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What is a share purchase agreement?
How does it work in simple terms?
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Table of Contents
What Is A Share Purchase Agreement
A share purchase agreement, commonly referred to as SPA, represents the legal contract between a seller and a buyer exchanging the shares of a corporation or legal entity.
The seller is usually known as the vendor, and the buyer is known as the purchaser.
Typically, the share purchase agreement will specify the terms and conditions related to the sale, the share price, the number of shares, and any other provisions required by the parties.
The main objective of signing a share purchase agreement is to ensure that the buyer and seller agree on the overall terms and conditions of the sale.
The SPA helps to declare mutual written commitment to the sales terms and conditions of part or all of the shares of a business.
A share purchase agreement can be signed in many situations, particularly in the context of mergers and acquisitions.
When the buyer acquires the shares of a corporation, he or she becomes a part owner of the legal entity.
If the buyer purchases a sufficient number of shares, he or she can acquire a controlling interest in the legal entity.
Why Enter Into A Share Purchase Agreement
Fundamentally, contracting parties will want to enter into a share purchase agreement because a party owns shares in a legal entity that the buyer wishes to acquire.
The underlying transaction is essentially either the issuance of shares by the corporation to a shareholder or a transfer of shares between two shareholders.
In private companies, transferring shares between shareholders is quite common.
Typically, the potential buyer will consult the company’s records to ensure that the price he or she is paying reflects the company’s true worth.
Also, investors will generally want to protect themselves by signing a share purchase agreement with a corporation in which they invest.
The investor’s objective is to mitigate risk and ensure the corporation is transparent about its business dealings.
When the shares are transferred from one party to another, the acquiring party will acquire legal title on the shares purchased.
What Happens Before Signing Share Purchase Agreement
Depending on the nature of the transaction, buyers may choose to perform due diligence on the company in which they intend to buy shares.
In the context of due diligence, the buyer of the shares will require that the corporation share pertinent information relating to the business before the investor formally acquires the shares.
For example, a private investor will want to consult the corporation’s books, records, and business dealings to ensure that he or she is properly valuing the stock and to uncover any undisclosed risk.
Share purchase agreements are not signed when you’re transaction shares that are publicly traded in the stock market.
You will typically sign a share purchase agreement in a private transaction with an investor, private equity firm, key employee, or other stakeholders close to the corporation.
Due diligence is the action by which the buyer of the shares examines the company’s work, its employees, assets, and documentary files.
The primary purpose of the process is to allow the buyer to understand everything about the company, including the inherent risks and liabilities that come with purchasing the shares.
It also allows buyers to uncover any mandatory consents that might be needed before the share transfer, for instance, banks, business contracts, or landlords.
Content of Share Purchase Agreements
A well-written share purchase agreement must include:
- Vendor’s name
- Purchaser’s name
- Fixed price of shares
- Amount of shares that are being sold
- Transaction’s date and location
- Warranties and representations
- Governing law and venue
Before entering into a formal share purchase agreement, you can execute a letter of intent allowing you to commence the due diligence process.
If the due diligence checks out, you proceed to formally acquire the company shares.
All parties must ensure that the sale and purchase part have the same conditions as the letter of intent. If any discrepancies are uncovered, it’s vital to negotiate the share purchase agreement before signing it.
Some share purchase agreements can provide for the adjustment of the sale price after the closing of the transaction.
It’s important that you make sure that you read all the terms and conditions to avoid any unintended surprises.
Types of Shares Sold In A Share Purchase Agreement
A company or shareholder can essentially sell any type of shares legally issued and outstanding by the corporation.
In most cases, companies transact their common shares.
However, two main types of shares could be transacted in a share purchase agreement.
The first type of shares is voting shares allowing the new shareholder to exercise a certain number of votes to elect the members of the board of directors.
If a shareholder buys a sufficient number of shares, he or she will acquire a controlling interest in the corporation.
Another type of share is the non-voting shares which do not allow shareholders to cast any votes on important corporate policy decisions.
However, the non-voting shares may guarantee the shareholder dividends or other advantages.
Advantages of Share Purchase Agreements
There are many advantages of creating a share purchase agreement.
The most important ones are the following.
In mergers and acquisitions and in corporate financing deals, the acquirer will start the process by performing due diligence.
Typically, the parties enter into a letter of intent where the parties agree in principle on the terms of the transaction and then move into the due diligence.
It is much easier to demand thorough due diligence when you’re looking to sign a share purchase agreement.
Executing a share purchase agreement allows the buyer and the seller to mitigate their risk.
