If you’re buying or selling a business that operates as a business, the most common way to do it is via a share purchase. The contract for sale is usually called a share purchase agreement or SPA.
The reason for buying a company’s shares rather than its assets is to keep the business intact but under new ownership. All employees, contracts and property remain in place.
While it’s possible to find model SPAs on the internet, we wouldn’t recommend using them. It’s safer to have lawyers create a document that’s bespoke to the deal and reflects the nuances of the business. Your lawyer will make sure the SPA protects your interests, whether you’re buying or selling.
This guide walks you through the SPA process and the main terms of the agreement.
A share purchase agreement (SPA) sets out the terms of a sale of company shares.
Here are the main terms:
The buyer’s lawyers usually prepare the first draft of the SPA, because they’re the party most at risk, unless this is a company being sold at auction when the seller’s lawyer provides the contract for inspection by interested bidders.
The buyer then investigates the company being sold (this is known as), following which the parties negotiate and sign the SPA. The buyer pays for the company, and the shares are transferred to them. Usually, this takes place on the same day.
The share purchase agreement process can be divided into three main phases:
During due diligence, the seller provides the buyer with information about the company such as:
Because certain words or phrases contained in an SPA are frequently used, ambiguous or have a precise legal implication, they are included in a ‘definitions’ section. This makes the document easier to read and clearer, so avoiding future disputes.
The identity of the buyer and the seller appears at the beginning of the SPA, together with their addresses or registered offices. Where there are multiple shareholders, each must sign so they’re fully liable to the buyer individually and as a group. If this isn’t the case, then the SPA will say so.
Sometimes a guarantor like a bank will also sign the SPA, as well as the company itself, for example, if business property is included in the deal.
At the heart of the SPA is the agreement of the seller to sell, and the buyer to buy shares. Normally this is ‘with full title guarantee’ – this means the seller is fully capable of transferring the shares free of any third-party rights or restrictions.
A SPA should specify the sale price, currency and timescale for payment. Usually, this is made in cash, although sometimes the buyer offers the seller shares loan notes – you’ll need a lawyer for this.
The purchase price may be fixed or variable, and adjusted when the transaction completes, for example, where the price has been worked out with reference to the value of the company’s assets or earnings.
Usually, SPAs are signed, the purchase price paid, and the shares transferred on the same day.
Sometimes there’s a delay between signing the SPA and completion, particularly when there are conditions to be met before the sale can take place.
If so, you’ll need a lawyer to firm up the conditions and handle the gap involved. A long-stop date by which the conditions must be fulfilled is essential, as well as a provision that states what will happen if any of the conditions aren’t met by that date.
Here are some typical conditions:
One of the reasons it’s so important to use a lawyer to draft an SPA is to get clarity on the conditions, who’s responsible for meeting them, how to determine whether they’ve been met, and what to do if the long-stop date isn’t met.
Another reason to involve a lawyer is that there can be a long time between the date the contract is signed and the date that the conditions are met. During this time, the business might suffer losses or be other events that could cause the buyer to wish to withdraw. Careful SPA drafting can help protect the buyer against such unforeseen occurrences.
‘Best endeavours’ has a precise legal meaning, so you shouldn’t agree to this lightly. It means that you must achieve a certain goal, no matter the cost. After ‘best endeavours’, the next most strict requirement is ‘all reasonable endeavours’ followed by ‘reasonable endeavours’.
The final sale price for the shares may be flexible, depending on how the company performs post-sale. If so, the business will prepare a set of completion accounts that value the company at the point of sale. If the business doesn’t perform as expected, the share price can be adjusted.
This is complicated to draft, and you need to involve accountants or other professionals to set a fair price that reflects the parties’ expectations.
The sale price may be paid in instalments that relate to the company’s performance post-sale. It could be calculated with reference to post-sale profits, or the meeting of performance targets. Get these drafted by a pro.
If you are considering an earn-out clause, bear in mind:
If part of the purchase price will be held back by the buyer following completion, for example, to meet potential claims under the seller’s warranties and indemnities, this can be put into escrow and only released when certain terms have been met.
