What Are the Key Terms of a Share Purchase Agreement?

A share purchase agreement is a legally binding contract that governs the sale and purchase of shares in a company. This agreement is crucial for both the buyer and seller as it sets out the rights, obligations, and protections of each party involved in the transaction.

This article will delve into the key terms of a share purchase agreement, providing a comprehensive understanding of the essential elements that should be included. We’ll cover topics such as the purchase price, representations and warranties, conditions precedent, closing mechanics, dispute resolution, and more. By understanding these key terms, buyers and sellers can ensure a smooth and legally sound share sale transaction.

Key Terms Related to the Shares Being Sold

Description of Shares

A share purchase agreement should clearly identify the shares being sold. This includes:

• The number of shares
• The class of shares (e.g., ordinary shares, preference shares)
• Any special rights or restrictions attached to the shares

For example, if a buyer is purchasing 1,000 ordinary shares from a seller, the agreement should state this explicitly. If the shares have voting rights or dividend entitlements, these should also be detailed in the agreement.

Purchase Price and Payment Terms

The share sale agreement will specify the purchase price for the shares. This can be a fixed amount or calculated based on a formula. The agreement should also outline the payment terms, such as:

• Whether the purchase price is payable in a lump sum or instalments
• The currency of payment
• The date(s) on which payment is due

For instance, the agreement might state that the purchase price is $100,000, payable in two instalments of $50,000 each. The first instalment might be due on the signing of the agreement, with the second instalment due on the completion date.

Conditions Precedent

Conditions precedent are events or actions that must occur before the share sale can be completed. These conditions protect both the buyer and seller by ensuring that certain requirements are met before the transaction becomes binding. Common conditions of precedent include:

• Regulatory approvals: If the share sale requires approval from a government agency or regulator, this should be listed as a condition precedent.
• Due diligence: The buyer may want to conduct due diligence on the company before completing the purchase. The agreement can specify that the buyer’s satisfaction with the due diligence results is a condition precedent.
• Financing: If the buyer needs to secure financing to fund the purchase, obtaining the financing can be a condition precedent.

For example, if the company operates in a regulated industry, the buyer might make the share purchase conditional on receiving approval from the relevant regulatory body. This ensures that the buyer is not obligated to complete the purchase if regulatory approval is not granted.

Representations and Warranties

Representations and warranties are key components of a share purchase agreement, serving as statements and promises made by the buyer and seller about the company and the shares being sold. These statements provide a foundation of trust and transparency for the transaction.

Seller’s Representations and Warranties

The seller makes various representations and warranties to assure the buyer about the company’s condition. These typically cover a wide range of aspects, including:

• Financial Statements: The seller represents that the company’s financial statements are accurate and fairly reflect its financial position.
• Ownership of Shares: The seller warrants that they have the legal right to sell the shares and that there are no encumbrances, such as liens or claims, on those shares.
• Compliance with Laws: The seller represents that the company is in compliance with all applicable laws, regulations, and licenses.
• Contracts and Agreements: The seller warrants that all material contracts and agreements of the company are in full force and effect.
• Litigation and Disputes: The seller represents that there are no pending or threatened lawsuits or legal disputes against the company.

For example, the seller might warrant that the company has no undisclosed tax liabilities.

Buyer’s Representations and Warranties

While the seller’s representations and warranties are more extensive, the buyer also makes certain representations and warranties. These typically include:

• Authority to Enter the Agreement: The buyer represents that they have the legal authority to enter into the share purchase agreement and complete the transaction.
• Financing: The buyer may warrant that they have secured the necessary financing to pay the purchase price.
• Compliance with Laws: The buyer may represent that they are in compliance with any relevant laws and regulations related to the acquisition.

For instance, the buyer might represent that they are not subject to any regulatory restrictions that would prevent them from acquiring the shares.

Importance of Disclosure Schedules

Disclosure schedules are an integral part of the representations and warranties section of a share purchase agreement. They serve to qualify or limit the seller’s representations and warranties by providing specific exceptions or disclosures.

For example, if the seller represents that the company has no pending litigation, but there is one minor lawsuit that has been disclosed in the disclosure schedule, the buyer cannot later claim a breach of warranty based on that lawsuit.

Disclosure schedules are crucial for both the buyer and the seller. They help to ensure that the buyer is fully informed about the company’s condition, while also protecting the seller from liability for known issues that have been properly disclosed.

