There are many important terms in a SPA that need professional attention before you can enter into an agreement. Read on to learn more about them!
A SPA is a legal arrangement between a seller and a buyer. You can also refer to them as a vendor and purchaser in the contract. This agreement lists the precise quantity of shares at the specified cost. It serves as evidence that the conditions of the sale and its terms are mutually agreed upon.
It is prepared in such a way that it can provide maximum statutory protection to the members involved in the transaction. Such a contract eliminates any potential for misunderstanding between the parties. By giving a legal foundation, it builds reliability between buyers and sellers. It displays all of the information concerning the share transfer. The dispute resolution clause for the agreement is prefixed, along with the seller’s warranties.
We’ve put up a guide that outlines the most important terms in a share sale purchase agreement and what factors to take into account when analysing them from the viewpoints of the buyer and seller.
Top 5 Important Terms
The agreement includes detailed terms that define the conditions around the purchase of shares. Some important terms are:
Price & Payment
An obvious but important clause will detail the number of shares being purchased as well as the price of these shares. This price may be a preset, fixed amount, or subject to change. For example, if the business continues to outperform expectations, the purchase price may be adjusted to reflect this.
It could also specify the buyer’s payment schedule, including how much and when they’ll pay. This is significant because the date the payment is affected may have an effect on the formal transfer of the transaction.
Conditions Precedent to Sale
There may be pre-sale requirements in an agreement. For example, the share price may be subject to regulatory approval initially. In order to strengthen a contract, it is a good idea to include all steps that both sides must take before the deal is finalised. It may also be important to give a timeframe for fulfilling these requirements.
Completion Arrangements
Generally, it includes provisions that will bring a purchase to a successful conclusion. The payment of stamp duty or the filing of official company notices may fall under this category. These obligations will often be stated in your agreement, leaving no opportunity for confusion after the sale is complete as to who is responsible for what.
Warranties
It is customary for a agreement to contain the seller’s and the buyer’s representations and warranties. This entails making claims and assertions of facts that both the vendor and the customer vouch for as being truthful. This is an important clause in a the contract. Unfortunately, there are instances where a buyer may subsequently find out that the seller’s claims and guarantees regarding the company were false. As a result, the buyer may decide to file a lawsuit.
Restraints
Restraint refers to provisions in a agreement that foreclose the seller from going up against the buyer for a set period of time after the sale of shares. This could take the form of a non-competition clause prohibiting the seller from opening a business, which would put the buyer in competition.
What To Look Out For?
Purchase Price
Buyer’s Perspective
A buyer will almost certainly want insurance against harm to the target’s financial standing between the start of negotiations and the date of closing. This could be done using a completion accounts process that offers the buyer valuation assurance.
Seller’s Perspective
Over the past year, sellers have been more interested in securing the price for the target shares using a locked box mechanism. In order to use this technique, a buyer and a seller must agree to a fixed price and permit some ‘leakages’ during the bargaining process. Where it is possible, a vendor will still try to lock the price.
Deferred Consideration
Buyer’s Perspective
Given the existing situation, it may be difficult (or inaccessible) for the buyer to predict the target’s future profitability. Therefore, a buyer can want to defer some of the consideration so that it can be computed based on the target’s future performance.
Seller’s Perspective
Over any upcoming payments, a seller might need some kind of security. The seller wants security because, in the event that the buyer is unable to make future payments and no security is obtained, the seller will rank among all other creditors of the company as an unsecured creditor.
If payment is secured and the security is valuable and registered appropriately (if applicable), the seller will be protected in the event of the buyer’s bankruptcy and may receive payment.
Warranties & Indemnities
Buyer’s Perspective
Depending on recent events, a buyer may want to put extra, detailed warranties in the contract. Common examples of specific warranties are as follows:
- Capabilities of IT system
- Verification of the usage of government programmes
- Size of the workforce and how it will evolve in the future.
Seller’s Perspective
Although a seller will acknowledge the necessity for extra warranties, they are prone to object to warranties that are prospective and outside of the target’s control. For complete transparency, a seller should try to provide as much information as possible regarding recent operations.
Split Exchange & Completion
Buyer’s Perspective
If a buyer agrees to a split exchange and completion, he or she must account for the probability of another outbreak occurring between exchange and completion. As a result, a buyer might try to incorporate a language in the contract that gives them the right to withdraw if there is a materially negative business or economic shift that affects the target or its assets.
Seller’s Perspective
A seller should strive to include flexibility in any undertakings provided in the agreement so that, if another outbreak occurs, the seller can make reasonable efforts to respond to any applicable government instructions.
Due Diligence
Buyer’s Perspective
Due diligence has practical implications because the buyer may need access to certain documents that the seller might not be able to provide.
Seller’s Perspective
While due diligence is important, it could be challenging and take more time to receive responses from various departments of the target because of illness, restricted access to computers, and restricted access to facilities.
Learn More about Outlining a SPA in India
Conclusion
The main goal of this agreement is to safeguard the parties’ interests in a given share transaction. Such a contract guarantees that the share transfer happens safely and without compromising anyone’s interests. If you need help in preparing a legally and factually perfect agreement, our experienced legal experts at Vakilsearch can be your best bet.
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