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SHARE PURCHASE AGREEMENT AND ITS IMPORTANCE

Meaning of Share Purchase Agreement

The term “share purchase agreement” refers to any binding agreement between two parties for the sale of shares of stock. The contract may designate them as the seller and buyer. The contract specifies the number of shares to be purchased at the agreed-upon price. As evidenced by this contract, the parties hereto have mutually agreed to the foregoing conditions of sale[1]. Buying shares is the same as buying the company itself, thus all of your current agreements with the firm will remain in effect. The tie between an investor and the company is severed irrevocably when the investor sells his or her shares. However, the buyer will need the seller to make certain representations and guarantees (warranties) regarding the firm that will remain binding on the seller even after the transaction has closed.[2]

What is the Importance of the Share Purchase Agreement?

Share purchase agreements are widely used in the corporate world because they make the buying and selling of stock legitimate. When a share is sold to a buyer or a seller in two areas with distinct legal systems, or when a buyer or a seller is located in a country with a different legal system altogether, a purchase agreement might mitigate the risks involved. Information on the firm, the individuals participating in the share sale, a dispute resolution clause, the amount and kind of shares being sold, a provision for the sale’s termination, and the terms of payment are all included in the agreement. It is structured such that the participants participating in the transaction get the broadest possible protections under applicable law[3]. The necessity stems from the fact that it is a legally binding document. Any potential misunderstanding between the parties is lessened by this agreement. As a result of this agreement, the Buyer can have confidence in the Sellers’ ownership, which serves as the legal basis for the transaction. Every facet of a stock sale is included in this document. In the share purchase agreement, a dispute resolution form is attached, including seller warranties.

The Share Purchase Agreements become more important due to the following reasons –

Due diligence – Due diligence is the initial stage for every investor investing in a company. To a large extent, the scope and scale of the due diligence process will be determined by the nature, size, and operations of the target firm. Business deals, licenses, authorizations, agreements, obligations, assets, borrowings, etc. would all be investigated during due diligence. This would give the buyer a complete picture of the company’s operations and any risks they may face in the future. Shares of the firm can then be priced accordingly, and sellers can pay an indemnification against any possible liabilities that have been identified.

Protection to Parties – Before any shares are ever traded, the parties to a share purchase agreement have a chance to look out for their own best interests. It is essential for the parties to a Share Purchase Agreement to carefully review each provision of the agreement and fully comprehend its importance since it applies to every aspect of the transaction.

Parties to Share Purchase Agreement

The typical participants are the vendor and the purchaser. It is possible, however, for the parties to be specially formed corporations whose sole purpose is to enter into the Share Purchase Agreement[4]. Covenanters or guarantors should include the principles of the substantive entities in these situations to assure the entities’ adherence to the contract. When there is more than one buyer and if the associated companies are established to enact a SPA, it is essential to make the owners of those companies’ guarantors or covenanters protect the payment in the event of fraud or other contingencies and to guarantee that the agreements made are kept[5]. A custodial agent is designated to keep the transferring shares as well as the purchase amount as collateral and be in charge of making sure the parties’ obligations are fulfilled. This is crucial when the transaction’s purchase price changes as a result of revisions, earn-outs, and holdbacks. The escrow agent is granted authority to work in both parties’ best interests and accordance with the terms of a share purchase agreement by the parties in a different agreement with the escrow agent.

How to Write a Share Purchase Agreement?

A share purchase agreement will often include the following facts: the company’s information; the seller and purchaser of shares; a dispute resolution provision; a termination clause; the kind of shares being sold; the number of shares being sold; the price of the shares being sold; and payment details.

