A Share purchase agreement (SPA) is a type of agreement under which terms and conditions are set out in relation to sale and purchase of shares in a company. It is mainly a contract of sale and purchase of share capital of the company. Under this, buyer is liable to pay certain amount i.e. Purchase price and thereafter share purchase agreement is executed. There is a requirement to review stamp duty under the relevant jurisdiction. This agreement shall be signed by both the parties i.e. seller and purchaser. Share purchase agreement consist the clauses which deals with the purchaser’s rights & obligations in the capacity of shareholder.
Core Elements of Share Purchase Agreement
Ø Description of the shares to be acquired
Ø Purchase Price
Ø Representation & warranties
Ø Obligation regarding Confidentiality
Ø Non-Competition
Why there is a need of Share Purchase Agreement?
Share purchase of a company constitutes that shareholders are the owners of the company. At the time shares are purchased, no existing contract is altered. In case shares are sold by the shareholder in a company then there is a break of relationship between the company and the shareholder. Share Purchase Agreement defines the terms & conditions between the company and shareholder.
Following below mentioned matters will be dealt under share purchase agreement:
1. Parties to the Share Purchase Agreement
This type of agreement comprises seller & acquirer.
2. Recitals
Recital of an agreement defines the relationship among the parties. Object and roles of the parties are also defined there under.
3. Share Transfer
Whenever share transfer takes place in a company, ownership will pass to the transferee. There will be description of rights & liabilities of the transferee.
4. Condition Precedent
There must be an exhaustive clause which will provide necessary permissions & permits. It should clearly state the person responsible for obtaining each.
5. Confidentiality
There should be clause which will be regarding confidential information shared among the parties involved.
6. Force Majeure
This clause is applicable in case of unwanted situation arise such as financial crisis. It strengthens the interest of parties involved in agreement.
7. Dispute Resolution
In case of any dispute among the parties, it shall be referred in arbitration to resolve dispute.
8. Jurisdiction
There will be an applicability of Indian laws where the registered office of the company is situated.
Advantages of Share Purchase Agreement
1. No involvement of third party
Shares can be purchased without the intervention of any third party. Therefore the process of share purchase is much distinct in comparison to asset purchase.
2. No liability for debts
There will be no liability of seller of shares for the company’s debts. As company has a separate legal personality from its directors and shareholders. Whereas in comparison to asset sale, all the current liabilities will be kept by the seller, unless negotiations have been made with the buyer to take them over with the business
Disadvantages of Share Purchase Agreement
1. Inheriting outstanding problems
Seller’s company will be inherited by the buyer which implies that problems will also be inherited which is in existence at the date of sale.
2. Risk
There is an involvement of greater risk in comparison to asset purchase as buyer inherits a company. Warranties are also there which are required to protect the buyer.
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