Everything you need to know about share purchase agreement

A Share purchase agreement (SPA) is a type of agreement under which terms and conditions are set out in relation to sale and purchase of shares in a company. It is mainly a contract of sale and purchase of share capital of the company. Under this, buyer is liable to pay certain amount i.e. Purchase price and thereafter share purchase agreement is executed. There is a requirement to review stamp duty under the relevant jurisdiction. This agreement shall be signed by both the parties i.e. seller and purchaser. Share purchase agreement consist the clauses which deals with the purchaser’s rights & obligations in the capacity of shareholder.

Core Elements of Share Purchase Agreement

Ø  Description of the shares to be acquired

Ø  Purchase Price

Ø  Representation & warranties

Ø  Obligation regarding Confidentiality

Ø  Non-Competition

Why there is a need of Share Purchase Agreement?

Share purchase of a company constitutes that shareholders are the owners of the company. At the time shares are purchased, no existing contract is altered. In case shares are sold by the shareholder in a company then there is a break of relationship between the company and the shareholder.  Share Purchase Agreement defines the terms & conditions between the company and shareholder.

Following below mentioned matters will be dealt under share purchase agreement:

1.     Parties to the Share Purchase Agreement

This type of agreement comprises seller & acquirer.

2.     Recitals

Recital of an agreement defines the relationship among the parties. Object and roles of the parties are also defined there under.

3.     Share Transfer

Whenever share transfer takes place in a company, ownership will pass to the transferee. There will be description of rights & liabilities of the transferee.

4.     Condition Precedent

There must be an exhaustive clause which will provide necessary permissions & permits. It should clearly state the person responsible for obtaining each.

5.     Confidentiality

There should be clause which will be regarding confidential information shared among the parties involved.

6.     Force Majeure

This clause is applicable in case of unwanted situation arise such as financial crisis. It strengthens the interest of parties involved in agreement.

7.     Dispute Resolution

In case of any dispute among the parties, it shall be referred in arbitration to resolve dispute.

8.     Jurisdiction

There will be an applicability of Indian laws where the registered office of the company is situated.

Advantages of Share Purchase Agreement

1.     No involvement of third party

Shares can be purchased without the intervention of any third party. Therefore the process of share purchase is much distinct in comparison to asset purchase.

2.     No liability for debts

There will be no liability of seller of shares for the company’s debts. As company has a separate legal personality from its directors and shareholders. Whereas in comparison to asset sale, all the current liabilities will be kept by the seller, unless negotiations have been made with the buyer to take them over with the business

Disadvantages of Share Purchase Agreement

1.     Inheriting outstanding problems

Seller’s company will be inherited by the buyer which implies that problems will also be inherited which is in existence at the date of sale.

2.     Risk

There is an involvement of greater risk in comparison to asset purchase as buyer inherits a company. Warranties are also there which are required to protect the buyer.

Source url - http://enterslice.over-blog.com/2018/07/everything-you-need-to-know-about-share-purchase-agreement.html

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Share Purchase Agreement

Share purchase is an agreement between the sellers (Company) and buyers (Shareholders) of the shares that confer rights and impose obligations over and above those provided by the regulatory laws.

The Share purchase agreements provide for matters such as restrictions on transfer of shares, forced transfers of shares, nomination of directors for representation on boards, quorum requirements, majority rights available to certain shareholders at the board level or the shareholder level.

Why is a Share Purchase Agreement Important?

Share purchase agreements are important because it sets out all the terms of sale into writing which prevents misunderstandings.

Benefits of entering into Share Purchase Agreement

·       Share purchase agreement provides specific information on the transfer of shares and rules governing the transfers.

·        Executing agreements allows businesses to raise revenue for the organization.

·        Share purchase agreement explains special tax treatments the shareholders may receive for the transfer.

·        Executing share purchase agreements allows the purchaser to claim dividends on their investment.

·        A dispute over various issues could be resolved between the purchaser and seller by executing share purchase agreement.

Clause of agreement

It is essential that some consideration be given in deciding the terms of agreement. Your share purchase agreement should contain at least some of the following provisions:

1.Information And Inspection Rights:

The shareholders should be given the right to have access with the information related to company’s financials.

In addition to the information and materials to be provided, shareholders should be provided with the right to visit the office for inspection at its own cost

2.Nomination of Directors

The holders of certain percentage of shares should be given the right to nominate Director on the Board or any committees of Board

3.Management related matters:

The holders of certain percentage of shares should be given the right to make the decisions with respect to control of the management like setting up the quorum for the board and shareholders meeting, passing of board and shareholders resolutions.

4.Representation & Warranties 

While executing the agreement the company should set out some of the representation-

§  like the agreement is legal, valid and binding;

§  the company will notify of any material changes made in the agreement or

§  approvals for the execution of share purchase agreement have been obtained from the Governmental Authorities 

5.Right of first refusal

Entering this clause in an agreement is useful in case where the existing shareholder in the Company decides to leave, other shareholders will have the option to purchase the shares before they're sold to the outsiders.

6.Buy-back Rights: 

These give the company the right to claim back the shares of a certain shareholder on withdrawal or death of the shareholder.

7.Liquidation preference

The same clause used by venture capitalists in their term sheet, should also be a part of share purchase agreement where on the occurrence of an Exit Event of the company, the proceeds will be distributed first to the Investors before the other shareholders in order to recover their investment.

8.Exit Options

The Company shall provide an exit option to the Investors in the agreement.

9.Confidentiality

This is the most important clause of any agreement which clearly spells out that contents of the Transaction Documents shall not be disclosed to any outsider without their knowledge and consent. In case if disclosed under the requirement of law/regulation or any order of any court/ authority, it should be clearly specified in the agreement.

It is to be mentioned that the above clause of share purchase agreement are not exhaustive and totally varies according to the industry.

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