A share purchase agreement (SPA) is an agreement between a buyer and seller(s) of a target company, setting out the terms and conditions relating to the sale and the purchase of a specific number of shares in the target company.
When a company’s shares are bought, they represent the purchase of a company’s operating business, without changes to the company’s existing contracts. Suffice to say that the liabilities of the company are also acquired, and this is where due diligence is required.
What is due diligence?
One of the key aspects of a share purchase transaction is due diligence (DD), which involves investigation of the target company’s business, its key people, records and assets. DD is designed to make a buyer aware of any risk that may be associated with the share purchase, as much as it is equally designed to justify the investment value and price of acquisition. However, a robust and in-depth DD investigation cannot be overemphasized, regardless of the size of the target company.
Some key issues, jargon and clauses which need to be understood in a share purchase agreement:
- Warranties – Warranties are statements of fact which sellers can often avoid giving. The principle of ‘caveat emptor’ (buyers beware) applies, so it is vital these are investigated.
- Indemnities – These are strong legal protections for the buyer because the seller must take certain legal responsibilities.
- Price and consideration – This clause states how the share price is satisfied, when the price will be paid, and whether the price is subject to adjustment.
- Tax provisions – Here the buyer is protected from any form of tax liabilities which should have been revealed by DD.
- Restrictive covenant – This will often require that the seller remains working in the business for a set period and may not work for a competitor or set up a competitive business.
Advantages of SPA
- No liabilities for debts – this is to the advantage of the seller who at the point of completion, transfers all debts to the buyer.
- No third-party involvement – A share purchase can be completed without the involvement of a third party.
Disadvantages of SPA
- Inheriting seller’s liabilities – In clear terms, the buyer of the target company’s shares will inherit any liabilities from the seller which exist at the date of sale.
- Risk – Share purchase can be risky in some instances, hence the inclusion of warranties to protect the buyer, and why it is vital to do due diligence.
We can help when it comes to share purchase transactions, whether investing in a limited company or buying or selling the entire share capital of a company.
If you need help with your share purchase agreement, contact Darren Davies, Partner at Hutchinson Thomas, on darren.davies@hutchinsonthomas.com or call 01792 438 000.