Share purchase agreement is a legal agreement/contract between the shareholders and the company at the time of purchasing the company's shares, which includes data such as an investment, allotment, lock-in period, investment terms, and so on.
In most share purchase agreements, the buyer is expected to take over the entire or a large portion of the company’s business. In this case, the buyer would be purchasing not only the company’s assets but also its liabilities. As a result, before engaging in such a deal, any potential buyer should conduct a thorough analysis of the company.
As a result, before investing in a company, a possible buyer would conduct due diligence on it, making it the first stage in the process. Due diligence would differ depending on the target company’s type, size, and activities. Due diligence usually involves examining the company’s business transactions, permits, licenses, authorizations, agreements, obligations, assets, borrowings, and so on. This would provide the buyer with a good picture of how the company operates as well as any potential problems that may arise in the future.
This will also help in deciding the price at which the company’s shares can be purchased. In addition, the due diligence findings would be addressed in the Share Purchase Agreement. Any action that the company or the sellers must take in the near future will be stated. Similarly, any anticipated obligations would be listed, with the sellers providing an indemnity.
What Is the Purpose of a Share Purchase Agreement?
A share purchase agreement should be used when a company or individual is buying or selling shares in a company with another corporation or individual. For example, if a company has two equal-share partners and one of them leaves, a share purchase agreement can be utilized to buy their shares in the company. Instead of purchasing all of the shares, purchase of a business agreement can be employed.
Before drafting a share purchase agreement, the parties should first negotiate and prepare a term sheet that outlines the major provisions of the agreement. This would make drafting and negotiating the share purchase agreement easier because all of the material terms would already be agreed upon by the parties.
What Information and Share Types Are Included in a Share Purchase Agreement?
A share purchase agreement includes information concerning the company for which the shares are being transferred, the seller and purchaser of shares, the applicable law, the type of shares being sold, and the number and price of shares being sold. This agreement also contains payment information, such as whether a deposit is required, when the whole payment is due, and the agreement’s expiration date.
Shares are usually defined by two categories of classes and shares. The two most important are voting and not voting. Voting shares allow shareholders to express their views on board of director decisions and corporate policy. Non-voting shareholders have no say in changes to the board of directors or business policies.
What Does a Stock Purchase Agreement Cover?
The stock purchase agreement covers interpretation by providing definitions for all terms used in the agreement. The sale and purchase of shares are also covered, including price modifications, tooltips of the purchase price, and how to settle disputes. All of the statements that the buyer and seller sign and claim to be true are included in the buyer and seller’s warranties and representations. Employee-related issues are also addressed, such as the terms of their benefits and how accrued bonuses are handled.
Details on any indemnifications that the buyer or seller will provide will also be mentioned, which will cover any costs that may arise after the transaction as a result of conditions that existed before the deal closed. The agreement also specifies any special tax treatment that the buyer or seller may be entitled to.
If you need assistance with a share purchase agreement, you can contact Vakilsearch’s experts for clarification and to create one.
Common Clauses in a Share Purchase Agreement
Normally, there will be two parties; but, if the shares are owned by multiple people, each shareholder will be required to sign the agreement. Where there are many parties, however, attorneys may include their information on a separate schedule to the agreement.
In some cases, the fulfillment of the share purchase agreement may be conditional on the acquisition of specific items, such as tax clearances or regulatory approval; in such cases, a condition precedent would generally be included in the agreement.
Agreement to Sell and to Purchase the Shares
This clause is usually quite brief, but it protects the buyer’s interests by ensuring that he receives good and valid ownership of the shares he is purchasing.
Price and Consideration
Several additional issues should be addressed in the purchase price requirements, including
- How the price will be fulfilled
- When the price must be paid, and
- If the price is a fixed sum or subject to a price adjustment system.
The completion mechanics might be complicated because the parties must agree on timings, place of completion, activities, and what will be provided at the end. All post-completion formalities (such as stock transfer paperwork, share certificates, board approvals, and the company’s statutory books) are usually included in the completion mechanics.
This is also known as a tax covenant, tax indemnity, or tax deed, but the purpose is the same: it protects the buyer from any tax liabilities that may not have been disclosed during due diligence.
Since both parties will disclose confidential information in most transactions, it is normal practice for the share purchase agreement to contain confidentiality provisions addressing these issues.