If you are looking to sell shares of your company, you will need to have a Share Purchase Agreement (SPA) in place. It is a document that provides clear terms and conditions for a buyer to purchase the shares. If you plan to sell your company at a later date, you will also need to submit any SPAs to potential buyers as part of the Due Diligence process.
The most important thing to remember about an SPA is that it is a legal contract. You’ll want a trusted lawyer to help you draft a solid agreement that protects your interests, whether through proper representation or NDA clauses.
While this may not seem overly complex, there are many potential components to a share purchase agreement. You may not use every section or clause listed here, but it’s important to fully understand your options. Crafting a comprehensive and detailed SPA is often the best way to stay compliant and build trust with your buyers.
What are the components of this agreement?
Although a share purchase agreement sounds like a straightforward document, it involves more than just the share sale and purchase price. These agreements are legal documents designed to ensure there are no loopholes or vague provisions.
There are several components to a share purchase agreement. You will need separate clauses for the following aspects, in order:
- Agreed-upon definitions - Some words could be vague or open to interpretation. To prevent this from happening, try to include descriptions of the most important and frequently-used terms to avoid confusion.
- Sale and purchase of shares - You may be familiar with this section of the SPA, which details the number of shares up for sale, the rights, title, interest acquired related to the shares, the purchase price, and how to pay for the purchase. You should also include the time and place of the transaction.
- Purchase price adjustments and earn-outs - Provide price adjustments to assure the buyer that the value will not change between the evaluation and transfer date. Typically, you will determine which evaluation method to use and adopt similar accounting methods to ensure that the valuation is consistent. If applicable, you can include earn-outs, which are additional payments made after closing a deal.
- Escrow - If you plan to have a third party involved in holding the funds or assets until the transaction is complete, you will list important information about that arrangement here.
- Material adverse effect - Also known as an MAE, the material adverse effect is a safeguard for the buyer if they acquire a negative impact due to the transaction.
- Conditions precedent - The closing conditions, also known as conditions precedent, must have been met before you can finalize a sale.
- Representations and warranties - This section should include details about your business, assets, liabilities, and other vital information. The primary purpose of this section is to prevent claims against misrepresentation. While this is not a mandatory component, it can safeguard sellers and inspire trust from buyers.
- Indemnification - These clauses deal with liability for losses due to misrepresentation or breaches of the rest of the SPA.
- Pre-closing covenants - This clause limits what a seller can do before the transaction is complete; the buyer usually sets out certain conditions to prevent asset value fluctuations while negotiating the sale.
- Termination rights - Termination clauses allow either party to end the transaction and terminate the agreement for several specified reasons.
- Ancillary documents and agreements - The seller and the buyer usually provide additional information when the SPA is signed. These documents could include non-disclosure or non-compete agreements, board minutes, guarantees, and other related documentation.
Depending on your needs and the buyer’s preferences, you may add additional documentation or provisions. You will also need to consider a choice-of-law clause to ensure that the interpretation of your contract is valid.
What makes a good and compliant agreement?
A “good” SPA will hinge on your specific needs. Not every share purchase agreement is the same, but it should be compliant.
A general rule to ensure that your SPA is compliant is that the more information provided, the better. Here are some best practices to follow:
- Your company’s lawyer should draft the agreement, which the buyer’s representative should approve.
- Keep minutes of every meeting to ensure that you have documented all decisions.
- Include clauses that protect both parties from potential losses.
- Keep your representation information consistent with the rest of your company materials.
Example Share Purchase Agreements
If you are on a tight deadline or simply want an example, you can review the SEC’s Edgar database, which provides sample SPAs. Some examples of share purchase agreements include:
These three examples have sections with definitions, share information, representation, warranties, other vital aspects, and copious supplementary documents. Ultimately, while share purchase agreements are complex, they can also be flexible.
In short, a share purchase agreement is not just for the buyer. It is a document that can serve as evidence for your internal due diligence process and protect your own company’s interests.
Putting together a SPA may be a time-consuming process, but it is critical if you plan to expand your company and sell shares. Try one of the examples provided as a starting point and go through the list of essential components to make sure you have all your bases covered.