Simply put, a share purchase agreement (SPA) outlines the T&Cs relating to the sale and purchase of shares in a company. The agreement is key in ensuring the transaction is clear, fair and legally binding. In this guide, we'll cover everything you need to know about an SPA including what it is, its purpose, how it works and the common mistakes for businesses.
Share purchase agreement (SPA) definition
A share purchase agreement is a legal contract between a buyer and a seller. The document is usually very detailed and outlines the T&Cs for the sale and purchase of shares in a company. The SPA acts as a sort of roadmap for the transaction, ensuring both parties understand their obligations and rights.
What is the share purchase agreement process?
The share purchase agreement process involves several stages to ensure a smooth transfer of ownership. In general, it covers the pre-contact stage, contract negotiation and everything that happens post-contract. A dedicated solicitor for buying a business will be able to guide you through the process, though it typically can look like this:
1. Negotiation and initial discussions
The process begins with the buyer and seller discussing the terms of the deal. This includes agreeing on the purchase price, payment terms, and any conditions that need to be satisfied before the sale.
2. Due diligence
Before drafting the SPA, the buyer conducts due diligence to assess the company’s financial, legal and operational status. This step helps identify potential risks or liabilities that could impact the transaction.
3. Drafting the SPA
Once due diligence is complete, the share purchase agreement is drafted. The document is tailored to the specifics of the transaction and often includes input from solicitors representing both parties.
4. Negotiation and finalisation
Both parties review the draft SPA, negotiate any points of contention, and make necessary amendments. Once both sides agree on the terms, the SPA is finalised.
5. Signing the SPA
The SPA is signed by both parties, signifying their commitment to the terms outlined in the agreement.
6. Completion
The transfer of shares is executed and payment is made. At this stage, the buyer officially becomes a shareholder in the company.
What are the main terms of a share purchase agreement?
A share purchase agreement contains several key sections to protect the interests of both parties. The main terms typically include:
Details of the parties
The agreement begins by identifying the buyer and seller. This appears at the beginning of an SPA and includes their legal names, addresses and contact details.
Sale and purchase of shares
This section specifies the number and type of shares being sold, along with their value and any associated rights. This is usually 'with full guarantee', which just means the seller is capable of transferring shares without third-party restrictions. You can learn more in our guide to purchasing shares in a company.
Purchase price and payment terms
The SPA outlines the total purchase price, payment structure (like lump sum or installments), and the currency of the transaction. Plus, the purchase price can also be fixed or variable and adjusted as and when the transaction is completed.
Warranties and indemnities
Warranties are like statements that sellers give as a promise to the buyer. There isn't a huge amount of protection for buyers, for this reason, the seller will provide warranties over the company's affairs and assets. Common warranties include things like:
The seller is the sole owner and registered holder of the shares
The seller is entitled to sell the shares to the buyer
The seller has no interest in a business that is or is likely to become competitive with the target company
Indemnity clauses are another legal protection for the buyer. These are contractual promises by the seller to meet a legal liability that a buyer may incur as a result of an acquisition. In short, an indemnity would entitle the buyer to compensation if the event occurs.
💡Editor's insight: "I see lots of people confuse a warranty and an indemnity. A warranty is a contractual statement made by the seller about the state of the business. An indemnity is a promise made by the seller that they will compensate the buyer for a specific liability, if it ever arises."
Conditions precedent
These are the conditions that must be fulfilled before the transaction is completed. Common conditions include regulatory approvals, tax clearance or the resolution of specific legal issues.
Confidentiality and non-compete clauses
SPAs naturally contains sensitive information. To protect each party's interests, the SPA may include clauses to maintain confidentiality (like an NDA). They may also restrict the seller from competing with the company for a specified period.
Completion
The SPA will also need to outline what happens upon completion. Common details might include:
When it will happen
What exactly will happen
What happens if completion fails to happen
Execution of stock transfers and handing over share certificates
Do you need a solicitor for a share purchase agreement?
While it’s not legally mandatory to hire a solicitor for a share purchase agreement, it’s highly recommended. SPAs are complex legal documents that require precise drafting to ensure all potential risks and scenarios are addressed. A corporate solicitor can:
Review the terms of the agreement to ensure they align with your best interests
Highlight potential legal and financial risks associated with the transaction
Negotiate terms on your behalf to secure favourable outcomes
Ensure compliance with UK corporate law and regulations
FAQs
What is the purpose of an SPA?
The main purpose of a share purchase agreement is to establish a legally binding framework for the sale and purchase of shares. It protects both the buyer and the seller by clearly defining the terms of the transaction. The SPA also provides legal documentation in case of disputes or breaches of contract.
What’s the difference between a share transfer and share purchase?
A share transfer involves moving ownership of shares from one party to another, often within the existing shareholders of a company. It typically occurs as part of a company’s internal operations. A share purchase refers to the acquisition of shares by an external buyer, often as part of a merger or acquisition.
Who prepares the share purchase agreement?
The SPA is usually prepared by solicitors representing the buyer or seller, depending on the circumstances. In many cases, the buyer’s solicitor drafts the initial agreement, and the seller’s solicitor reviews and negotiates any changes.
Final thoughts
A share purchase agreement (SPA) is an essential document in any share transaction. It offers clarity, protection and a structured approach to transferring ownership. Whether you’re a buyer or seller, understanding the purpose, process and key terms of an SPA is crucial to a successful deal. Though an SPA can seem daunting, the guidance of an experienced solicitor can provide peace of mind and ensure the agreement is comprehensive and legally sound.