If you are buying or selling shares in a company, the share purchase agreement (SPA) is one of the most important legal documents in the transaction. It records the price and other commercial terms, allocates risk between the parties and sets out how the transaction will proceed to completion.
This guide explains what an SPA is, why it matters and what to expect from the drafting and negotiation process. Whether you’re preparing for your first M&A transaction or reviewing a proposed deal, this guide explains the main terms, the risks each side needs to manage and where specialist advice can make a material difference.
Buyers will usually focus on understanding inherited liabilities and securing effective contractual protection. Sellers will generally prioritise price certainty, controlled liability and a clear route to completion.
If you are planning a business sale or acquisition, our experienced M&A lawyers can help you negotiate an SPA that reflects the agreed commercial terms and allocates risk clearly.
Jump to:
- What is a share purchase agreement?
- Who prepares the first draft of the SPA?
- Share purchase agreement due diligence
- What is the share purchase agreement process?
- What should buyers and sellers decide before SPA negotiations begin?
- What are the main terms of a share purchase agreement?
- Execution of the SPA
- Should you use a lawyer to draft a share purchase agreement?
- Speak to our M&A lawyers
What is a share purchase agreement?
A share purchase agreement sets out the terms on which shares in a company are sold and purchased. It is a central document in most private company share sales.
The agreement identifies what is being bought, the price and the principal obligations and protections applying to each party. In a share sale, the company keeps its existing assets and liabilities. The buyer therefore takes control of a business that may carry historic tax, employment, contractual or regulatory exposure. Clear drafting helps the buyer address those risks and helps the seller understand, limit and price its potential liability after completion.
An inadequately drafted agreement can create uncertainty during the transaction and increase the likelihood of disputes afterwards. The SPA should therefore reflect both the commercial deal and the risks identified during due diligence.
The principal terms commonly include:
- The identity of the seller or sellers and the buyer
- The shares being sold and the purchase price
- Any conditions that must be satisfied before completion
- Warranties, indemnities and other buyer protections
- Limitations on the seller’s liability
- The transaction timetable and completion requirements
- Confidentiality and announcement provisions
Who prepares the first draft of the SPA?
In a bilateral transaction, the buyer’s lawyers commonly prepare the first draft of the SPA, although the approach will depend on the deal structure and negotiating process.
In an auction sale, the seller’s lawyers may prepare the initial draft for prospective bidders to review. This allows the seller to propose a consistent contractual position and can help maintain control of the sale process.
Due diligence and SPA drafting commonly proceed in parallel. Issues identified during the investigation may be reflected in the price, warranties, indemnities, disclosures, conditions or other negotiated terms.
Share purchase agreement due diligence
Before entering into an SPA, a buyer will usually require a detailed understanding of the company it proposes to acquire. Due diligence allows the buyer to assess risk, verify information and determine whether the proposed price and transaction structure remain appropriate.
The seller may be asked to provide information concerning:
- Financial records, forecasts, customer concentration and tax
- The ownership structure, share capital and corporate governance
- Existing or threatened disputes and regulatory compliance
- Leased or owned property
- Intellectual property and technology
- Employees, contractors and pensions
- Key customer, supplier and financing arrangements
- Subsidiaries and other group companies
Due diligence is not simply a document-gathering exercise. It should identify gaps, inconsistencies and liabilities that may affect the buyer’s decision, the purchase price or the protections required under the SPA.
The seller’s responses will also inform the disclosure process. Disclosures made against the warranties can qualify the buyer’s contractual rights, so they should be prepared and reviewed carefully.
You can find out more about disclosure during the due diligence process and why it is important in our separate guide.
What is the share purchase agreement process?
The precise timetable will depend on the size and complexity of the transaction, but the process commonly involves four stages.
- Preparation and heads of terms - The parties agree the principal commercial terms, establish confidentiality arrangements and identify any exclusivity period, funding requirements or approvals.
- Due diligence, drafting and disclosure - The buyer investigates the company, the SPA is developed and the seller prepares disclosures against the proposed warranties. Findings may affect price, deal structure and contractual protections.
- Negotiation and signing - The parties negotiate risk allocation, liability limits, conditions, payment arrangements and completion requirements. Signing may be followed immediately by completion or may occur before outstanding conditions are satisfied.
