What is a Share Purchase Agreement

What is a share purchase agreement?

In short, a transfer of shares agreement is an agreement between a seller and a buyer for the sale and purchase of company shares or company stock.

A simple share purchase agreement will set out the terms of the sale, the number of shares transferred, the purchase price, the payment date and basic warranties concerning the transferred shares, to name a few areas it covers.

Table of Contents

• What are the different types of Share Purchase Agreements?

• What is a share contribution agreement?

• When should you use a share purchase agreement?

• What is the difference between a Note Purchase Agreement and a Share Purchase Agreement?

• What is a Share Purchase Agreement Warranty?

• What is involved in a share transfer agreement registration?

• Why is a share purchase agreement important?

• Reason to standardise share purchase agreements

• What are the common pitfalls of a share purchase agreement?

What are the different types of Share Purchase Agreements?

There are many different types of Share or Stock Purchase Agreements (SPAs), which can vary significantly based on the specifics of the transaction, the type of company involved, and the country's jurisdiction where it will occur, for instance.

However, here are some of the most common examples of different types of Share Purchase Agreements.

Standard Share Purchase Agreement

Used for straightforward transactions involving the sale of shares from one party to another, a standard Share Purchase Agreement details the terms, number of shares, and warranties that are part of the transaction.

Some of the Pros of a Standard Share Purchase Agreement

✅ Clarity and Certainty, as it clearly outlines the terms of the share sale, including price, number of shares, and payment terms - reducing ambiguity.

✅ Legal Protection as it offers you and the other party legal protections through warranties and indemnities.

✅ Due Diligence Framework as it facilitates the due diligence process, helping the buyer understand what they are purchasing.

✅ Customisable as it can be tailored to suit the specific needs of the transaction.

Some of the Cons of a Standard Share Purchase Agreement

❌ Can be complex and require legal expertise to draft and interpret.

❌ Legal and advisory costs can be significant, especially for complex transactions.

❌ Time-Consuming: Negotiating and finalising a SPA can be a lengthy process.

❌ Risk of Litigation, if disputes arise post-completion, there's a potential for costly litigation.

Asset Purchase Agreement

While technically different, it's sometimes used in place of a share purchase agreement as an Asset Purchase Agreement (APA) is a legal document used to acquire a company's assets rather than its stock.

Some of the Pros of an Asset Purchase Agreement

✅ Allows for the purchase of specific assets and assumption of certain liabilities, providing more control over what is acquired.

✅ It can offer some tax benefits, as buyers can often write off the purchased assets in some countries.

✅ Offers flexibility in structuring the deal to meet your specific needs.

Some of the Cons of an Asset Purchase Agreement

❌ Transferring of individual assets can be complex and time-consuming.

❌ There's a risk of inadvertently assuming unwanted liabilities.

❌ Requires extensive due diligence to value and understand the assets and liabilities involved accurately.

Agreement for Private Limited Companies

Tailored for transactions involving shares in a private limited company, an Agreement for Private Limited Companies focuses on the specific legal requirements and shareholder restrictions typical in such purchases.

Some of the Pros of an Agreement for Private Limited Companies

✅ Tailored to meet the specific requirements and restrictions of private limited companies.

✅ Private companies often benefit from greater confidentiality in their transactions.

✅ Agreements can often be more flexible to suit the needs of smaller or closely-held businesses.

Some of the Cons of an Agreement for Private Limited Companies

❌ Private companies may have more complex rules about share transfers, requiring more detailed agreements.

❌ The market for shares in private companies is often more limited, potentially affecting the valuation and liquidity available.

❌ Often bound by existing shareholder agreements that can complicate the overarching transaction.

Cross-border Share Purchase Agreement

Cross-border Share Purchase Agreements are used for international share transactions, incorporating terms and considerations for different legal jurisdictions worldwide. These have their own unique advantages and challenges. Some of these can include:

Some of the Pros of a Cross-border Purchase Agreement

✅ Enables companies to expand into new geographic markets.

✅ Offers you diversification of business operations and risk.

✅ This agreement can provide strategic opportunities like acquiring unique technologies or market positions the company didn't have prior.

Some of the Cons of a Cross-border Purchase Agreement

❌ Must navigate varying legal and regulatory environments in different countries.

❌ Challenges in aligning different business cultures and operational practices.

❌ Involves managing currency exchange risks and complex tax considerations.

Leveraged Buyout Agreement

It involves acquiring a company using a significant amount of borrowed funds to meet the purchase cost. This purchase comes with its own unique challenges. Some of these can include:

Some of the Pros of a Leveraged Buyout Agreement

✅ Can result in high returns on equity due to the use of leverage.

✅ Often provides an opportunity to restructure and improve the acquired company's operations.

Some of the Cons of a Leveraged Buyout Agreement

❌ High Financial Risk: The high level of debt can lead to financial instability and an increased risk of bankruptcy.

❌ Pressure on Cash Flow: The need to service debt can significantly pressure the company's cash flow.

Management Buyout Agreement

A Management Buyout Agreement is where the company’s management team purchases the assets and operations of the business they manage to acquire a significant part or all of the company.

Some of the Pros of a Management Buyout Agreement

✅ Managers are typically highly knowledgeable about the company, ensuring a smooth transition and continued business success.

✅ Provides a strong incentive for managers to perform, as they have a direct stake in the company's success.

Some of the Cons of a Management Buyout Agreement

❌ Managers may face challenges in securing sufficient financing for the buyout.

❌ Potential conflicts of interest can arise between the managers' roles as buyers and their duty to the company and its shareholders.

