Share Purchase Agreement Draft - Overview

People hold a stake or ownership in a company through shares. Several times, people buy and sell shares in companies. In a share purchase agreement, the person buying shares is the buyer. This transaction of buying and selling shares is done through this legally binding agreement. A draft share purchase agreement is an agreement between two parties in which the seller agrees to sell the stated number of shares to the buyer at a particular price.

The agreement is made to prove that both parties agreed to the transaction and includes various other details of the transaction. A share purchase agreement as per companies act 2013 can be drafted by legal experts who are aware of the process and the procedure of such a transaction. Vakilsearch is one such organisation that will handle this for you.

Who Are the Parties of a Share Purchase Agreement?

The parties involved in a Share Purchase Agreement (SPA) are typically:

• The Seller(s): These are the current owner(s) or holder(s) of the shares that are being sold. The seller could be an individual, a group of individuals, or a company.
• The Buyer: This is the individual or entity that is purchasing the shares. The buyer could be an individual, a group of individuals, or a company.
• The Company: The company whose shares are being sold is also a party to the agreement, although its role is typically passive. The company itself doesn't sell or buy the shares but is affected by the transaction.

Contents of a Share Purchase Agreement

The share purchase contract specifies the agreed terms of the company stock sale. It includes:

• Company name
• Share face value
• Buyer's name
• Seller and buyer promises
• Staff perks
• Number of shares sold
• Transaction specifics
• Protection from unexpected costs

A letter of intent sets the stage before finalising the contract. The buyer should verify if the letter and contract terms match during their due diligence. The seller must focus on the sale and warranty sections. The letter of intent's terms should reflect in the sale. Any inconsistencies might be due to buyer diligence, requiring negotiation before finalising the contract. Warranties must be verified for accuracy. Any false information could lead to legal repercussions. The seller may need to adjust the sale price if any misrepresentations are found.

Prerequisites Before Drafting a Share Purchase Agreement

• Identification of Parties: The buyer and seller must be clearly identified.
• Due Diligence: A thorough investigation of the company's financial and legal status should be conducted.
• Letter of Intent: A letter outlining the basic terms of the deal should be agreed upon by both parties.
• Valuation: The value of the shares to be purchased must be determined.
• Legal Advice: Both parties should seek legal advice to ensure they understand the terms and potential risks.
• Financing: If necessary, the buyer should secure financing for the purchase.
• Negotiation: The terms of the agreement must be negotiated and agreed upon by both parties.
• Regulatory Compliance: The sale must comply with all relevant laws and regulations.

How Do You Execute a Share Purchase Agreement?

• Due Diligence: This is a detailed investigation carried out by the potential buyer into the target company. It reviews all important aspects of the company, such as business transactions, permits, licenses, liabilities, and assets. The information gathered from this process helps to set the terms of the SPA and determine the purchase price of the shares​
• Term Sheet: Before drafting the SPA, the parties should agree on a term sheet. This outlines the key terms of the SPA. Having this in place makes drafting and negotiating the SPA easier because the main terms have already been agreed upon​
• Sale and Purchase of Shares: This crucial clause in the SPA specifies the number of shares being sold, their price, how payment will be made, and when. It's important to note that payment and transfer of shares often don't happen on the same date the SPA is entered into, due to obligations that need to be met before the shares can be transferred​
• Earn-Out and Holdback: The purchase price can be a fixed sum, or it can be adjusted based on terms the parties agree to. The buyer might choose to withhold some of the purchase price until the seller has met all post-completion conditions
• Escrow: An escrow agent can be appointed to hold the shares and the purchase price as security, and to make sure the parties fulfil their responsibilities. This is particularly important if the purchase price might fluctuate due to adjustments, earn-outs, and holdbacks
• Representations and Warranties: These are factual claims made by the parties to encourage each other to enter into the agreement. They usually last until the date of closing, but sometimes they may continue beyond that. The indemnity and termination clauses in the agreement protect these representations and warranties
• Pre-Closing Covenants: These rules are put into the SPA to ensure the company doesn't change significantly between the time the SPA is executed and the time the shares are transferred. If these rules are broken, the indemnity and termination clauses of the agreement come into play​
• Conditions Precedent and Closing Conditions: These are actions that both parties must take before the shares can be sold. If these actions aren't completed on time or to the satisfaction of the other party, that party can seek to terminate the SPA​
• Indemnification: This clause outlines who is responsible for any losses a party incurs due to a breach of any representation, warranty, covenant, or obligation under the agreement

What is the need of Share Purchase Agreement?

A share purchase agreement (SPA) is a legally binding document that outlines the terms and conditions of the sale of shares in a company. It is used to protect the interests of both the buyer and the seller, and to ensure that the sale is conducted in a fair and transparent manner.

The SPA typically covers the following:

• The number of shares being sold
• The purchase price
• The payment terms
• The representations and warranties of the seller
• The covenants of the buyer and seller
• The conditions precedent to the sale
• The indemnification provisions
• The governing law
• The dispute resolution mechanism

The SPA is an important document that should be carefully reviewed by both the buyer and the seller before it is signed. It is important to have a lawyer review the SPA to ensure that it is fair and protects your interests.

