. Consequently, thorough documentation and risk allocation are essential.
Structure of a Share Purchase Agreement
An SPA is typically divided into structured sections that collectively define the transaction framework.
1. Preliminary Clauses
These clauses establish the interpretational foundation of the agreement.
Parties
Identifies the buyer(s) and seller(s) with legal precision.
Recitals
Provide background context and outline the commercial rationale behind the transaction.
Definitions and Interpretation
Define key terms used throughout the agreement to prevent ambiguity and ensure clarity in enforcement.
2. Operative Provisions
These clauses form the commercial core of the SPA.
Sale and Purchase
Specifies the shares being transferred, including class and number, and binds the seller to sell and the buyer to purchase.
Consideration
Details the purchase price and payment structure, which may include:
- Lump-sum payments
- Deferred consideration
- Earn-outs linked to performance
- Completion account adjustments
Completion Mechanics
Outlines the process for closing the transaction, including payment procedures, transfer forms, board approvals, and delivery of share certificates.
3. Conditions Precedent
Conditions precedent (CPs) are events that must occur before completion. These may include:
- Regulatory approvals
- Shareholder or board consents
- Lender approvals
- Completion of satisfactory due diligence
If these conditions are not fulfilled within the agreed timeline, either party may have the right to terminate the agreement.
4. Representations and Warranties
Representations and warranties are assurances provided by the seller regarding the company’s condition and compliance status. They serve as both disclosure tools and risk allocation mechanisms. Common warranty areas include:
- Accuracy of financial statements
- Absence of undisclosed liabilities
- Status of litigation
- Compliance with applicable laws
- Validity of key contracts
- Tax compliance
If these statements prove inaccurate, the buyer may seek compensation, subject to agreed liability caps and time limits.
5. Indemnities
Indemnities provide specific protection against identified risks. They typically offer stronger protection than warranties because they allow direct recovery for defined losses. Common indemnities cover:
- Pre-completion tax liabilities
- Ongoing disputes or litigation
- Regulatory penalties
- Known contingent liabilities
Indemnities are often negotiated separately from warranty claims and may have distinct financial thresholds.
6. Covenants
Covenants regulate conduct before and after completion.
Pre-Completion Covenants
Require the seller to operate the business in the ordinary course until closing, preserving company value.
Post-Completion Covenants
May include:
- Non-compete obligations
- Non-solicitation of employees or customers
- Transitional support arrangements
- Confidentiality commitments
These clauses safeguard goodwill and business continuity.
7. Boilerplate Provisions
Though standardized, boilerplate clauses are legally significant. They typically include:
- Governing law and jurisdiction
- Dispute resolution mechanisms
- Confidentiality
- Entire agreement clause
- Notice procedures
- Amendment and waiver provisions
These ensure procedural clarity and enforceability.
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Ancillary Documents Supporting the SPA
An SPA is usually supported by supplementary documents that refine risk allocation.
Disclosure Letter
The disclosure letter qualifies the seller’s warranties by disclosing exceptions and known risks. Matters properly disclosed cannot later form the basis of a warranty claim. This document plays a central role in balancing liability exposure.
Tax Deed (Tax Covenant)
A tax deed provides specific indemnity protection for pre-completion tax liabilities. It often offers broader protection than general tax warranties and may not be subject to the same financial caps. This ensures that buyers are shielded from historical tax exposures.
Risk Allocation in Practice
At its core, the SPA is a negotiated risk allocation framework.
Buyers typically seek:
- Broad warranties
- Robust indemnities
- Higher liability caps
- Extended claim periods
Sellers often negotiate:
- Financial caps on liability
- Time limitations for claims
- Materiality thresholds
- Comprehensive disclosures
The final agreement reflects the commercial bargaining power of the parties.
Conclusion
A Share Purchase Agreement is a sophisticated legal instrument that underpins the transfer of corporate ownership. Its strength lies in precise drafting, comprehensive disclosures, and balanced risk allocation. Understanding the interaction between warranties, indemnities, conditions precedent, disclosure letters, and tax deeds is essential for structuring a legally secure and commercially sound transaction. Whether acting as buyer or seller, careful negotiation and professional legal review remain indispensable to ensuring a successful share acquisition.