Earn-Out Agreement

An earn-out agreement is where part of the purchase price is deferred and relies on the person buying it for future performance.

Some of the Pros of an Earn-Out Agreement

✅ Encourages sellers to continue contributing positively to the company post-sale.

✅ Reduces upfront costs and ties part of the payment to the company's future performance.

Some of the Cons of an Earn-Out Agreement

❌ Different interpretations of the agreement can lead to disputes between buyers and sellers.

❌ Difficulty in defining and measuring performance metrics somewhat.

Merger Agreement

In a Merger Agreement, in the context of a merger, shares are often transferred, and this agreement can include terms related to the merger process.

Some of the Pros of a Merger Agreement

✅ Mergers can create synergies, resulting in greater efficiency and profitability.

✅ Offers opportunities for market expansion and increased market share.

Some of the Cons of a Merger Agreement

❌ Mergers often face strict regulatory scrutiny and may require approval from multiple authorities.

❌ Integrating two distinct corporate cultures and systems can be challenging.

Stock Swap Agreement

A Stock Swap Agreement involves the exchange of shares between companies, often in the context of mergers or acquisitions.

Some of the Pros of a Stock Swap Agreement

✅ Often, this can be more tax-efficient than cash transactions.

✅  Does not require a significant cash outlay, which can benefit companies wanting to preserve liquidity.

Some of the Cons of a Stock Swap Agreement

❌ Determining the fair value of each company's stock can be complex.

❌ Often requires approval from shareholders, which can be challenging to obtain.

Short Form Shareholders Agreement for PLCs

The Short Form Shareholders Agreement for PLCs is a simplified version often used for smaller transactions or intra-group transfers in public limited companies. This type of contract has several top-level pros and cons, such as:

✅ Easier and quicker to draft and execute compared to more comprehensive agreements.

✅ Concentrates on the essential terms necessary for the transaction.

Some of the Cons of a Short Form Shareholders Agreement for PLCs

❌ May not cover all contingencies or complex scenarios.

❌ Less comprehensive nature might leave some areas open to interpretation.

What is a share contribution agreement?

A Share Contribution Agreement is a legal document used when a shareholder contributes additional shares or assets to a company - often in exchange for an increased equity stake. 

This agreement outlines the terms of the contribution, including the type and amount of assets or shares being contributed, the resulting ownership structure, and any conditions or warranties associated with the contribution. 

It's commonly used in scenarios like capital increases, restructuring, or when shareholders agree to inject more assets into the company for growth or stabilisation purposes.

When should you use a share purchase agreement?

A share purchase agreement (or “SPA”) should be entered into about any sale and purchase of shares as it formalises the seller’s and the buyer’s agreement on price, closing date, payment date and other principal terms of the share transfer. 

Consequently, a share purchase agreement can also include warranties regarding the shares, providing the buyer with additional protection.

What is the difference between a Note Purchase Agreement and a Share Purchase Agreement?

Although these 2 agreements, even though they sound similar, they differ in several ways. These can be broken out, for example, by the following:

Note Purchase Agreement

A Note purchase agreement involves selling and purchasing debt instruments - like promissory notes. The buyer buys the debt, along with the rights to receive repayments from the borrower under the terms of the note.

Share Purchase Agreement

This differs from a share purchase agreement about the sale and purchase of equity in a company - in the form of shares. The buyer acquires ownership interest in the company, including rights to dividends and voting rights.

What is a Share Purchase Agreement Warranty?

A Share Purchase Agreement Warranty is a statement of fact relating to the shares, the company and its business. If any such statement then 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 of a share purchase agreement, stating only the bare minimum required to document a share transfer.

What is involved in a share transfer agreement registration?

A share or stock purchase agreement transfer requires a registration, which typically involves the formal recording of the transfer of shares from one party to another. This process can vary depending on the jurisdiction and the type of company involved. 

However, generally, it involves updating the company's register of shareholders to reflect the change in ownership and may require filing documentation with relevant corporate or governmental bodies as well.

This registration ensures that the transfer is officially recognised and that the new shareholder has the legal rights associated with the shares.

Why is a share purchase agreement important?

The share purchase agreement is often used to ensure that: 

1. The terms of the transaction are appropriately documented.

   As mentioned above, the SPA sets out in writing the terms and conditions of the sale and purchase of shares.

   
   

2. Any conditions to which the transaction is subject are clearly spelt out

   In certain transactions, the finalisation of the transaction is subject to certain conditions being satisfied, which need to be adequately clarified in the agreement to avoid any confusion.

   
   

3. Transaction risk is allocated

   A share purchase 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.

   
   

4. 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. 

Reason to standardise share purchase agreements

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 not properly reviewing the seller's warranties to the buyer under a share purchase agreement.

Thoroughly review the warranties

As the seller, you should thoroughly review the warranties to ensure that they are correct to avoid misunderstandings with the buyer. Consequently, the inclusion of a warranty that needs to be corrected is likely to give rise to costly legal disputes down the line that are easily avoidable.

Utilising AI contract review can assist in efficiently examining and verifying warranties, reducing the risk of errors and legal disputes.

Failure to identify and manage transfer restrictions

Another common mistake concerning share transfers is failing to identify and manage transfer restrictions in any shareholder agreement and / or the company’s articles of association. 

A shareholder agreement usually contains a right of first refusal clause, meaning that the shareholders must offer the shares to existing shareholders before 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 them at the same price they bought them.

To avoid any such transfer restrictions becoming issues, ensure proper waivers are obtained from all relevant parties and shareholders.