WHEN TO USE A SHARE PURCHASE AGREEMENT

Buying stock shares on the stock market is a fast transaction. You buy them today and you may sell them tomorrow. Sure, you have done your research on the company financials and its history on the stock exchange, but since you have very little to say about how the company is run — other than your vote at the annual stockholders meeting — you are taking a risk about how someone else will run the company while you still own some company stock.

The situation becomes different, however, when you are buying the entire company and you will be making critical operational decisions. You want to know all the details about the company as the owner of all stock shares. This would also be the case if you only purchase a significant amount of the company shares, such as buying the shares of a departing partner, a substantial outside investor, or as a venture capitalist investor. You may not have complete control over the critical decisions, but you do have a significant say so.

This is when you need to document the purchase with a Share Purchase Agreement (SPA). It is a legally binding contract that outlines the terms and conditions for buying or selling ownership shares in a company. It acts as the master blueprint for a transaction and serves two primary functions:

• Establish the purchase price
• Define the obligations and rights of each party

Key Elements and Clauses of a Share Purchase Agreement

• Parties Involved: Clearly identify the buyer and seller by their legal names and addresses
• Recitals: Outline the background of the transaction and the intent of the parties to buy and sell the shares
• Definitions: Define key terms that could be ambiguous with specific terminology used in legal and financial transactions
• Shares Being Sold: Specify the company name and exact number and class of shares being transferred
• Purchase Price and Payment Terms: Detail the total amount the buyer will pay for the shares, the method of payment (e.g., cash, stock swap), the currency and timing of payments, and any provisions for adjustments, earn-outs, or funds held in escrow
• Representations and Warranties: The statements of fact made by both parties, including the seller’s assurances about the company’s financial status, assets, liabilities, contracts, and compliance with laws, and the buyer’s assurances about the availability of funds to complete the transaction
• Covenants: The promises made by the parties to do or refrain from doing certain things between the signing of the SPA and the closing of the transaction
• Conditions Precedent to Closing: The specific conditions that must be satisfied by both parties before the obligation to complete the transaction becomes effective
• Indemnification: Outlines how one party will compensate the other for losses arising from breaches of representations, warranties, or covenants, or for specific identified liabilities
• Closing Procedures: Detail the date, time, and location of closing, documents to be exchanged, and actions to be taken at closing
• Termination Rights: Specify the conditions for either party to legally terminate the agreement before closing
• Governing Law and Jurisdiction: Designates which jurisdiction and laws will interpret the agreement and where any legal disputes will be resolved
• Dispute Resolution: Outlines the process for resolving disagreements, such as mediation, arbitration, or litigation
• Miscellaneous Clauses: Standard legal clauses covering how notices should be given, whether the agreement can be assigned to another party, whether any terms can be waived, and confirmation that the SPA constitutes the entire agreement between the parties

Making sure the SPA is accurate and complete will give you protection against unforeseen issues. That is the work of the business lawyers at Corporate Securities Legal LLP — to help their clients be successful in all their business ventures.