3 Key Elements Of A Share Purchase Agreement

In a private share acquisition, the parties enter into a Share Purchase Agreement. This agreement is the core document governing the transaction; documenting the terms and conditions of the transaction. Every transaction is different and therefore every Share Purchase Agreement is different and should be tailored to your transaction. However, there are common provisions that a Share Purchase Agreement should have:

Operative Provisions

These are provisions that set out what the parties are buying and selling, how much for and when monies are due. It is crucial that these are carefully drafted so that there is clarity for both parties on what they are getting out of the deal and when. Whilst it may seem like these are obvious and straight forward, they are often complex to account for deferred consideration and purchase price adjustments (for example to account for cash and debt as at completion, net assets as at completion or even post-completion performance of the target). Getting this wrong could result in lengthy litigation due to misunderstandings of what is expected, or even a contract failing altogether due to lack of clarity. Therefore, it is best to engage with your solicitors to ensure these are concisely drafted to reflect your intentions.

Warranties

A share purchase is a high risk transaction, particularly because a buyer inherits a company’s liabilities as well as its assets. Therefore, a prudent buyer usually seeks assurances from a seller in the form of warranties. These are legally binding promises and statements about the company being acquired and its business, inducing the buyer to enter into the contract itself. If these warranties turn out to be untrue, this could give rise to a claim against the seller. Therefore, these need to be carefully negotiated to ensure that their scope is sufficient protection for the buyer, but not an unrealistic demand on the seller.

Restrictive Covenants

When taking on a business, any buyer will want to ensure that the Seller doesn’t set up a new business in direct competition with the one they have just acquired. Therefore, to protect the goodwill of their new company, a buyer will commonly require a series of covenants from the seller preventing competition and poaching. These should be reasonable to be enforceable, that is they cannot be too onerous in terms of how long they apply for. They should also have a geographic element as they limit the restriction to the territories in which the buyer’s business has operated to date.

Of course, these are only some elements that will need careful consideration. Other provisions such as a Tax Covenant, completion accounts and buyer covenants may all form a part of a transaction. To mitigate risks, it is also important that the buyer undertakes detailed due diligence to understand the business they are acquiring pre-completion and that the Sellers make full and frank disclosures in a Disclosure Letter.

Buying and selling shares is a complex process with many factors to account for and our Business Services team is here to help every step of the way. If you would like to know more about the process and documentation involved, contact us on 01604 828282 / 01908 660966 or email [email protected].