- Completion and post-completion obligations - The agreed funds and documents are delivered, the share transfer is approved and registered, and control of the company passes to the buyer. The parties then deal with matters such as Stamp Duty, Companies House updates, deferred payments, earn-out reporting and restrictive covenants.
Each stage can affect the transaction timetable and the parties’ negotiating position. Early identification of decision-makers, approvals and material risks can help avoid unnecessary delay.
What should buyers and sellers decide before SPA negotiations begin?
Before detailed drafting begins, each party should identify its main commercial priorities and the issues on which it has flexibility.
Buyers should consider the liabilities they are prepared to accept, the protections required following due diligence, how the price will be calculated and whether any part of the consideration should be deferred or conditional.
Sellers should consider the level and duration of potential liability they can accept, which matters need to be disclosed, whether the proposed timetable is realistic and how any earn-out or deferred consideration will be protected.
Both sides should also confirm who has authority to make decisions, which internal and external advisers need to be involved and whether regulatory, lender, shareholder or third-party approvals could affect timing. Early agreement on these points can prevent legal negotiations from becoming disconnected from the commercial deal.
What are the main terms of a share purchase agreement?
Definitions
Some words and expressions in an SPA have a specific negotiated meaning. A definitions and interpretation section helps ensure that those terms are applied consistently throughout the agreement.
Parties
The SPA identifies the buyer, the seller or sellers and any other parties undertaking obligations under the agreement.
Where several shareholders are selling, the SPA should make clear whether each seller is responsible only for their agreed share of a liability, or whether one seller could be pursued for the whole amount. Sellers will usually want liability to be several and proportionate, while a buyer may seek wider protection for particular obligations.
Sale and purchase of shares
The agreement identifies the shares being transferred and records the seller’s obligation to sell and the buyer’s obligation to purchase them.
The shares will commonly be transferred with an agreed form of title protection and free from specified third-party rights. The precise wording should reflect the parties’ negotiations and the company’s ownership arrangements.
Price
The SPA should specify the price, currency, payment method and timing.
Some transactions use a fixed price. Others include completion accounts, locked-box arrangements, deferred consideration, retention amounts, loan notes or shares in the buyer. Financial and legal advisers should ensure that the contractual drafting accurately reflects the agreed valuation mechanism.
Sale conditions
Signing and completion may take place on the same day. In other transactions, completion is conditional on matters such as regulatory clearance, shareholder or lender approval, third-party consent, financing or an internal reorganisation.
The SPA should identify each condition, who is responsible for satisfying it, the applicable deadline and what happens if it is not met. It should also address how the business must be operated between signing and completion.
Best and reasonable endeavours
An SPA may require a party to use 'best endeavours', 'all reasonable endeavours' or 'reasonable endeavours' to achieve a particular outcome.
These phrases can impose different levels of obligation. Their effect depends on the wording, commercial context and relevant case law, so the intended standard and any practical limits should be made clear.
Flexible payments and earn-out clauses
Part of the price may be deferred or linked to the company’s performance following completion. An earn-out may be based on revenue, profit, customer retention or another agreed measure.
These arrangements require careful consideration of:
- How performance will be calculated
- Which accounting policies will apply
- How the buyer may operate the business during the earn-out period
- What information the seller will receive
- How disagreements will be resolved
- What security, if any, supports the deferred payment
Financial and legal input is important because the drafting must translate the agreed commercial formula into an objective and workable mechanism.
Learn more about how to structure and negotiate an earn out in this article.
Completion
The SPA should identify every payment, document and corporate action required at completion. These may include signed stock transfer forms, share certificates, board approvals, director resignations, releases of security and the handover of company records.
The company will normally need a properly completed instrument of transfer before it can register the buyer as the new shareholder. The completion process should also make clear who will update the register of members, deal with any people with significant control notifications and arrange for replacement share certificates.
A clear completion schedule helps each party understand its responsibilities and reduces the risk of last-minute gaps. Where signing and completion are separated, the agreement should also address the conduct of the business during the intervening period.