The SPA needs to describe in detail what happens at completion, for example:
Because the general rule of ‘buyer beware’ applies to the sale of shares, the law doesn’t give the buyer much protection if unexpected liabilities or problems pop up after the sale. Because of this, the seller will give the buyer statements and promises regarding the state of the company’s affairs and assets (warranties).
The seller may also give indemnities to the buyer – this means that the buyer is on the hook for any losses the buyer incurs if the warranty is breached.
The warranties have two main purposes:
If a warranty turns out to be untrue, the buyer will bring a breach of contract claim against the seller to recoup a portion of the purchase price. A buyer won’t be able to bring a claim for breach of warranty if the seller has already told them about the issue. For this reason, the seller will make ‘disclosures’ to the buyer during the sale so that the buyer can evaluate the nature of the risk and adjust the purchase price if necessary.
These disclosures are made in a ‘disclosure letter’ negotiated and handed over at completion. This helps to flush out any issues not known to the buyer and that could affect the purchase price or decision to buy.
The wording of warranties and indemnities must be extremely precise and should be drafted by an expert.
Restrictive covenants stop a seller from competing with the buyer after the sale.
For example, they may prevent the seller from operating in the same sector or geographical area, or stop them from approaching the buyer’s employees, customers or suppliers.
Some restrictive covenants are implied by law, for example, to prevent the seller from using the company’s trade secrets or pretending to be acting on behalf of the company, post-sale. However, these are limited in scope, so the advice of a professional is essential.
Although restrictive covenants are important insurance for the buyer, they must be very carefully worded as if they are too wide, they can be deemed unreasonable and therefore unenforceable.
Because a SPA is a private transaction, it usually contains provisions restricting the flow of confidential information and preventing the buyer and seller communicating details of the deal to third parties.
Similarly, the SPA may contain a clause that describes how, where and when announcements about the transaction may be made public.
If you’d like to know more about Mergers or Acquisitions or would like further information about buying or selling a company contact our team of expert M&A lawyers.
This depends on the nature of the parties, for example, whether they are limited companies, individuals or partnerships. In most cases, the document can just be signed and not witnesseds and sealed.
You can do this electronically or manually.
Even if the seller does their best to disclose the business’s tax liabilities before signature, sometimes unforeseen tax liabilities can arise. For this reason, SPAs usually contain tax warranties and a tax covenant (or tax indemnity) that covers the buyer should such expenses come to light.
A tax covenant aims to cover the buyer completely for the whole amount of the tax payable. If the tax liability arose because of pre-completion activities, the seller will pay. If it arose because of post-completion business, then this will be the buyer’s responsibility.
The reason for tax warranties (in addition to the tax covenant) is so that the buyer can additionally get protection for tax liabilities after completion that are greater than they anticipated following their inspection of the seller’s records (for example, the way that tax allowances and reliefs have been calculated).
The share purchase agreement will often provide a mechanism for resolution of disputes, sometimes using a mediation or arbitration procedure. Otherwise, the parties may take legal action.
The share purchase agreement is a crucial document in any M&A transaction and beware of going the DIY route as this can prove costly. The SPA is often heavily negotiated and only finalised at a late stage. Having a legal team in place that understands the business and your goals will ensure you achieve a fair distribution of risk and reward. Choosing a good legal advisor is your best protection against unforeseen liabilities and future disputes and helps ensure that you achieve a result that’s right for you and your business.
For more answers to commonly asked questions and advice on share purchase agreements, mergers and acquisitions and tax covenants, consult our corporate solicitors. Get in touch on 0800 689 1700 email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
About our expert
Having qualified as a solicitor in 2003, Adam has over 20 years' experience in advising businesses on their growth and exit strategies. Adam joined Harper James as a Partner in 2018 and became Head of Corporate in 2022. As of April 2024, Adam’s new role is Chief Legal Officer & Head of Corporate. In this role, he is responsible for the legal services aspects of Harper James and for defining the firm’s strategic vision and objectives to achieve our long-term goals, together with our CEO, Toby Harper, and the other senior leaders.
