The Contract Behind a Company Sale
In our previous article on disclosure letters, we considered the ability which sellers have to qualify warranties and how risk is ultimately allocated between the parties. This article follows on from that discussion by looking at the document that sits at the heart of most corporate acquisitions: the share purchase agreement, or “SPA”.
The SPA is the principal contract governing the sale and purchase of shares in a company. It sets out what is being sold, on what terms, and how responsibility for the business transfers from seller to buyer.
What is it?
A share purchase agreement is a legally binding contract under which a buyer acquires shares in a target company from one or more sellers. Unlike an asset sale, a share sale involves the buyer stepping into ownership of the company “as is”, including all of its assets, liabilities, rights and obligations.
Because of this, the SPA must address a wide range of legal and commercial issues, many of which are designed to manage risk rather than simply record price and ownership.
Key Components of an SPA
While each transaction is subjective and will be negotiated by the parties and their respective advisers, the SPA tends to follow a familiar structure. One might expect to see:
- Details of the sale, identifying the shares being sold and confirming the sellers’ title to them.
- Conditions precedent, setting out matters that must be satisfied before completion, such as regulatory approvals or internal consents.
- Warranties and limitations, allocating risk between the parties by reference to the condition of the business.
- Completion mechanics, dealing with the steps required to transfer ownership and control of the company.
Purchase Price and Completion Mechanics
The SPA will specify how the purchase price is calculated and paid. This may be a fixed amount, or it may be subject to other commercial/legal consequences. For example, one might see post-completion adjustment by reference to completion accounts or net debt and working capital mechanisms.
Completion mechanics sit alongside the price provisions and govern the precise steps required to transfer ownership and control of the company. This includes the delivery of share transfer forms, resignations and appointments of directors, releases of guarantees, and payment flows.
Warranties and Indemnities
As mentioned in our previous article, warranties are contractual statements given by the seller about the company’s affairs, contained within the SPA. If a warranty proves to be untrue and the buyer suffers loss, the buyer may bring a claim - subject to the limitations agreed in the SPA and any matters properly disclosed.
Indemnities, where included, provide more targeted protection against known risks and operate on a pound-for-pound basis. Together with disclosure, these provisions form the backbone of the deal’s risk allocation.
Practical Considerations and the Role of Culbert Ellis
A share purchase agreement is far more than a standard form document. It is a carefully negotiated contract that reflects the commercial deal, the due diligence findings and the parties’ appetite for risk. Poorly drafted SPAs can lead to uncertainty, disputes and costly post-completion claims.
At Culbert Ellis, we advise buyers, sellers and investors on share acquisitions across a wide range of sectors. Our role is to ensure that SPAs accurately reflect the commercial intent of the parties, that risk is clearly understood and appropriately allocated, and that the transaction progresses smoothly from negotiation through to completion.
How To Get In Contact
We specialise in corporate transactions, acquisitions and investments. If you require assistance with corporate law, please contact Joe Moulding at Joe.Moulding@culbertellis.com or call +44 (0)204 600 9907.
