What Is Share Purchase Agreement? A Complete Guide

Discover what is share purchase agreement is, its key terms, and why it’s essential in buying or selling company shares.

Let’s travel back in time to the stage of my entrepreneur’s life where my co-founder and I were negotiating with an investor to sell a portion of the equity in our startup. We were thrilled’ somebody had finally believed in what we had built! But then the lawyers for the investor brought something we had not quite realized: a Share Purchase Agreement, or SPA. My initial impulse was: “Sounds complicated and scary.” But as we continued reading, it became clear’ this was not lawyerly mumbo-jumbo. This was the backbone of our agreement, the document that ensured everything was done right, justly, and openly.

So, what is a Share Purchase Agreement, then? And why ought you, as a business person, investor, or interested learner, care about it when selling a business? Let’s dive into what a share purchase agreement is and why it matters.

Understanding the Share Purchase Agreement (SPA)

A Share Purchase Agreement is a binding legal agreement entered into by a seller and a buyer to buy shares in a company. It lists the terms, conditions, warranties, as well as undertakings, of each party for the purchase. Quite simply, if you’re wondering, “what is share purchase agreement,” then you’re thinking of this fundamental legal agreement.

Suppose you’re buying a car. You don’t just pay cash and drive it away. You want documents: proof of ownership, condition of the car, undertakings made by the seller. The SPA does the same, just for shares in a business.

Whether you are a sole founder issuing shares to a financier or a business acquiring another business, the SPA ensures everyone is on the same page’ literally. It is no wonder then that so many business leaders must understand what a share purchase agreement is.

The reason why a Share Purchase Agreement is important: My Personal 

Take Back to my own startup experience. We were also privileged to have a business-savvy attorney friend review the SPA draft. Something that did impress me was the transparency that it gave. Who was getting how many shares? When was the closing happening? What if the buyer backed out? All on paper, in ink.

That is the wonder of a SPA: it provides transparency of the transaction along with the proportion of shares that are being transferred to the company or the purchaser. No guessing. No he-said-she-said.

And in the unfortunate event of misunderstandings down the road (and trust me, they do happen), the SPA is the point of reference. It’s your deal bible. If something goes awry, flip to the relevant section and voilà’ answers.

Even not sure what a shares purchase agreement is. It’s your legal protection.

The main benefits of a share purchase agreement include:

Let’s outline several of the main benefits:

• Enforceability by law: It becomes a legally binding document after signing. Both parties are then at peace.
• Warranty of equal protection: All the parties are assured by express warranties in the agreement.
• Transparency: All shares, dollars, and terms are accounted for.
• Conflict resolution: It provides processes for resolving conflict and breaches.

All these benefits help to further demonstrate the response to “what is a share purchase agreement”: it is a basic document in every share transaction.

Share Purchase Agreement (SPA) content:

Now you’re likely to wonder: what goes into a SPA? Plenty, as it turns out. Let’s get to it:

1. Definitions and Interpretations

The This section is establishing background. Every word utilized in this document is defined here in order to avoid ambiguity. For example, what exactly is a “Completion”? Or a “Consideration”? Don’t want ambiguity where contracts are at stake. It’s because of this reason that it is necessary to know what is a share purchase agreement.

2. The Parties to the Agreement 

Here, you will determine all parties concerned. These are:

• Full legal names
• Addresses 
• Whether they are organizations or individuals

For corporations, include: 

• Full name of signing officers
• Legal name
• Trading name

3. Company Selling the Shares Information 

You need to comprehend exactly what you’re getting yourself into. This involves:

• Company registration details
• Share structure
• Financial background
• Key assets and liabilities
• Significant assets and liabilities

3. Price at which shares are purchased 

How valuable are the shares? How is the payment to be made? Lump sum payment? Installments? Do deferred payments carry any conditions? All of these questions are answered in this section.

5. Title and Ownership

This condition provides assurance that the seller has the right to sell the shares. They must be the owner of the shares legally as well as possess a right to sell.

6. Timetable for Completion 

The project will When will the transaction get finalized? Does it end at a signing date, a closing date, as well as a grace period? This prevents unnecessary delays.

