Share purchase agreement

What is a share purchase agreement?

In short, a share purchase agreement is an agreement between a seller and a buyer for the sale and purchase of company shares (or company stock). The share purchase agreement sets out the terms of the sale, the number of shares transferred, the purchase price, payment date and basic warranties concerning the transferred shares.

When should you use a share purchase agreement?

A share purchase agreement (or “SPA”) should be entered into in relation to any sale and purchase of shares as it formalizes the seller’s and the buyer’s agreement on price, closing date, payment date and other principal terms of the share transfer. A share purchase agreement also includes warranties regarding the shares, providing the buyer with additional protection. Warranties are statements of fact relating to the shares, the company and its business. If any such statement turns out to be inaccurate, untrue or misleading, the buyer may have a claim against the seller for a breach of the share purchase agreement.  For simple transactions, e.g. a transfer of shares from an individual to a wholly-owned company, or from a group company to another group company, a simpler version of the share purchase agreement, also known as a transfer note, may be used instead. A transfer note is in essence a short form share purchase agreement stating only the bare minimum required to document a share transfer.

Why is a share purchase agreement important?

The share purchase agreement is often used to ensure that: 

• the terms of the transaction are properly documented: as mentioned above, the SPA sets out in writing the terms and conditions of the sale and purchase of shares

• any conditions to which the transaction is subject is clearly spelt out: in certain transactions, the finalisation of the transaction is subject to certain conditions being satisfied and these conditions need to be properly clarified in the agreement to avoid any confusion; 

• transaction risk is allocated: as a share purchase essentially means that the buyer is buying the company (or part of it) with everything in it including all and any liability, the SPA usually includes a level of contractual protection against key undisclosed risks or understated liabilities;

• the buyer is protected against post-completion competition from the seller: it is not uncommon for the agreement to contain non-compete and non-solicitation provisions for a limited amount of time following the completion of the sale. 

While a share purchase agreement may sometimes seem superfluous (shares are traded all day long on the stock exchanges without written agreements, right?) we strongly recommend that all transfers are formalised in a share purchase agreement, or a transfer note as a bare minimum. A written agreement always mitigates risks of discussions and potential disputes as it is clear to both parties what their obligations and liabilities are.

What are the common pitfalls of a share purchase agreement?

A common mistake is to not properly review the warranties provided by the seller to the buyer under a share purchase agreement. As the seller, you should thoroughly review the warranties to ensure that they are correct to avoid misunderstandings with the buyer. The inclusion of a warranty that is not correct is likely to give rise to costly legal disputes that are easily avoidable. 

Another common mistake concerning share transfers is the failure to identify and manage transfer restrictions set out in any shareholder agreement and/or in the company’s articles of association. A shareholder agreement usually contains a right of first refusal clause, which means that the shareholders must offer the shares to existing shareholders prior to selling them to a third party. The company’s articles of association may also contain a similar right of first refusal clause, a consent clause (which means that the board of directors must consent to a share transfer), and/or a post-sale purchase right (which means that a buyer of shares must, after the purchase thereof, offer the existing shareholders to purchase the shares from him at the same price he/she bought them). To avoid any such transfer restrictions becoming issues, make sure that proper waivers are obtained from all relevant parties and shareholders.

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