Indemnification Provisions

Scope of Indemnification

Indemnification provisions in a share purchase agreement are crucial for allocating risk between the buyer and seller. These clauses outline the circumstances under which one party will compensate the other for specific losses or liabilities arising after the share sale. The scope of indemnification should clearly define the types of claims covered, such as breaches of warranties, undisclosed liabilities, or tax liabilities. For example, if the seller breaches a warranty about the company’s financial health, the buyer may seek indemnification for any resulting financial losses.

Limitations on Liability

While indemnification provisions offer protection, share purchase agreements often include limitations on liability to prevent excessive exposure for either party. These limitations can take various forms, such as:

• Caps on Indemnification Amounts: The agreement may set a maximum amount that a party can claim under indemnification, often expressed as a percentage of the purchase price.
• Time Limits for Making Claims: The agreement may specify a time frame within which a party must notify the other party of a claim and initiate legal action.
• Exclusions: Certain types of claims may be excluded from indemnification, such as losses arising from general economic conditions or changes in law.

Negotiating these limitations is crucial to strike a balance between protecting the buyer’s interests and ensuring reasonable risk allocation for the seller.

Closing Mechanics and Post-Closing Obligations

Closing Date and Deliverables

The share purchase agreement will specify a closing date, which is when the legal ownership of the shares officially transfers from the seller to the buyer. On this date, several key actions typically take place to finalise the transaction. The agreement should clearly outline the specific deliverables required from both the buyer and seller on the closing date.

For the buyer, this usually involves delivering the agreed-upon purchase price to the seller. The payment method, whether by wire transfer, check, or other means, should be specified in the agreement. The buyer may also need to provide certain documents, such as signed share transfer forms or any required regulatory filings.

The seller’s deliverables typically include transferring the share certificates to the buyer, providing any necessary corporate resolutions authorising the sale, and delivering any other documents required under the agreement. This might include items like financial statements, tax records, or contracts related to the company.

Post-Closing Adjustments

In some share purchase agreements, the final purchase price may be subject to adjustments after the closing date. This is common when the final financial statements of the company are not available at the time of closing. The agreement should outline the specific mechanisms for calculating these post-closing adjustments.

For example, the purchase price may be adjusted based on the company’s working capital or net asset value as determined by the final audited financial statements. The agreement should specify the timeframe for completing these adjustments and the process for resolving any disputes that may arise during the calculation.

Non-Compete and Non-Solicitation Clauses

To protect the buyer’s investment, share purchase agreements often include non-compete and non-solicitation clauses that restrict the seller’s future business activities. These clauses are designed to prevent the seller from competing with the company after the sale and from soliciting its customers or employees.

A non-compete clause typically prohibits the seller from engaging in a similar business within a defined geographic area and for a specific period. For example, the agreement might prevent the seller from starting a competing business within a 50-mile radius for three years after the sale.

Non-solicitation clauses prevent the seller from contacting the company’s customers or employees for a certain period after the sale. This helps to ensure that the buyer can retain the company’s existing business relationships and workforce. The agreement should clearly define the scope of these restrictions, including the specific activities that are prohibited and the duration of the restrictions.

Dispute Resolution and Governing Law

Choice of Law and Jurisdiction

A share purchase agreement should clearly state which jurisdiction’s laws will govern the agreement and where any legal disputes will be resolved. This is important because laws can vary significantly between different states or countries. For example, if the buyer is based in New South Wales and the seller is in Victoria, the agreement might specify that the laws of New South Wales will apply.

Alternative Dispute Resolution Mechanisms

Many share purchase agreements include provisions for alternative dispute resolution (ADR) mechanisms, such as mediation or arbitration, to resolve disagreements before resorting to litigation. These methods can be more cost-effective and efficient than going to court. For instance, the agreement might state that the parties must first attempt to resolve any disputes through mediation before initiating legal proceedings.

Conclusion

A share purchase agreement is a crucial document in any transaction involving the buy or sell of shares in a company. It sets out the terms and conditions of the sale and purchase, protecting the interests of both the buyer and seller. Key terms, such as the purchase price, representations and warranties, conditions precedent, and dispute resolution mechanisms, are carefully negotiated and drafted to ensure a smooth and legally sound transaction.

Given the complexity of share purchase agreements, seeking legal advice is essential. An experienced lawyer can guide you through the process, ensuring that the agreement is tailored to your specific needs and protects your interests. By understanding the key terms and seeking professional guidance, you can navigate shared transactions with confidence and achieve a successful outcome.

Frequently Asked Questions