Key provisions of the Share Purchase Agreement include warranties, guarantees, indemnities, and covenants. Read on to learn how they protect buyers in an SPA.
A Share Purchase Agreement (SPA) is a binding legal contract between a seller and a buyer. In the contract, they could be referred to as the seller and the buyer. The contract is evidence that the sale and its conditions were mutually agreed upon and the covenant clause in a share purchase agreement is a very important clause in the agreement. The agreement contains all of the finalised terms and conditions that apply to the sale and purchase of company shares. A share purchase agreement includes the following elements:
- Company name
- Share value
- Purchaser name
- Purchaser and seller’s representations and warranties
- Incentives and benefits for employees
- Quantity of shares being sold
- Details of the deal
- Agreement for unforeseen expenditures’ indemnification.
Letter Of Intent
A letter of intent is created before the agreement is finalised. The buyer must exercise due diligence to confirm that the terms of the purchase agreement and the letter of intent are the same. The sale and buy parts as well as the warranties and representations sections must be carefully read by the seller.
The selling and purchase conditions should be the same as those in the letter of intent. Any differences that arise from the buyer’s due diligence must be worked out before the share purchase agreement is finalised.
You also need to check the warranties and representations to make sure there aren’t any inaccuracies. If something occurs and is later found, there may be legal action and other proceedings. In the event of any misrepresentations, the seller may be required to make certain changes to the purchase price.
Conditions Mandating A Share Purchase Agreement
A share purchase agreement must be made whenever a company or person buys or sells shares to another company or business. For instance, in a partnership with two partners, the other partner can purchase the shares through a share purchase agreement if the first partner leaves the company. It describes all the terms and conditions related to the purchase of a company’s shares and serves as legal proof of the purchase of shares.
Clauses of a Share Purchase Agreement (SPA)
The share purchase agreement has many clauses, all of which are important. The important clauses are as follows:
Parties To The Agreement
The seller and the buyer are considered to be the parties. The only exception is where the parties are corporations that were formed exclusively to carry out the SPA. To secure adherence to the contract in these situations, the leaders of the substantive companies must be added as covenanters or guarantors.
Recitals
In the recitals, the facts of the transaction must be laid clearly, and the relationships must be stated. It is also necessary to clarify the purpose of the transaction and the roles of the participants.
Definitions and Interpretations
This is critical because definitions provide the agreement’s specific words and phrases along with their context and significance.
Consideration and Sale of Shares
A detailed analysis of payment requirements is provided in this section.
- The money to be paid as a deposit at the time of execution.
- The sum must be paid at closing.
- The amount escrowed is to be used as a counterpunch to indemnities and breaches of warranties and representations.
- The payment due if a security interest is filed against a firm.
If the payment is made in installments, the details for each payment should be clearly stated.
Conditions Precedent
This section needs to be thorough, mentioning all authorisations, permissions and permits required (both internal and external), as well as who is in charge of securing each one.
Closing
The acts that will take place on the closing day, such as the board resolutions that must be passed, should be listed in a closing memorandum, which should be included.
Conditions Subsequent
This clause is rare. The conditions that follow do include some permits and requirements. If any of the ensuing conditions are broken, the buyer must be provided with protection.
Covenants by the parties
Covenant clauses in SPA provide protection to both parties. When it comes to running the business between signing and closing, the buyer needs it from the seller.
Buyer’s Representations and Warranties
The buyer’s rights, capacity to make the payment, and ability to enter into further agreements are all covered here. The buyer’s corporate status is also mentioned if the buyer is a corporate entity.
Obligations pre and post-closing
They are similar to the representations and warranties clause, but included to safeguard the parties’ interests.
Confidentiality
When listed corporations are involved and secret information has been traded, it is significant to add the confidentiality clause. The provision is valid for between 18 months and two years.
Indemnification
This provision is heavily negotiated. This section, which is sometimes the subject of the most scrutiny, also outlines the claims reimbursement procedure.
Notice
It is necessary to specify the venue, the mode of delivery, and whether the parties are prepared for electronic notices or not.
Dispute Resolution and Arbitration
According to a decision by the Supreme Court, the Arbitration and Conciliation Act governs domestic arbitration where both parties are located in India.
Jurisdiction & General Clauses
The relationship terms that define the parties’ relationship and the assignment clauses, which cannot be interpreted in any other way, must be given priority. These are the key provisions of the SPA agreement. These clauses protect both the buyer’s and the seller’s rights.
How Does The Covenant Clause In A Share Purchase Agreement (SPA) Safeguard The Buyer?
The purpose of the covenant clause in SPA is to safeguard the rights of both buyer and seller by imposing compensation on the breaching party of the contract.
The covenants, which can be either positive or negative, are intended to prevent the buyer from taking certain actions that the seller may take between the time of signing and the agreement’s closure (and vice-versa). A covenant may be made to commit on doing something positive or to forbid someone from doing something negatively. The parties cannot take certain actions before or after the closing date due to restrictive covenants. The seller is bound by the restrictive covenants’ use.
The purpose of the restrictive covenants is to de-stimulate the parties if Covenant clauses in SPA are broken. They function as a risk-allocation tool. If the covenant is broken, the violating party must compensate the non-breaching party financially.
Conclusion
This covenant clause in SPA aims to safeguard the interests of both parties by limiting the buyer’s and seller’s ability to take actions that would jeopardize the other party’s rights under the agreement. Covenants can be classified as either “negative covenants” or “restrictive covenants” depending on their intended use. If one of the parties breaches the covenants, the non-breaching party is entitled to compensation from the violating party. It is very important that all the necessary details and specifications of the covenant clause in SPA are laid down properly. Therefore, you might need expert legal assistance to avoid any future problems. Our experienced legal experts at Vakilsearch can be your best bet to make your SPA agreement pitch perfect and help your share transaction be seamless & hassle-free.
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