Key Clauses to Include in a Share Purchase Agreement for M&A Success

Legal agreements can be vital when making business transactions. They protect the parties involved, and agreements can give clarity. One of the most critical agreements in mergers and acquisitions is played by the Share Purchase Agreement (SPA). 

A share purchase agreement sets the terms for selling shares in a company. It should distinguish that transaction from a sale of the company’s underlying assets and allocate the agreed risks and responsibilities.

SPAs play a big part in reducing the risks associated with share transfers. Therefore, these key clauses shouldn’t be left out to ensure smooth transactions.

Definitions and Interpretation

SPA M&A explained by Acquinox Advisors is an agreement that helps direct the intricate transfer of assets and ownership in M&A transactions. One crucial clause is the definitions, which provide context and meaning to phrases or specific words used in the agreement. 

Ideally, a definition is limited to the term’s meaning and shouldn’t include covenants intended to be included in the main text only. They’re typically listed alphabetically at the beginning of the SPA or in a separate annexure. 

Definitions usually refer to the term that first appeared throughout the agreement. To distinguish a defined term from common words is to capitalize it and treat it as a proper noun, and these definitions can be exclusive or inclusive. 

Meanwhile, the interpretation clause helps reduce repetition and make the agreement easier to read. It’ll also add context for specific words used. While the interpretation clause is standard in SPA, it can contain significant points for reading the agreement. 

Non-Competition Clauses

When acquiring a company by purchasing its shares, the buyer typically wants to ensure that the previous owner won’t immediately start a rival business. Although a SPA aims to profit, allowing the last owner to launch a rival firm could undermine the buyer’s ability to realize the expected benefits from the acquisition. 

A seller non-compete clause may protect acquired goodwill, but enforceability depends on applicable law and proportionate scope, duration and geography. Competition-law issues may also arise; it is not automatically enforceable merely because the parties sign it. See related guidance.

Recital Clauses

The recital clauses contain the factual background of the transaction. There shouldn’t be gaps in laying out the relationship between the parties to ensure the transaction remains objective and clearly defines each involved party’s role. 

In addition, recital clauses contain the context of the agreement and would be relevant to its interpretation. Recital clauses aren’t usually treated as an integral part of the SPA as they don’t bind the parties. However, both parties may agree and express that the recitals are the essential part that binds them. 

Ownership, Dividends, Return of Capital Clauses

SPA acts as a contract between two parties or more, where one party will acquire ownership of the shares of another. Therefore, it’s essential to have a stock purchase agreement as a safety measure in case of disputes or if bankruptcy happens. The key clauses in the stock purchase agreement include ownership, dividends, and return of capital. 

The SPA should identify the shares and their rights, and agree any pre-completion dividends or value transfers. A return of capital is not automatically a buyout remedy for financial difficulty; company-law requirements and the negotiated transaction structure matter. See related guidance.

Purchase Price and Payment Terms

The purchase price and payment terms clause explain how the purchase price is determined. It can be a fixed amount or subject to adjustment based on set criteria. The clause will also include the payment terms, whether escrow, installments, or lump sum. Including a purchase price and payment terms is crucial to ensure the transaction progresses smoothly. 

Confirmation of Completion Paperwork

Completion requirements depend on the transaction and jurisdiction. For a UK share sale, they may include signed transfer documents, share certificates, corporate approvals, agreed payment and register updates, plus applicable stamp-duty and filing obligations. Tax liability itself is not a document, and completion accounts are not required in every deal.

This clause aims to clarify the timeframe within which each piece of documentation is complete. It also clarifies the responsibility for each piece of paperwork and ensures they’re all included.

FAQ

Do SPAs Contain Confidentiality Clauses? 

Most SPAs require parties involved to keep certain information confidential. This includes avoiding sharing the details of negotiation with the public and other confidential information connected to relevant companies.

What Are The Key Terms of an SPA?

A typical SPA contains specific provisions underlining terms and conditions related to purchasing shares. Generally, SPAs contain clauses to determine or define price and payment, completion arrangements, conditions precedent to sale, warranties, and restraints.

What Are Exclusivity Clauses in SPAs?

An agreed exclusivity obligation may restrict negotiations with others for a defined period. Its scope, timing and enforceability must be negotiated; it is not mandatory in every SPA.