The buyer’s main interest is to purchase the shares at the lowest price possible and transfer most risk to the seller.
On the other hand, the seller’s interest is to sell the shares “as-is” without any representations and warranties.
However, in most cases, there’s a balance that is achieved by the parties in defining the proper terms and conditions, allowing the investor and seller have the necessary comfort in signing the agreement.
In most cases, you’ll need to execute a share purchase agreement if you’re looking to purchase shares in a private company.
Private companies can attract investors by providing them with certain contractual protections allowing the investor to take a greater risk.
Disadvantages of Share Purchase Agreements
Even though share purchase agreements have many benefits, they also have some disadvantages.
When investors buy part or all company shares, they also acquire unresolved issues, such as debts and tax bills that get by at the sale’s date.
Usually, purchasing shares carry more risk than buying assets.
This is because the buyer takes over a company.
In a share purchase agreement, there are warranties to reduce liabilities for the purchaser.
Another disadvantage of signing a share purchase agreement is that the parties may get into lengthy negotiations.
As the due diligence advances, the buyer may ask for more information and the seller takes time to deliver the needed information.
Eventually, the parties may lose interest and the deal may fall off.
Although two parties can execute a share purchase agreement, in most cases, the content of such an agreement can get technical.
Particularly, in M&A transactions, the buyer and seller will want to include many provisions and protective terms in the agreement.
As a result, the transaction cost may go up fast as the parties will need to pay legal fees and to their legal counsel to properly execute the share purchase agreement and perform the necessary filings with the regulatory bodies as may be needed.
Share Purchase Agreement vs Asset Purchase Agreement
What is the difference between a share purchase agreement and an asset purchase agreement?
The primary difference between a share purchase agreement and an asset purchase agreement is that the first one defines all terms and conditions when an investor purchases a portion or all of the company’s shares.
An asset purchase agreement occurs when an investor buys and sells the company’s assets without acquiring any shares of the legal entity.
In other words, the buyer acquires the asset from the corporation, which remains a legal entity owned by its current shareholders.
Share Purchase Agreement FAQ
Who Uses a Share Purchase Agreement?
Usually, share purchase agreements are used by corporations or individuals who buy or sell company shares with another business or investor.
A typical example is when a company has two equal shareholders, and one wants to sell his or her shares.
A share purchase agreement is signed to have the shareholder sell the shares to another shareholder.
Do You Need a Letter of Intent Before a Share Agreement Purchase?
Although it’s not mandatory, it’s best to execute a letter of intent before executing a share purchase agreement.
Before signing the share purchase agreement, the parties will negotiate the key terms of the agreement in the context of a letter of intent.
A letter of intent defines the essential elements of the transaction for the parties.
Ultimately, the share purchase agreement will need to include the elements that were agreed in the letter of intent.
When an intent letter is agreed it reduces the possibility of later disputes.
Can Anyone Transfer Company Shares?
Shareholders can negotiate and transfer their shares to whom and when they want.
However, the corporation may have restrictions in its articles of incorporation that may affect the transaction.
Also, when shares are sold, a private company must ensure that the transaction remains private without triggering the securities laws and strict obligations applicable to shares sold to the public.
For instance, private company clauses can state that the board of directors might have the authority to refuse to register share transfers as they see fit.
Pre-emption clauses can oblige shareholders to first offer their stocks to named individuals, like other shareholders or directors.
What Happens After Signing a Share Purchase Agreement?
Once all parties agree and sign a share purchase agreement, the buyer must complete a few steps:
- Pay for the shares purchased
- Register the transfer into the company’s shareholder ledger
- The company will file the resolutions approving the deal in its books
- Keep a copy of the share purchase agreement in corporate records
The share purchase agreement is a private document, so it’s not required to register it with the corporate registry.
What’s included in a Share Purchase Agreement?
A well-written share purchase agreement should contain certain essential elements, such as:
- Total amount of shares that are being transferred
- Governing law
- Type of shares transacted
- Certificate number and issuance date
- At what price are the shares sold
- The vendor’s identification
- The buyer’s identification
Please note that a share purchase agreement must also include payment details.
It should define whether a deposit is necessary when the total amount is due and the transaction’s closing date.
So there you have it folks!
A share purchase agreement is an agreement where a party agrees to purchase the shares of another party at pre-determined terms and conditions.
Typically, the share purchase agreement will identify the buyer, seller, shares sold, number of shares, and share price.
Depending on the complexity of the transaction, the parties can include many other protective provisions, such as warranties and representations from the seller.
Now that you know what a share purchase agreement is and how it works, good luck with your research!
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