7. Warranties

Both buyer and seller offer assurances or “warranties.” For instance:

• The seller confirms the company isn’t facing lawsuits.
• The buyer promises they have the funds and authority to complete the purchase.

These warranties create a safety net in the deal.

8. Restrictions Following Completion

Often, sellers are restricted from doing things that could harm the business post-sale. For example, they may be barred from starting a competing business or poaching employees.

9. Confidentiality Requirements

Business deals often involve sensitive information. This clause ensures all parties keep that information private.

10. Governing Law

Which jurisdiction’s laws will apply to the agreement? This is crucial if parties are in different states or countries.

11. Dispute Resolution

How will disagreements be handled? Through arbitration, mediation, or court? This clause outlines the process.

Still on the fence about what is share purchase agreement? Hopefully, the above breakdown clears things up.

Provisions Typically Contained in a Stock Purchase Agreement

Here are a few additional details that you can find in a SPA:

Parties

We’ve talked about this before, but it’s worth repeating: use exact legal names. Name variations can invalidate parts of the agreement.

Recitals

These are opening lines which:

• Identify the seller and the buyer

• State the purpose of the agreement

Consider them as the “About this deal” section.

Conditions Precedent

They are requirements to be met before a transaction can be concluded. For example:

• Regulator Approvals

• Stockholder or board approval

Completion of Due Diligence

Covenants

These are promises by the parties. For example:

• The seller will not undertake new indebtedness before the closing. 
• The buyer promises to keep confidentiality.

Indemnities

This clause protects one party if the other breaches the agreement or if certain liabilities arise. This is the reason why we must know what is share purchase agreement in a detailed sense prior to entering into a transaction. 

For Example: My Second SPA Experience 

As a child, A couple of years on, we were making a purchase of a smaller company in order to expand product lines. This time, I found myself on the other side of the negotiations. Negotiating the SPA was much simpler’ I’d learned my lessons. 

But we were caught off guard by a single provision: post-sale employee restrictions. The seller wanted the ability to hire back their employees. We did not want them poaching employees. We negotiated a 12-month no-hire provision’ something small, yet a giant impact on operations. 

That’s the character of SPAs. The devil’s in the details, as the saying goes, and each clause matters. 

That’s why those parties so often search for what is a share purchase agreement’ because that information can be the difference-maker. 

Key Takings:

• Why You Need to Take SPAs Serously Regardless of whether you’re selling your very first startup, investing in a promising venture, or acquiring a competing business, a Share Purchase Agreement isn’t a form to check a box on’ it’s your safety net. 

• It protects your rights, establishes your roles, and clarifies what otherwise can be a messy process. I can assure you from personal experience: don’t skimp on reading and interpreting your SPA. 

• Find a decent attorney. Ask questions. And don’t be afraid to negotiate terms. Your bank account’ and your future self’ will thank you. So the next time someone asked you what is share purchase agreement, you will be well-versed to answer.  

• The Monuments, – A Share Purchase Agreement is a binding legal contract for the sale/purchase of shares. Terms such as parties involved, timelines, price, warranties, and dispute resolution are stated. 

• It protects all parties involved and clarifies. – Every clause matters, and real situations tend to put your SPA to a test. And yes, you now quite clearly know what is share purchase agreement. 

Additional Resources:

1. Share Purchase Agreement: Ultimate Practical Review Guide:This comprehensive guide delves into the intricacies of SPAs in venture financing, covering essential components such as representations and warranties, covenants, and indemnification provisions. It also offers practical tips for reviewing and negotiating SPAs.
2. Stock Purchase Agreement? Templates and More Resources:This article outlines the key provisions of a stock purchase agreement, including representations and warranties, covenants, and indemnification. It also discusses how to structure an SPA and provides links to templates and additional resources.
3. Navigating Share Purchase Agreements: Key Elements and Importance:This piece explores the essential components of SPAs, such as purchase price, representations, warranties, and closing conditions. It emphasizes the importance of SPAs in ensuring seamless ownership transitions and legal protection for all parties involved. 
4. The Essential Guide to Your First Share Purchase Agreement:This guide provides a detailed overview of the components of an SPA, including definitions, sale and purchase terms, purchase price adjustments, and indemnification clauses. It also offers best practices for drafting a compliant and effective SPA.