Warranties, disclosures and indemnities
A buyer of shares generally acquires the company together with its historic liabilities. The buyer will therefore usually seek contractual information and protection in the form of warranties.
Warranties are statements concerning matters such as:
- Ownership of the shares
- Accounts and financial information
- Material contracts
- Employees and pensions
- Intellectual property
- Property
- Compliance and disputes
- Insurance
- Tax
If a warranty is inaccurate and the buyer suffers recoverable loss, the buyer may be able to bring a contractual claim.
The seller will normally qualify the warranties through a disclosure letter. Proper disclosure can prevent the buyer from bringing a warranty claim in relation to the disclosed matter, depending on the terms of the SPA.
Indemnities are usually negotiated for identified risks and can provide a more direct contractual route to recovery if the specified liability arises. Common areas include known litigation, tax exposures or other liabilities identified during due diligence.
The SPA will also usually include limitations on the seller’s liability, including financial caps, time limits, thresholds, exclusions and claim-notification requirements.
You can find out more about warranties and indemnities in our separate guide.
Restrictive covenants
A buyer may require restrictions preventing a seller from competing with the company, soliciting customers or employees, or interfering with supplier relationships following completion.
To improve the prospects of enforcement, the restrictions must protect a legitimate business interest and go no further than is reasonably necessary in the circumstances. Their duration, geographical reach, restricted activities and the seller’s previous role should all be considered in the context of the deal.
Find out more in our helpful article, which answers the most common questions we hear from clients.
Communications and confidentiality
SPAs commonly include provisions concerning confidentiality and public announcements.
These can be particularly important where disclosure of the transaction may affect employees, customers, suppliers, lenders, regulators or the market. The agreement should identify when an announcement may be made and how legally required disclosures will be handled.
Execution of the SPA
Execution requirements depend on the parties, the form of the agreement and whether any related documents are executed as deeds.
Electronic signing may be appropriate, provided the relevant formalities are satisfied. The parties should confirm the authorised signatories and execution process before completion, particularly where several sellers, overseas parties or corporate groups are involved.
Tax implications
A share acquisition can expose the buyer indirectly to historic tax liabilities within the company. The buyer may also need to pay Stamp Duty on the share transfer, subject to the price, transaction structure and any available relief or exemption.
SPAs therefore commonly include tax warranties and a separate tax covenant. A tax covenant may allocate specified pre-completion tax liabilities to the seller, subject to negotiated exclusions, limitations and conduct provisions.
The agreement should also address how tax claims are notified and managed, whether the buyer can settle or defend a claim without the seller’s involvement and how any corresponding tax benefit is treated.
Tax advisers should be involved alongside the legal team so that the contractual protection reflects the company’s tax position and the agreed transaction structure.
Dispute resolution
The SPA should specify the law governing the agreement and the forum in which disputes will be determined.
Depending on the transaction, the parties may also agree specialist determination procedures for matters such as completion accounts, earn-out calculations or valuation disputes. Mediation or arbitration may be appropriate in some cases, but the chosen process should reflect the type of dispute, the need for confidentiality and the parties’ ability to obtain an effective remedy.
Should you use a lawyer to draft a share purchase agreement?
An SPA records the commercial agreement but also determines how transaction risk is divided between the parties. Small differences in wording can materially affect the purchase price, the buyer’s remedies and the seller’s exposure after completion.
Buyers will typically need advice on how due diligence findings should affect the price, warranties, indemnities, conditions and completion arrangements. Sellers will usually require support with disclosure, liability limitations, payment protection and ensuring that the agreement does not extend beyond the deal they intended to make.
Specialist advice becomes particularly important where the transaction involves deferred consideration, an earn-out, several sellers, external funding, regulatory approvals, material property or IP, or significant tax and employee issues.
Speak to our M&A lawyers
A well-structured SPA should support the commercial deal, provide a workable route to completion and make clear where risk will sit after the transaction.
Our M&A lawyers advise buyers, sellers and management teams on share acquisitions and disposals, from heads of terms and due diligence through to negotiation, signing and completion.
Whether you’re testing the terms of a proposed acquisition or protecting the value of a sale, our M&A lawyers can help you turn the commercial deal into a clear, workable agreement. Fill out the short form below and a member of our team will contact you.
