Share Purchase Agreement - overview

What is a Share Purchase Agreement?

A Share Purchase Agreement ("SPA") is the formal contract in a share sale transaction in a private company, typically used as part of the process of buying all shares in a company, but equally, a share purchase agreement may also be used for an investment which does not involve all the shares.

Many key terms (see below) will apply regardless of the type of underlying transaction but there will be differences depending on whether the transaction is :-

• Sale of the entire share capital  - i.e the company is being sold.

• Acquisition of a controlling interest in the company.

• Purchase of a minority interest

Share purchase vs asset purchase

When acquiring a business in the UK, there are 2 primary options: a share purchase or an asset purchase. Each approach has distinct advantages and disadvantages, which can significantly impact the transaction's structure, tax implications, and potential liabilities.

In a share purchase, the buyer acquires the shares of the target company. This means they acquire the entire company, including all its assets and liabilities, existing contracts remain in place, avoiding the need for complex assignments and employee rights, including pensions and collective bargaining agreements, transfer automatically. The buyer assumes all the target company's liabilities, both known and unknown.

In an asset purchase, the buyer acquires specific assets of the target company, such as property, equipment, and intellectual property. The buyer can choose which assets to acquire and can often negotiate to exclude unwanted liabilities. An asset purchase will involve assigning (transferring) existing contracts which may need the other contract party's consent to third-party consents. Employee rights may or may not transfer under TUPE regulations, requiring careful consideration.

Key terms in all types of Share Purchase Agreement

• Purchase price and payment terms - establishes the agreed-upon price for the shares and outlines the payment schedule.The most common forms, quite commonly made up of a combination, of consideration are as follows:

  • cash either all or part payable at completion.

  • deferred consideration is often used and can take many forms but the most often used mechanism is based on a certain timeframe (eg 12 months after completion of the transaction), an earn out, or loan notes.

  • an issue of shares in the buyer.

  • some form of debt instrument such as loan notes – there is a section below summarising loan notes) issued by the buyer to the seller.

• Warranties and indemnities -  legally binding assurances, typically about the accuracy of information provided, finances and other important issues and, with a full share sale, probably indemnities in favour of the buyer against specific potential future liabilities. If a warranty is found to be untrue when given at completion, then the buyer can make a claim against the seller for a breach of warranty. Warranties serve two main purposes, firstly to provide the buyer with a remedy, and secondly, to encourage the seller to disclose known problems. If a seller does disclose against a warranty then generally a buyer cannot make a claim for a breach of warranty for matters that are known to the buyer. Negotiation of the warranties can be lengthy and time consuming, as the seller needs to review each warranty, confirm the warranty can be given, and at the same time identify any disclosures, while the solicitors will try to limit the warranties (if acting for the seller) or preserve or extend them (if acting for the buyer).

• Conditions precedent - specific events that must occur before the agreement is finalised, such as regulatory approvals or financial audits.

• Post-completion restrictions and covenants -  restrictions and obligations given by departing shareholders, such as non-compete agreements, confidentiality and information sharing clauses. The most common provision is preventing the seller from establishing a competing business following completion, thereby protecting the goodwill of the target company (also known as a non-compete clause). Other key restrictive covenants are designed to prevent the seller from taking suppliers or employees (also known as a non-solicitation clauses).

• Termination provisions - circumstances under which either party can terminate the agreement before completion.

Potential risks, negotiating points and Issues

Navigating an SPA requires awareness of potential risks :-

• Minority shareholder rights - When acquiring a non-controlling stake, consider voting rights, dividend distributions, drag-along and tag-along rights, Board representation (board seats or observer rights), possible different classes of preference shares with enhanced voting and/or other rights

• Breach of warranty - If a seller's warranty proves inaccurate, the buyer may claim damages but successful recovery of losses is always uncertain.

• Tax implications - understanding tax consequences for both parties is crucial.

• Change of circumstances - unforeseen events like market downturns or regulatory changes can impact the transaction.

Deferred Consideration

In many full company sales, the buyer will seek to agree that part of the purchase price is deferred. If agreed, this will deferred payment is often in the form of an earn out where part of the purchase price may be tied to the company's future performance, aligning buyer and seller interests and incentivizing post-closing value creation.

Another potential funding method with private equity investments is convertible loan notes. There are considerable risks for remaining shareholders

Other documents that may be needed

Although the SPA contains the details that form the basis of the acquisition, other documents are often used to cover additional legal or commercial issues. These vary depending on the nature of the transaction but usually include:

• Disclosure Letter - . a key document in the process of the seller making general and specific disclosures against the warranties contained in an SPA to reduce the risk of warranty claims. Disclosures are also beneficial to the buyer as they can combine the disclosures with their own findings to create a more complete picture of the target company.

• Release of Security - if there is a charge (such as a debenture put in place by a lender) then these are usually released at completion.

• Loan Notes - if part of the purchase is in the form of loan notes.

• Service Agreements - if the seller stays with the target company after completion, for example, as an employee or director, the buyer may want the seller to enter into a new service or employment agreement. Equally, if the seller is a consultant then a consultancy agreement can be used.

• Guarantee - where the buyer requires a third-party guarantor to guarantee performance of the obligations and liabilities of the seller under the SPA, a guarantee may be required.

• Board Minutes and other company law formalities - board minutes record the discussions and decisions made at a board meeting, director resignation form and stock transfer forms.

How we can help

Our experienced corporate lawyers offer a comprehensive range of services to guide you through the entire process, including due Diligence, skilled negotiation of key terms, such as price, warranties, indemnities, and conditions precedent, preparation and review of comprehensive share purchase agreements, including confidentiality agreements and exclusivity agreements, tax issues and post-completion adjustments, warranty claims, and other related matters.

Please call or email us to discuss your needs and to find out why we are the right choice of lawyers for you.