When looking to sell a private company limited by shares, the most common means is by a share sale. Essentially the sale of the shares and therefore the ownership of the whole company. The document to govern this transfer is a share purchase agreement or SPA.
An SPA will dictate the course of the transaction from beginning to end. Quite often resulting in a lengthy document, the share purchase agreement will address a number of key elements within the acquisition, each of which will be dealt with in turn below.
Definitions
The language used in the share purchase agreement requires a streamlined, unambiguous and logical framework as many of the aspects dealt with in the SPA can take some time to unravel. To avoid or reduce confusion SPA’s are drafted with a definitions section to simplify and provide clarity throughout. The definition section is usually found at the start of the document though can sometimes be found at the end or within a schedule and generally if in a longer form. The clearer the definitions the less room for potential disputes down the line.
Parties
Here the SPA will outline the buyer, the seller and any other relevant parties to the agreement. Each party will have their address or registered office in the case of a company. These parties listed will be the parties who sign the SPA, whether as an individual or as a director on behalf of a corporate entity.
Consideration and purchase details
The target company is a term used to describe the company whose shares are being purchased by the buyer. Though at the stage of having an SPA drafted and approved the buyer and seller will be well aware of the salient points of the transaction, the SPA will solidify these details with an agreement for the seller to sell the shares and the buyer to buy the shares for the agreed consideration.
The consideration will be clearly broken down, specifying currency and timescale, usually with a sum payable on the completion date, accompanied by any manner of other payment conditions such as deferred consideration or earnout provisions. Each can be tailored to the buyer or seller’s needs though may need the input of a lawyer and/or tax advisor.
Warranties and indemnities
Arguably one of the most important parts of the SPA (especially in the position of the buyer) are the warranties. The general rule is “buyer beware” therefore, there is very little a buyer can do in way of claims should any unexpected liabilities crop up post completion.
To combat this, the warranties are asked of the seller, whereby the seller warrants to the buyer various statements and promises regarding the state of the target company. If the target is not in the warranted condition, then the seller has the chance to give an indemnity through the disclosure process to essentially get them off the hook for the warranty by disclosing the true state of the business. Should an unexpected liability arise under a warranty given by the seller, then the buyer may claim against the seller for a breach of contract.
All warranties and their respective disclosures will be agreed in tandem to the drafting of the SPA in the form of the disclosure letter. Both will eventually be agreed and signed upon completion.
Completion requirements
The SPA will lay out what is to be expected on completion and after completion. This is to eliminate any confusion as to what documents are to be expected.
Confidentiality
Due to the nature of the SPA being a contract solely between the parties, it is therefore a private transaction. This means there are usually provisions in place within the SPA to limit the communication or distribution of the transaction information. There are sometimes provisions to describe how, when and the wording of the press announcements made post completion.
Restrictions following completion
Restrictive covenants are a section of the SPA in which the seller agrees that they will not do certain activities post completion. These restrictions often include not allowing the seller to set up a company to compete with the buyer/target or similarly not to solicit the customers or clients that the target company dealt with. These restrictions are usually prefaced with a time period, for example 24 months from the completion date, as to not completely eliminate the seller from the market.
Conclusion
A well drafted SPA is essential for a smooth and successful transaction. This will not only clearly dictate the transaction path, but also provide protection for the parties entering the agreement.
If you are contemplating buying or selling a business find out how our corporate specialists can assist you by getting in touch with the corporate team at Gardner Leader LLP. Arrange an appointment in one our offices in Newbury, Thatcham, Swindon, Maidenhead, Oxford, Windsor and London by visiting our website.
Speak with our expert Lewis Harvey or our Corporate team here.
This article is part of our share sale series. Read our previous article in our series here.