Advantages & Disadvantages of Share Purchase Agreement

Advantages of Share Purchase Agreement:

• Legal Clarity: A Share Purchase Agreement (SPA) provides a clear and legally binding contract that outlines the terms and conditions of the share transaction, reducing the likelihood of misunderstandings or disputes.
• Protects Interests: The SPA includes representations, warranties, and indemnification clauses, which protect the interests of both the buyer and the seller, providing recourse in case of misrepresentations or breaches.
• Smooth Transaction Process: With a well-drafted SPA, the share acquisition process can proceed smoothly, as it sets out the conditions precedent that must be fulfilled before the transaction is completed.
• Due Diligence Facilitation: The SPA encourages the buyer to conduct due diligence before finalizing the deal, allowing them to assess the company's financial, legal, and operational health.
• Control and Ownership Transfer: For the buyer, the SPA allows for a transfer of ownership and control over the company's assets, operations, and future profits.
• Compliance with Laws: The SPA ensures that the share transfer is conducted in compliance with relevant laws and regulations, minimizing legal risks for both parties.
• Confidentiality: Confidentiality clauses in the SPA protect sensitive information shared during negotiations, safeguarding business secrets and competitive advantages.

Disadvantages of Share Purchase Agreement:

• Complexity: SPAs can be complex legal documents, requiring professional expertise to draft accurately. Without proper legal advice, parties may overlook essential terms or include unfavorable provisions.
• Liability Risks: Sellers may face potential liabilities for representations and warranties made in the SPA, leading to legal claims if information is inaccurate or omitted.
• Due Diligence Costs: The due diligence process before signing the SPA can be time-consuming and costly for the buyer, especially for complex transactions.
• Share Price Negotiation: Disagreements over the share price and other terms during negotiations can delay or even derail the transaction.
• No Assurances on Future Performance: The SPA focuses on the present condition of the company, and there are no guarantees about future business performance or market changes.
• Limitation of Control for the Seller: Once the shares are sold, the seller relinquishes control over the company, and the buyer gains decision-making authority.
• External Factors: Economic fluctuations, changes in industry trends, or unforeseen events can impact the value and profitability of the acquired shares.

Benefits of Share Purchase Agreement India

• Share Allocation: The agreement clearly states the share percentage designated to the buyer or entity
• Rights and Liabilities: The agreement outlines each party's rights and liabilities. In case of breaches, parties refer to the agreement first
• Warranties: The agreement includes specific warranties for all parties. No party can avoid obligations arising from the agreement
• No Third-Party Interference: The agreement involves a fixed number of parties, with no third-party involvement.

Share Purchase Agreement - Checklist

• Though it is not legally required, recitals are to be included because it sets down the primary context of the agreement
• The agreement must mention the accurate and complete details of the parties
• It must include the number of shares involved in the transaction and any other details of the shares
• The purchase price of the shares is considered to be fair to both parties in a Share Purchase Agreement
• Mutual agreement on the mode of payment of the purchase price
• The closing mechanism for city, date, time and the duration within which the procedures are concluded
• The warranties and representation of the buyer and seller
• Warranties are contractual statements by the seller made upon the conclusion serving the objective of delivering out the information which the buyer must be aware of in regard to the shares and business involved
• Any false or inaccurate information provided may land all parties in the court, thus proper attention must be taken
• Statement of severability and binding effect of the agreement.

Share Purchase Agreement - Drafting Procedure

• Step 1: One has to approach a law consultant who will consider and hear all the necessary details of the transaction
• Step 2: The lawyer will then draft the share purchase agreement format India accordingly and explain about the stamp duty on share purchase agreement, if needed.
• Step 3: The draft agreement will be sent to you for review by the lawyer within 5-6 business days.

Circumstances That Warrant a Share Purchase Agreement

When a company or person buys or sells business shares, they need a share purchase agreement. For example, in a two-partner business, if one leaves, the other can use this agreement to buy the departing partner's shares.

Share Purchase Agreement Draft - Documents Required

• Share Transfer Form: After completion, the seller of the shares must hand it over to the buyer, a signed share transfer form setting out the shares being transferred and the consideration received.
• Share Certificate: The company requires to cancel the seller’s existing share certificate and gives new share certificates according to the new shareholdings.
• Letter of Resignation: If the seller resigns from the company, the seller must hand over the resignation letter prior to or on completion.
• Notification to ASIC: Once a share sale has been effected, the company requires to notify the ASIC (application-specific integrated circuit) within 28 days of the change. This can be done by Form 484, which is available on the ASIC website.

Why Do You Need a Share Purchase Agreement?