Some of the most important clauses that must be covered in SPA are:

  1. Definitions and Interpretations of various terms and conditions – Each term used in this Agreement must be defined in terms of its meaning as used in this Agreement, and each provision of this Agreement should be read in the same manner. The scope of a definition should correspond closely to the scope of the term being defined.
  2. Details of the parties – The most important aspect of any contract is the people who are party to it. Both the seller and the buyer are considered to be parties in a share purchase agreement. Companies are often formed only to into a share purchase arrangement or to serve as a “shell” corporation for another purpose.
  3. Confidentiality – This is a key part of the agreement to buy shares of stock. Since the parties have already exchanged proprietary information, this section will serve to prevent any third party from learning about the exchanged data without the prior approval of all involved parties. Confidentiality provisions often have a time limit of between 18 months and two years.
  4. Resolution of disputes and Arbitration – Although arbitration is not widely used in India, the Supreme Court has decided that it can take place in India if both parties are Indian, or outside if one party is not a citizen or permanent resident. The number of arbitrators, the language to be used in arbitration proceedings, and the applicable legislation for procedures should all be included in this article.
  5. Authorizations, permissions, and the permits needed to be taken before the sale The agreement must specify in detail the approvals, permissions, and permits that must be obtained before the shareholder sells or transfers shares. It must be made clear who is in charge of requesting these permissions as well. A clause that gives the buyer the option to waive a condition is frequently added to ensure flexibility[6].

Since there are typically two classes of shares, one where shareholders can voice their opinions on the board of directors’ actions and policies and the other where shareholders cannot, the SPA must specifically identify the type of shares so that there is no misunderstanding between the parties. Therefore, the type of shares must be made clear. When preparing to construct a SPA, it is strongly advised that you engage a knowledgeable attorney who will ensure that the contract eliminates all potential future contingencies.

When is a Share Purchase agreement enforced?

It just requires the fulfillment of two fundamental ideas, namely the offer and the acceptance of the offer, to enforce a share purchase agreement. This enables the legal enforcement of such agreements. It just takes the fulfillment of two fundamental ideas, namely the offer and the acceptance of the offer, for a share purchase agreement to be enforceable. This enables the legal enforcement of such agreements. It is essential to establish these two ideas. However, it should be highlighted that the SPA must be correctly developed and not just a copy of a template. All pertinent information on the firm, shareholders, and shares must be stated in the agreement. The SPA will need to describe in detail what happens at completion, for example, the details related to office designations or the directors, the time and date of completion, and the exact procedure at completion[7].

CONCLUSION

Despite our vast cumulative knowledge in this area and numerous SPAs that have been “executed” over the years, the ideal entirely error-free agreement eludes us all. Even after the share sale is complete, additional activities might still need to be taken by the parties’ agreement. These range from stopping any ongoing legal proceedings against the firm to transferring records in the buyer’s favor. Only after the successful completion of the share transfer are all of these acts possible. Depending on which parties a lawyer is representing, a share purchase agreement will be drafted differently. Similar to this, so does the quantity of representations and guarantees. However, the transaction that controls the agreement is what gives it its charm. The ultimate document that every corporate attorney aspires to design is a share purchase agreement. Setting the stage for creating a SPA in this article.

Author(s) Name: Himanshi Choudhary (O.P. Jindal Global University, Sonipat)

References:

[1]‘Share Purchase Agreement’ (Cleartax, 31 March 2021) <https://cleartax.in/s/share-purchase-agreement#:~:text=A%20share%20purchase%20agreement%20is,it%20were%20mutually%20agreed%20upon> accessed 4 August 2022

[2]Millie Johnson, ‘Share Purchase Agreement’ (Rocket Lawyer) <https://www.rocketlawyer.com/gb/en/quick-guides/share-purchase-agreement> accessed 4 August 2022

[3]Pankaj Tyagi, ‘Essential Clauses In A Share Purchase Agreement: A Detailed Overview’ (Corpbiz, 10 May 2021) <https://corpbiz.io/learning/essential-clauses-in-a-share-purchase-agreement/> accessed 4 August 2022

[4]Share Purchase Agreement (n 1)

[5]Ashish Shaji, ‘Share Purchase Agreement: Importance And Key Contents In Drafting’ (Enterslice, 24 April 2020) <https://enterslice.com/learning/share-purchase-agreement-importance-and-key-contents-in-drafting/> accessed 4 August 2022

[6]Ibid

[7]‘Share Purchase Agreements (SPA): Your Practical Legal Guide’ (Harper James, 18 May 2020) <https://harperjames.co.uk/article/share-purchase-agreements-practical-legal-guide/> accessed 4 August 2022