Do you need help with a share purchase agreement? EM Law are experts in drafting, negotiating and advising clients on share purchase agreements. Our lead corporate lawyers are Barry Doherty, Neil Williamson and Anca Toma-Thomson who have extensive experience in advising clients on a wide range of corporate matters.
Share Purchase Agreement: the key transaction document for a share sale
A share purchase agreement sets out the terms on which the sale and purchase of the target shares will take place and it is therefore the principal transaction document in a private share acquisition. The complexity of a share purchase agreement will vary depending on the nature and circumstances of the transaction, but it will typically be a lengthy document, half of which (or sometimes more) can be devoted to a schedule of warranties.
It is common practice for the buyer to insist on an indemnity from the seller against potential pre-completion tax liabilities affecting the target company, and the indemnity will usually be structured as a tax covenant. The covenant may be set out in a separate document (usually referred to as the “tax deed”) or in a schedule to the share purchase agreement.
Exchange and completion of a share purchase agreement normally takes place simultaneously. However, there may sometimes be a gap between the two if, for instance, a tax clearance or a shareholder consent is needed before the transaction can proceed to completion.
Agreement to sell and purchase sale shares
This provision is probably the most important operative provision in the share purchase agreement, yet it tends to be one of the shortest and simplest clauses. The buyer’s main concern is to ensure that proper title to the shares is transferred and that the shares are transferred with all rights attaching to them.
Types of consideration
The most common forms of consideration for an acquisition of shares are the following (or a combination of them):
The amount of the consideration may be fixed at completion, or it may be adjusted following completion on the basis of an agreed mechanism. Consideration might be variable where, for example, the buyer’s offer was calculated by reference to the target’s net asset value or a multiple of earnings shown in a prior set of accounts. Alternatively, the seller may have sought offers on the assumption of a particular net asset position or earnings performance as at the completion date. In these cases, the share purchase agreement may need to provide for the preparation of completion accounts and a mechanism for adjusting the provisional consideration paid at completion (either upwards or downwards, as appropriate) to reflect the position as shown in the completion accounts.
Where all or part of the purchase price is to be determined by reference to the future performance of the target company, this is known as an earn-out. If an earn-out is to be used, additional drafting will be required to document the earn-out arrangements.
Warranties and indemnities
The warranties clause and schedule in the share purchase agreement will often account not only for at least half the length of the share purchase agreement, but also for more than half of the time spent negotiating the agreement. The shares in the target company could very easily be acquired by the seller simply delivering a duly executed stock transfer form to the buyer, but the general law provides very little protection for the buyer as to the assets and the liabilities of the target company. Extensive contractual statements in the form of representations and warranties are therefore the only way in which a buyer can elicit information about the true value of the target and obtain some form of redress if any of those statements prove to be untrue.
The share purchase agreement normally contains an extensive completion schedule which lists all the documents that the parties are required to deliver, and all actions they must take, at completion of the transaction. Many of these are obvious formalities relating to the change of ownership of the target company, such as:
If existing loan facilities are to be repaid at completion, then the buyer will usually require discharges in respect of any security provided by the target company.
Stamp duty is a statutory tax payable on certain documents. In particular, it is chargeable on a transfer of shares on sale. Stamp duty is currently chargeable on transactions where the consideration is over £1,000, at the rate of 0.5% of the share price, and rounded up to the nearest £5. Where the consideration is certified to be £1,000 or less, the transfer is exempt from stamp duty.
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