If you are considering buying or selling a business, the usual way to do it is through a sale of the company’s shares (assuming the business is run as a company).
It is common practice for the potential buyer to obtain a professional valuation and draw up a comprehensive contract, known as the share purchase agreement, before agreeing to purchase shares in a private company. The parties will then negotiate with a view to settling on the price for the shares and other terms of the transfer.
Summary
- What is a Share Purchase Agreement?
- The Importance of Due Diligence
- Making a SPA Claim
- How We Can Help
- FAQ
What is a Share Purchase Agreement?
A share purchase agreement (SPA) is a legally binding document between the buyer and seller in the sale of a company’s shares. It is a key document that offers legal protection for both parties to the transaction and ensures that the sale is carried out fairly and transparently.
What Should a Share Purchase Agreement Contain?
A SPA should typically cover the following key areas:
- the price the buyer will pay for the shares
- the number and category of shares being sold
- payment terms for example, how much and when the buyer will pay for the shares
- representations and warranties, i.e. statements made by the seller concerning the company’s financial, legal and operational status
- undertakings made by the seller to the buyer to complete certain actions or refrain from doing specific things
- conditions that must be met before the sale can be finalised, such as regulatory approvals or consent to carry on the business
- provisions that protect the buyer in the event the seller breaches the agreement
Why are Share Purchase Agreements Needed?
The purpose of a share purchase agreement is to formalise the seller and buyer’s agreement regarding the sale and purchase of shares in a company. It makes sure that both parties are on the same page and reduces the risk of disputes or misunderstandings.
It is a crucial document in any share acquisition transaction because it sets out the scope and terms of the agreement so that both parties understand their rights and liabilities resulting from a transfer of shares.
Creating Share Purchase Agreements
The buyer’s legal advisor will usually draw up a draft SPA as they will be most concerned that the SPA adequately protects the buyer against post-sale liabilities. The terms of the SPA will then be negotiated between the parties and the seller may also seek legal advice and make revisions to the agreement. Once this process and the due diligence have been completed, the parties each sign the SPA.
It is definitely a good idea to seek legal advice when drafting or negotiating a share purchase agreement; a lawyer can assist you in ensuring that the contract is legally binding and safeguards your interests.
The Importance of Due Diligence
Before a share purchase agreement is drafted, the buyer must collect as much information about the target business to understand what they are taking on. This is known as due diligence.
Due diligence is typically a thorough investigation into the condition of the target company, which is undertaken before completing the purchase of shares. The buyer will request information and documents from the seller that will allow them to learn more about the target company’s products, values and prospects. It should also help them to identify any risks, liabilities and business problems.
Due diligence is important because of the principle ‘let the buyer beware,’ which applies in English law. This means that any issues with the target company will be for the purchaser to deal with post-completion because they acquire the target with all its problems, including debt and legal claims.
As a result, carrying out a robust due diligence process protects the buyer from striking a poor deal that may hide some nasty surprises. It will influence whether the buyer wants to proceed with the share purchase as well as determine what issues need to be negotiated in the share purchase agreement, such as the price that the buyer is willing to pay, any matters that need to be resolved for the sale to go ahead and any protections that need to be sought.
Due Diligence Checklist
Some of the key areas that should be considered as part of a buyer’s due diligence process to make sure it is a sound investment are listed below:
Finances
This includes looking at trading data, balance sheets and the financial forecast for the company. Some things to consider include; company accounts and statements that show cash flow and profit and loss as well as annual reports, payroll, loans, VAT statements and tax liabilities.
Legal
This involves checking that the company is compliant with its legal and regulatory obligations and has all the consents needed to carry on the business and/or sell it. It can include areas such as tax returns, insurance policies as well as any claims made, permits and licences, health and safety and any litigation issues
Operational Structure
The third area of due diligence is investigating the business’s strengths and weaknesses, including people, supply chain, processes, sales, marketing and IT.
