A share purchase agreement (SPA) is an agreement setting out the terms and conditions relating to the sale and purchase of shares in a company.
We’ve put together a guide setting out what to consider when looking at a SPA, from the buyer and the seller’s perspectives.
A buyer will almost want protection against a negative effect on the target’s financial position from the date of negotiations up to the date of completion. A completion accounts mechanism, providing the buyer with valuation certainty, would achieve this.
In the last year, sellers have been increasingly looking at locking the price for the target shares by way of a locked box mechanism. This method entails a buyer and a seller agreeing to fix the price and allowing for certain ‘leakages’ during the negotiations.
A seller will still be seeking to lock the price where possible.
Due to current circumstances, the buyer’s ability to forecast the future profitability of the target may not be an easy (or accessible) task.
A buyer may therefore look to defer part of the consideration to be calculated by reference to future performance of the target.
A seller may require some form of security over any future payments.
The reason for wanting security is that if the buyer is unable to pay future payments and no security is taken out, the seller will be an unsecured creditor and will rank alongside all other creditors of the business.
If a payment is secured and such security has value and is registered accordingly (if applicable) then the seller will be protected on the buyer’s insolvency and may be repaid.
Warranties and indemnities
A buyer may seek to include further and specific warranties in the agreement relating to recent events.
Examples of specific warranties we would expect to see are:
- the capabilities of the IT system
- confirmation of whether government schemes have been used
- the size of the workforce and what that looks like going forward.
Whilst a seller will understand the need for further warranties, they are likely to resist accepting warranties that are forward-looking, and which are out of the target’s control.
A seller should look to disclose as much as is possible in relation to operations during recent times for full transparency.
Split exchange and completion
If a split exchange and completion is agreed, a buyer would need to cater for the possibility of a further outbreak happening between exchange and completion.
As a result, a buyer may seek to include a clause in the agreement with the effect that a material adverse business or economic change affecting the target or its assets entitles the buyer to walk away.
A seller should seek to include flexibility in any undertakings given in the agreement, so that, if there is a further outbreak, the seller can take reasonable steps to respond to any applicable government guidance.
There are practical implications for the due diligence exercise, as the buyer will want access to certain documentation which the seller may not physically be able to give.
Whilst the due diligence is key, it may be difficult and more time consuming to gain responses from different departments of the target due to illness, lack of access to computers and lack of access to buildings.