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Corporate Transaction Series (3/5): The Share Purchase Agreement

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In our third instalment of our corporate transaction series, we consider the significance of the share purchase agreement within the context of the transaction.

What is a share purchase agreement?

A share purchase agreement (SPA) is the agreement that sets out the terms and conditions connected to the sale and purchase of the shares in a company.

By purchasing the shares of a company, the company’s operating business is automatically acquired. The company’s existing contracts with suppliers and customers do not change (unless a clause known as a change of control is in place).

If a shareholder sells their shares in a company, then they can achieve a complete end in the relationship between them and the target business. However, the buyer however, will normally insist upon some contractual promises about the company which will continue to bind the shareholder after the sale.

What does a share purchase agreement cover?

A typical share purchase agreement will deal with the following matters:

  • Sale Mechanics - Once the shares have been purchased legal ownership passes to the buyer. It is likely that the buyer will want to appoint new directors, auditors, etc and remove the current officers.

  • Warranties - Warranties are contractual statements made by the seller on completion relating to the target business. While warranties are beneficial, the seller must be able to stand by them as the seller is giving the warranties personally. They have two purposes:
    • To "flush out" any information which the buyer ought to know and which could affect the value of the company, or even the buyer’s decision to buy the business.
    • To give the buyer some comfort in the event that the business is not as the seller represented to him, e.g. the company may have some hidden problem or litigation.
  • Restrictive covenants - Restrictive covenants prevent the seller from competing with the buyer for a limited time once the sale is finalised. On their face, restrictive covenants are particularly important for the buying party, as immediate competition by the seller could harm the new business or significantly impair it. The covenant in question must be no more than adequate to protect the business interest, the reasonableness of the duration or scope of any restraint being tied to the nature of the interest in question. The restrictions may include:
    • A non-competition clause that prevents the seller from setting up a business in competition with the buyer.
    • A non-solicitation clause that prohibits the seller from soliciting the buyer’s’ customers or suppliers.

What are the advantages of SPAs?

  • No third-party involvement - The buyer will step into the seller’s shoes as shareholder, however, the company’s employee’s, contracts, properties, etc will remain in the company’s ownership. There is therefore, no need for the assets of the company to be transferred. Therefore, a share sale can often be completed without any third-party involvement and is more discreet than an asset purchase.
  • No liability for debts - At completion, the seller of shares will have no liability for the debts of the company, which become the responsibility of the new owners. By comparison, if there is an asset sale, then, with a few exceptions (eg employees), the seller will keep all the current liabilities of the business, unless he can negotiate with the buyer to take them over with the business.

What are the disadvantages of SPAs?

  • Inheriting outstanding problems - The buyer will inherit the seller’s company, which means they will also inherit any problems with the company that exist at the date of the sale.
  • Risk - As the buyer inherits a company, the share purchase generally involves far greater risk than an asset purchase. This justifies the inclusion of warranties, which are necessary to protect the buyer.

If you are considering buying or selling shares in a business and would like to discuss a share purchase agreement, please contact Simon Porter in BakerLaw’s Company and Commercial Department at or call 01252 730754 to discuss further.