Employees
It is crucial to look at employee data, such as the number of staff on payroll. As part of this, it would also be worth assessing employee contracts, job roles and salaries, company policies and handbooks, benefits such as pension plans and complaints or compensation claims from employees
Transferring Shares in a Company
After due diligence has been carried out and the share purchase agreement has been agreed upon and signed, the buyer or both parties will apply for the consent and approvals required to satisfy any conditions in the SPA.
Once the conditions have been satisfied, the last step in the process is the transfer of the shares. The parties will lodge the shares transfer form and file the documentation at Companies House. This results in the buyer becoming the owner of the shares that formed part of the sales transaction.
It is important to note, however, that unless it is provided to the contrary, the term ‘transfer’ in the company’s articles of association refers only to the transfer of the legal title to the shares – not to the transfer of an equitable interest. This can have significant consequences concerning the restrictions on the transfer of shares.
Restrictions on Share Transfers
In theory, a shareholder has the prim facie right to transfer their shares to anyone they want, when they want. However, shareholders or private companies will often want to control the admission of new shareholders to the company, especially if this could have an important impact on the management or control of the company.
For this reason, it is common practice in such companies, to restrict or qualify the shareholders’ rights to transfer their shares. These restrictions are usually incorporated in the company’s articles of association or the shareholders’ agreement. Common restrictions include the directors’ right to refuse to register a transfer of shares and pre-emption clauses, which oblige the shareholder wishing to make the transfer to first offer the shares to existing shareholders or certain specified people, such as the directors.
Making a SPA Claim
Despite the best intentions and careful drafting, disputes can arise during or after the signing of an SPA. The types of SPA disputes that can arise between the parties include the following:
- Breach of Contract
- Misrepresentation
- Breach of Warranty Claims
- Non-Payment or Payment Disputes
- Non-Compliance with Regulatory Requirements
Such disputes can be resolved through negotiation, alternative dispute resolution or litigation. The best method will depend on the nature of the dispute and what the parties involved prefer.
How We Can Help
Our solicitors are skilled at handling share purchase transactions and will ensure you get the best deal possible.
Our experienced team provides comprehensive due diligence services so that you can make an informed decision before finalising the purchase. We can also draft share purchase agreements meticulously, with attention paid to every sentence. In addition, we will negotiate on your behalf to ensure your best interests are protected, whether you are a buyer or seller entering into a share purchase agreement.
To discuss how we can assist you, email us today.
FAQ
Who prepares the shares purchase agreement?
Usually, it is the buyer’s solicitor who prepares the initial SPA. The seller’s solicitor will then revise it and advise their client on the terms and conditions. Both parties will negotiate until a final agreement is reached.
What issues should a share purchase agreement address?
The SPA must identify the buyer and seller, provide a description of the number and type of shares being sold, and the purchase price, payment terms and the closing date of the process.
It should also include representations and warranties, which assure the accuracy of information provided as well as promises made by the parties to perform or refrain from certain actions during the transaction. It may include conditions that must be satisfied or waived before the transaction can proceed and a termination provision that allows parties to end the agreement where certain conditions are not met.
What is a share purchase agreement’s role in a merger and acquisitions?
A share purchase agreement is an agreement used to acquire some or all of the shares of a company, allowing the buyer to gain a minority or majority stake in the target company.
It is the last step of an M&A process and involves the agreement to purchase shares being finalised after the due diligence process has been completed and the buyer has evaluated the company’s current condition.
What is the difference between a shareholders’ agreement and a share purchase agreement?
A shareholder’s agreement is a contract between the shareholders of a company that sets out their entitlements and responsibilities. A share purchase agreement is a legal document used when buying or selling company shares.
Is it necessary for the seller to give warranties on the sale of a business?
It is customary for the seller to give some form of assurance to the buyer relating to the assets and liabilities of the company. This is done in the form of warranties and indemnities in the share purchase agreement.
The buyer takes over the existing and contingent liabilities when they buy the business, including those liabilities that might not be obvious at the time of purchase. For this reason, the buyer will seek warranties and/or indemnities to protect them from any unforeseen business-related issues that could arise in the future.
