The concept of investing in shares may seem exciting but there's a lot to learn. Read on to find out more about share purchase agreements and what they cover!
A share purchase agreement is drafted when you buy shares in a company. The company is in control of the shares and how it’s managed. But you can buy shares as an investment. If you want to own a part of a company but not be involved with the day-to-day management, then purchasing shares is the only option. This blog discusses about share purchase agreement clauses in detail.
What Is a Share Purchase Agreement?
A Share purchase agreement is a business deal between a seller and a purchaser in the form of an agreement. If a purchaser and a vendor agree to a sale, they may refer to the contract as a “share purchase agreement.”
What Does a Share Purchase Agreement Cover?
The list of terms and conditions that are settled during the sale and purchase of shares is included in the agreement. The following details are included in a share purchase agreement:
- The name of the corporation
- Warranties and commitments placed by the seller and buyer
- The total number of shares sold
- Details about the transaction
- Indemnification for unforeseen expenses:
When drafting the final agreement, a letter of intent will be prepared first. When performing due diligence before finalising the purchase agreement and letter of intent, the buyer must carefully check the purchase and sale sections as well as the warranties and representations sections.
In addition, the seller must focus on the purchase section and warranties and representations. Because any discrepancies that arise during buyer due diligence and the agreement’s completion may be resolved, they must be negotiated before its completion. A purchase price adjustment may be required if false statements are found.
Benefits of Having a SPA
- You can buy shares at a discount – Buying shares in the open market may cost you more.
- You may pay more than the company’s actual worth.
- You can buy shares at a discounted price.
- If the company is raising money, it may sell shares to a few investors at a discount.
Disadvantages of SPA
- You may have to wait for shares to be traded—sending a representative to buy shares in a company is expensive.
- You may not receive the shares you want—In a private placement, you may only receive shares of a certain number. You may not want all the shares in a company that you buy.
- You must take all the shares that the company offers you.
- It may cost you more than if you buy shares in the open market or with a bank loan.
Necessary Clauses In A Share Purchase Agreement
The share purchase agreement draft comprises the most important clauses that benefit both parties involved in the process.
Shares are bought and sold
Under this class, the total number of shares that are being sold and the price of the shares will be mentioned. Subsequently, this clause clarifies the payment method used for buying the shares. Any obligations presented will be mentioned in this section.
Earnout and Holdback
After fixing the purchase price, there can be some adjustments made based on the terms and conditions used by the parties. Usually, the purchase price is finalised by accounting for the past financial year’s performance of the company. In most cases, the purchase price is fixed along with the scope of adjustment. These can be in the form of the performance of the company or special goals achieved by the company. This acts as a hedge against any losses for the buyer. In some cases, the buyer has the right to withhold a certain percentage of the purchase price until all the conditions have been satisfied by the seller.
Escrow
Subsequently, an escrow agent is also appointed. The person’s role is to transfer the share and purchase price security and be responsible for making sure that all the obligations and actions regarding the same are carried out. This is crucial when the transaction comprises fluctuating purchase prices, which are subject to adjustments.
Warranties and Representations
In this section, multiple facts or promises provided to persuade the buyer party are mentioned clearly with a specified date. Other representation and warranties can effectively cover disputes regarding tax status and other litigation.
Indemnification Clause
This is an important clause in the share purchase agreement. This deals with the liability for losses due to breach of any representation and warranty.
Pre-closing Covenants
During the share purchase agreement, the price of the share will be fixed based on the company’s books. However, throughout the process, the company continues to conduct its business as usual. This makes sure the position of the company in the interim period doesn’t change. This clarifies the actions that are permitted to be conducted by the company during the ordinary course of business. This provides the buyer with greater power to fix the actions to be carried out effectively.
How Vakilsearch Can Help You Draft a Fool-Proof Share Purchase Agreement?
You may wonder what is in a share purchase agreement. We hope that you’ve learned a lot about share purchase agreements. You see, the share purchase agreement should be drafted with the utmost care and expert guidance. If it is not drafted properly, in some cases, it may result in a loss for both the buyer and the seller. Reach out to our experts at Vakilsearch and they will help you draft a share purchase agreement. The agreement has to contain all the key details to eliminate confusion and analyse all areas of the transaction.
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