A Share Purchase Agreement (SPA) is a vital legal document that outlines the terms and conditions of a company's sale and purchase of shares. It serves several essential purposes and is crucial for various reasons:

• Legally Binding Contract: The SPA is a legally binding contract that formalizes the buyer and seller agreement. It ensures that both parties are committed to fulfilling their obligations per the agreed-upon terms.
• Clarifies the Transaction: The agreement clearly defines the specifics of the share transaction, including the number and type of shares being sold, the purchase price, and payment terms. This clarity helps to avoid misunderstandings or disputes later on.
• Protects Both Parties: The SPA includes representations and warranties from the buyer and the seller, ensuring that each party provides accurate information about the shares and their condition. This protection helps to mitigate risks and provides recourse if any misrepresentations occur.
• Establishes Rights and Obligations: The SPA outlines the rights and obligations of both parties involved in the transaction. It specifies what is expected of each party before, during, and after the sale of shares.
• Facilitates Due Diligence: Before entering into the SPA, due diligence is conducted to assess the company's financial and legal health. This process helps the buyer to make an informed decision and understand the risks associated with the purchase.
• Enables Smooth Closing: The SPA sets out the conditions precedent that must be met before the transaction can be completed. This ensures that the necessary approvals and requirements are fulfilled, leading to a smooth closing of the deal.
• Provides Indemnification: The SPA includes indemnification clauses to protect the parties from potential losses or liabilities arising after the transaction. It offers a mechanism for seeking compensation if certain agreed-upon conditions are unmet.
• Compliance with Laws: The SPA ensures the share purchase complies with applicable laws and regulations. It provides a framework for the legal transfer of ownership and helps avoid legal complications.
• Preserves Confidentiality: In cases where sensitive business information is exchanged during negotiations, the SPA includes confidentiality clauses to protect such information from being disclosed to third parties.
• Legal Recourse in Disputes: If any disputes arise between the parties, the SPA serves as evidence of their agreement, facilitating legal recourse and potential resolution through courts or arbitration.

What Are the Components of a Share Purchase Agreement

• Name of the company
• Par value of shares
• Name of purchaser
• Warranties and representations made by seller and purchaser
• Employee benefits and bonuses
• Number of shares being sold
• Details of the transaction
• Indemnification agreement for unforeseen costs

Prior to finalising this agreement, parties draft a Letter of Intent. This document sets the stage for the negotiation process, spelling out preliminary understandings between both parties.

The buyer should perform thorough due diligence to ensure that the terms in the final Share Purchase Agreement align with those initially proposed in the Letter of Intent. If discrepancies emerge, they likely arise from findings during the due diligence process, and will require negotiation before reaching a finalised agreement.

The seller, in turn, must scrutinise the Sale and Purchase section and the Warranties and Representations section. These segments encapsulate the core of the agreement, outlining the sale terms and affirming the accuracy of all statements made about the company.

The Sale and Purchase terms must match those in the Letter of Intent. Any discrepancies need addressing before finalising the agreement.

Warranties and Representations must also undergo careful review to prevent any false assertions. Should any arise and later become discovered, the guilty party might face legal action. Any misrepresentations could also result in an adjustment of the purchase price, potentially resulting in reimbursement from the seller.

Key Terms of a Share Purchase Agreement

Some of the key terms of a share purchase agreement (SPA) include:

• Purchase Price: The price at which the shares are being sold
• Conditions Precedent: The requirements that must be satisfied before the transaction can be finalised
• Representations and Warranties: The seller's promises about the shares being sold
• Due Diligence: The process of investigating the company and its shares before the sale is completed
• Indemnification: A promise by the seller to compensate the buyer if there are any losses arising from the sale
• Closing Date: The date on which the sale is completed is mentioned in the share purchase agreement.
• Escrow: A mechanism for holding back a portion of the purchase price until certain conditions are met
• Non-Compete Clause: A promise by the seller not to compete with the buyer for a certain period of time
• Governing Law: The law that will govern the agreement and any disputes that arise from it
• Confidentiality: The obligation of both parties to keep the details of the agreement confidential.

WShare Purchase Agreement Format

The parties involved in the trade is expected to adhere to all the terms and conditions provided henceforth:

Sale and Purchase of Shares

Subject to the terms and conditions of this share purchase agreement, Seller hereby agrees to sell, transfer, and give to Buyer, and Buyer hereby agrees to purchase from Seller, the Shares, free and clear of all liens, claims, encumbrances, and restrictions of any kind.

Purchase Price

Rupees ₹[Purchase Price]) shall be the purchase price for the Shares, which is due at closing (as defined below).

Closing

On [Closing Date] (the 'Closing Date') at [Closing Time] at [Closing Location], the acquisition and sale of the Shares will be finalised (referred to as the 'Closing'). The following things must happen at the Closing:

• Seller shall provide to Buyer stock certificates representing the Shares, duly endorsed in blank or together with duly executed stock powers, and such other documents as may be required to transfer the Shares to Buyer;
• Buyer shall provide to Seller the Purchase Price by wire transfer or certified check;
• The parties shall sign and submit any additional documents and instruments that may be considered reasonably necessary in order to consummate the transactions contemplated by this Agreement.