Share Purchase Agreement (“SPA”) in M&A Transactions

Definition of Share Purchase Agreement: The share purchase agreement is a legal document that spells out the terms and conditions under which a company’s shares are sold. It distinguishes between a full sale and a partial selling of a company’s shares. There must be at least two parties to the agreement: A buying entity as well as a selling entity that holds the title rights to the shares. The shares are usually transferred in exchange for cash. There is also the option of paying with shares, payment-in-kind, or media for equity. The share purchase agreement is commonly referred to as a “SPA.” Please note that the umbrella phrase “Sale and Purchase Agreement” is commonly abbreviated as SPA for the sake of clarity. The following items are generally included in a sale and purchase agreement: The share purchase agreement is the subject of this article.  What Role Does a Lawyer Play in a Share Purchase Agreement? Lawyers have two primary tasks in M&A transactions: conducting legal due diligence and preparing the selling and purchase agreements. Due Diligence in Law Before submitting a binding offer, legal due diligence is part of the due diligence phase. It entails a thorough examination of a company’s external and internal legal relationships. All important contacts are thoroughly examined, including supplier and customer agreements, labor contracts, and existing litigation and conflicts. This phase, which comes before the preparation of the share purchase agreement, is critical. While outstanding lawsuits may result in the buyer paying substantial fines, change of control clauses in supplier and customer contracts may put the company’s bottom line at risk. Drafting the Share Purchase Agreement The majority of difficulties discovered during due diligence can be managed or compensated through the share purchase agreement. They must, however, be reported during due diligence, recognized by the buying organization, and addressed effectively in the SPA. The first share purchase agreement is usually drafted by the sell-side. Toward the end of the second round, they upload the draft to the virtual data room. This comes after several rounds of back-and-forth between the lawyers for both parties.  A Share Purchase Agreement’s Structure and Components The substance of a share purchase agreement is determined by the transaction’s complexity. Nonetheless, every SPA comprises the following core elements:
  • Preamble and Interpretation – Parties and Transaction Description
  • The contract’s topic — This is the definition of the transaction’s sales object.
  • Purchase Price – A breakdown of the price components as well as the payment method.
  • Closing Conditions – Requirements that must be met prior to the transfer of title rights.
  • Warranties, indemnities, and undertakings
  • Liability of the seller’s terms and conditions
  • Additional obligations of the parties, such as non-compete clauses, non-solicitation clauses, and confidentiality clauses
 What’s the Difference Between Signing and Closing a Contract? The process of agreeing on the terms and conditions of a transaction and contractually expressing them by stating the rights and obligations of the parties involved is referred to as assigned. The signature does not always imply that the assets or shares will be transferred, i.e. the close. Certain agreed-upon conditions must be completed before the actual transfer can take place. These so-called closing criteria could include, but are not limited to,
  • letting employees know about the transaction,
  • Carving-out assets
  • Obtaining waiver letters for major contract change-of-control clauses,
  • in addition to regulatory approval
In most cases, the acquirer is only entitled to the business’s profits after all closing conditions have been met. Parties can, however, agree that the acquirer will receive the advantages – and incur the associated risks – from a date before signing. In that instance, the economic transfer can take place prior to the signing of the contract. A case in point would be the locked box mechanism. In the absence of any closing conditions, signing and closing might occur on the same day.  In a Share Purchase Agreement, there are Repetitions and Warranties (“Reps & Warranties”). The information offered in the virtual data room is crucial to the prospective buyer. In most cases, there is little time to familiarise yourself with the target’s conditions, as well as any other factors that may affect the transaction’s execution. As a result, the buyer will demand a list of representations and guarantees. Representations are assertions about the company’s current condition or operations, whereas warranties ensure that these representations are true. A few examples are as follows:
  • The seller has all title rights to the sales object and associated properties.
  • Financial statements prepared in accordance with ‘generally recognized accounting practices’
  • There are no liabilities and no legal challenges on the horizon.
  • There are no tax liabilities that have not been revealed.
  • No third-party consent is required for any of the company’s IPs.
The purchase agreement enables for a contractually agreed-upon deadline for the representatives and warranties to be true. In the event that such warranties are breached, the purchaser is entitled to compensation. The buyer wants the representatives and warranties catalog to cover as many issues as possible, but the seller wants to keep it to a bare minimum. As a result, this provision of the share purchase agreement is frequently the subject of heated debate.  What are the differences between a Drag-Along Right, a Tag-Along Right, and the Right of First Refusal?  A shareholder agreement is normally in existence when a corporation has many shareholders. The shareholders’ rights and obligations are outlined in these agreements. In the majority of circumstances, they include specific rights relating to a shareholder’s withdrawal. If this is the case, lawyers must take these rights into account in the transaction’s share purchase agreement. Drag-Along Right Some buyers may be exclusively interested in acquiring a company’s sole ownership. Some shareholders may not want to sell their shares if the target has several stockholders. The drag-along right might be useful in this scenario. It empowers the majority shareholders to compel – or “drag” – the minority shareholders to sell their shares.  Tag-Along Right The tag-along clause, on the other hand, regulates a right rather than an obligation of the minority shareholder. The minority shareholder has the right to “tag-along” if the majority shareholder sells its shares. As a result, they enjoy the same rights as the majority shareholder when it comes to selling their shares. Because an investor-only wishes to buy a particular number of shares, a minority shareholder can participate in the transaction pro-rata, or at the proportion of the shareholding previous to the sale.  Right of First Refusal The right of the first refusal refers to a shareholder’s obligation to offer his or her share to one of the existing shareholders before selling to a third party. This allows the current shareholder to purchase at the same (financial) terms as the external buyer.

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