Key contracts in UK commercial contract law, Share Purchase Agreements (SPAs) outline the terms and conditions under which the sale or purchase of company shares will take place. These documents ensure that both parties are knowingly clear of their obligations and rights during the transaction. Regardless of whether you are the buyer or seller, like your legal advisor, you must have an understanding of the intricacies of SPAs for the efficiency of the deal.
Our article will provide you with all you need to know. From the purpose, scope and important clauses, to the processes and advantages and disadvantages to be aware of. You will also find guidance on the tax implications to help round off your understanding.
The Purpose of Share Purchase Agreements
A Share Purchase Agreement’s number one objective is to legally formalise the sale of a company’s shares between the buyer and the seller. It documents the final terms of the share transfer, confirming the price and means of this payment, representations, warranties as well as the obligations and rights of all parties involved.
It is more than a contract for the buyer and the seller. Instead, it is protection for both. In drawing up the SPA, both parties have the opportunity to double-check that they are on the same page with the transaction. The idea is that by agreeing to this the risk of a future dispute is reduced.
The agreement also helps to ensure any pre-transaction conditions are carried out. For example, there may need to be shareholder consent or regulatory approval.
Why SPAs Are Crucial
In short, SPAs are necessary for all parties as they provide:
- Clear and transparent terms and conditions for the sale
- Protection of the interests of both parties
- A clear definition of the buyer’s and seller’s roles and responsibilities
- Information on the relevant laws and regulations to help ensure compliance
- Details of possible potential disputes to help pre-empt and avoid issues
The Scope of Share Purchase Agreements
SPAs cover nine details that are essential to the success of a transaction.
1. Sale and Purchase of Shares: Details the number and type of shares being sold and what the agreed price is.
2. Conditions Precedent: Conditions that must be met before the transaction can go ahead.
3. Price and Payment Terms: Details how the agreed price will be paid, explaining the payment structure and detailing any deposits or instalments.
4. Warranties and Representations: Factual statements are documented by both the buyer and the seller, as well as the consequences should these be proven false. Warranties are also added, usually ensuring the company has no undisclosed liabilities or litigation, either ongoing or pending.
5. Indemnities: State the responsibilities relating to certain liabilities, including post-sale claims and debts.
6. Covenants: Sections are dedicated to documenting any actions that both the buyer and seller must agree to undertake after the sale has gone through, such as confidentiality, non-compete clauses or restrictions on the future sale of shares.
7. Post-Completion Obligations: Any duties that must be completed post-sale.
8. Dispute Resolution: Should a disagreement arise, methods are listed to help aid a resolution; for example, mediation and arbitration.
9. Governing Law and Jurisdiction: The type of UK law that will govern this agreement will also be identified.
Key Jargon to Know
If you are looking to draw up an SPA, it is important to be familiar with some common terms:
- Shares – Owned units/proportions of a company.
- Completion – The last step in the process when the shares are transferred.
- Escrow Account – If there are additional conditions that need to be fulfilled in the SPA, the agreed funds are held in this third-party account.
- Due Diligence – Doing your research into the other party to ensure all you have been told is true and there are no hidden surprises with their financials, operations or liabilities.
- Earn-Out Clause – Some SPAs include a provision where extra payments may be made based on the seller’s future performance.
- Restriction of Transfer – Terms that document how and when the shares can be transferred after the transaction.
- Disclosure Letter – A supporting document to the SPA that details any warranty exceptions.
Who Should Prepare the First Draft?
In most cases, the buyer’s solicitors will provide the first draft of the SPAs as they can lay out the key terms required for them to purchase. However, this is not set in stone. A seller’s solicitors may help speed up the process and take the lead with the first agreement; usually, convenience can play a role.
Once drafted, the SPA is reviewed and negotiated. The discussion is between the buyer and seller plus their legal advisors. Representation is recommended as with legal support, both the buyer and the seller can ensure they are aware of the terms before signing.
The Process
The first draft is not the first step in the process. Usually, the purchase of shares takes place in six steps. These are:
- Negotiation: Initial conversations take place between the buyer and seller discussing which shares are for sale, for what price and any key conditions.
- Due Diligence: The buyer is recommended to go away and conduct checks on the company they are buying from, including their operations, financials and their legal standing.
- Creating the First Draft: Now the first draft can be created.
- Review and Amendments: The first draft is checked with legal advisors and any amendments are proposed and agreed upon, such as price, indemnities and warranties.
- Final Agreement: When everyone agrees, the SPA can be signed and executed.
- Transaction Completion: The buyer pays the purchase price and the shares are transferred.
Executing SPAs
To guarantee the agreed SPA is legally binding and that all conditions are met, the execution must involve several steps, including:
- Signing: Both parties must sign with legal witnesses.
- Payment: The buyer pays the agreed sum.
- Transfer of the Shares: The shares and the legal ownership are transferred to the buyer.
- Additional Post-Completion Actions: All post-completion obligations are completed as stated in the SPA.
The Tax Implications
An additional consideration is tax. During the process of buying and selling shares, certain tax implications may be triggered. These include:
- Stamp Duty: Depending on which is higher, stamp duty at 0.5% of the purchase price or market value may be due.
- Capital Gains Tax (CGT): CGT may apply to the seller depending on the circumstances and reliefs available.
- VAT: Usually, share sales are exempt from VAT but considerations should still be made on the VAT implications on the transaction.
Your SPA can be structured to help mitigate these liabilities. Your legal advisor will be able to guide you further as these vary based on the timing and structure of your transaction.
The Advantages of SPAs
These agreements offer several advantages to both the seller and the buyer:
- Clarity and Certainty: SPAs clearly document the transaction’s terms reducing the chance of misunderstandings and disputes.
- Legal Protection: Both the buyer and seller are protected during and after the sale, with the help of warranties, representations and indemnities.
- Flexibility: The agreements can be tailored with custom clauses added if necessary.
- Tax Planning: SPAs can include tax efficiency provisions; for example, certain structures can be used to minimise capital gains tax or stamp duty.
Are There Disadvantages?
These agreements, for the most part, are beneficial; however, there are some drawbacks to be aware of:
- Complexity: Drafting these agreements is complex without legal expertise.
- Cost: There can be significant costs for the legal fees required for drafting, negotiating and executing the contract.
- Time-Consuming: Some SPAs can take time to draw up and agree on, especially if extensive due diligence is required, or negotiations run on.
- Potential Liability: The seller has to be careful not to become liable for post-sale claims, especially if there is a breach of warranties or indemnities.
If you’re in need of an experienced commercial contracts solicitor, look no further. Our legal experts are on hand to help you with the sale or purchase of company shares. We can support you throughout the process, including drawing up legally binding SPAs that take care of your best interests. Contact us today to discuss your transaction, call us on 0300 303 2071 or email us at info@witansolicitors.co.uk.
FAQ
What is the purpose of Share Purchase Agreements?
SPAs are used to formalise the terms between a buyer and seller during the sale of company shares, helping to offer legal protection to both.
How do APAs and SPAs differ?
An Asset Purchase Agreement (APA) provides the same outline of terms for a purchase between a buyer and seller but instead of being used for shares, they are used for the sale of assets, such as property, inventory or goodwill.
How do SHAs and SPAs vary?
While an SPA helps to govern the sale of shares between two parties, a Shareholders’ Agreement (SHA) governs the relationship a company has with its shareholders.
What is the main clause in a SPA?
There are many key clauses, all of which are important, including the sale and purchase, payment terms, warranties and representation, indemnities and dispute resolution.
