Components of Share purchase Agreement for startups in India

Overview

A share represents a unit of ownership in the company and unless restricted under the Articles of Association of a company, they are freely transferable under the provisions of the Companies Act 2013. Therefore, in cases where a shareholder sells his shares to another body corporate or any individual, another person also acquires ownership in the company. Hence, to determine the terms &conditions of such sale-purchase between the parties, including their respective rights & obligations, a legal contract is mutually agreed upon and drawn by the parties which are known as a Share Purchase Agreement.

Therefore, a Share Purchase Agreement is a legal agreement drawn between two parties- seller & purchaser, under which a seller agrees to sell a specified number of shares to the purchaser at a pre-determined price. It is a common business practice to sign a share purchase agreement among businesses in pursuance of which a shareholder is initiated. It is a legally binding document and typically covers all the aspects related to the purchases such as identification of the parties, purchase price, escrow account, kind of share purchased, the number of purchased shares, agreed on consideration, rights, and the liabilities of the shareholder and the company, any condition precedent or after being fulfilled and covenants by the parties. On meeting all these conditions, shares will be allotted to the purchaser after the parties agree and sign the document.

The main objective of this agreement is to make sure that the terms and conditions of the sale and purchase of the shares of a company are equally agreed upon by both parties and that there is a balance of interests between the seller & buyer. For instance, they may have agreed to fulfill any condition precedent or after signing the agreement, and in the event, any party denies fulfilling the condition subsequent, the other party could have the right to take legal recourse for breach of the terms & conditions. Such kind of agreement is generally used when the parties wish to transact a large number of items.

The legal implications of signing a share purchase agreement are simple. On signing the agreement, the ownership of the agreed number of shares passes to the buyer and the buyer gets a certain amount of powers & control over the business of the company. Though, it is to be noted that there are no major changes in the business organization except the powers & control acquired by the buyer to participate in the decision-making process of the company. To ensure its effectiveness, the parties must examine each document and understand its significance.

Share Purchase Agreement –Meaning & Importance

A Share Purchase Agreement is a significant legal document that holds key importance to the business. It provides the parties an opportunity to protect their interests before and after the transfer of shares. It covers every aspect of the transaction between the parties to diligently and carefully discuss and agree on each clause in the document for comprehending its importance.

If the agreement can be executed formally, it plays an important role in defending the interests of the parties involved in the transaction and avoids any kind of confusion in the future.

It helps the company to update the list of its shareholders and above all, allows the new shareholders to participate in the crucial decision-making for the company. Further, an effective share purchase agreement may help the parties to save their costs & money in case of disputes by encouraging the court settlements through arbitration.

Before drafting the final share purchase agreement, the parties may discuss & negotiate the terms of the agreement in a Letter of Intent or draw a term sheet. The parties must carry out due diligence to confirm that the terms & conditions are the same under the letter of intent and the final agreement. In case of any discrepancy, things could be altered or further negotiated before the completion of the share purchase agreement.

Furthermore, the agreement could be checked to know whether any false statements or misrepresentations are being made by either party. If the same is found after signing the agreement, there could be legal action against the party at default including price adjustments in case of any misrepresentations.

 Shareholder’s Agreement vs. Share Purchase Agreement

Parties to a Share Purchase Agreement

A share purchase agreement is generally signed between parties in cases where a business entity or an individual wishes to sell shares to another business entity. For example, if there are two partners in a partnership firm and one wishes to leave, the other partner could buy the shares of the leaving partner through the share purchase agreement.

The share purchase agreement is also used by the start-ups to transfer shares to investors to raise capital for the business.

Though a share purchase agreement (SPA) could be carried out between a seller & buyer, at the same time, the agreement may also involve one seller and multiple buyers. In such cases, it is of critical importance to make the authorized persons of such businesses (in case the buyer is a business entity) guarantors or covenanters to ensure the protection of the seller business entity from fraud or any similar contingencies and to ensure that the promises made in pursuance of such agreement are fulfilled timely.

Contents of a Share Purchase Agreement

A shares purchase agreement with all the finalized terms & conditions may include the following particulars-

• Name of the seller & buyer
• Type of shares being transferred/sold
• Par value of shares
• Seller/Buyer Warranties and representations
• Number of shares being sold
• Agreed Consideration
• Details of the transaction
• Indemnification for unanticipated costs

What are the important Clauses in Share Purchase Agreement?

Provided below are the important clauses to be included in a Share Purchase Agreement-

i. Parties to the Agreement

The seller & buyer are the parties to the share purchase agreement only exception being companies/shell companies that are incorporated only to execute the agreement. In such cases, the substantive entities’ principles need to be added as covenanters or guarantors to ensure commitment to the contract.

ii. Recitals to the Agreement

Recitals provide for the role & responsibilities entrusted to the parties along with the factual background & goal-related transaction.

iii. Definitions and Interpretations

Definitions & Interpretation clause must provide for the definition of important terms and the intention of the parties in the agreement. Ideally, a definition clause should stick around with the fundamental meaning of the terms.

iv. Condition Precedent

A share purchase agreement clause covers the ‘Condition precedent’ clause that establishes permits necessary (internal and external) and the person responsible for obtaining each of them. This clause must include the warranties, representations, obligations & execution of the agreement-related conditions.

v. Condition Subsequent

These types of clauses are infrequent and provide the permits & obligations that are residuary in the conditions after the purchase under the terms. Even after the completion of the process of the sale of shares, there may be actions required to be carried out by the parties based on their mutual understanding, and the subsequent buyer may require to afford protection. These actions could be anywhere from the disposal of any pending litigation against the company to transferring documents in favor of the buyer. Thus, all these actions could be achieved only after the successful transfer of shares, and these actions could be further secured through the indemnity clause.

Therefore, if the parties wish to fulfill any such obligations, they may identify such actions and put them under this clause.

vi. Sale of Shares & Consideration

Like any other transaction, it is important to set out the terms of purchase & payment for shares purchase transaction between parties. The payment structure should be presented in a clear but elaborative way so that there is no ambiguity in the language. It must include all the details under this clause including –

• The place, time, & manner of closing,
• Deposits are to be submitted at the time of execution of the agreement;
• Whether the payments would be made in installments or as a one-time full-fledge payment.
• The final sum payable on closing (pricing formula determined on a case to case basis)
• Amount held in escrow to be set off against indemnities, breaches of warranties, and representations
• Any amount payable in case any security is registered against any company.

vii. Seller’s Representations and Warranties

This clause encloses details such as the aggregate number of shares available with the seller along with the list of the active directors of the company. Some other details include any pending disputes or litigation, transparency of accounts or financial solvency, any pending loans, etc. Above all, this clause should specify clearly that the vendor holds absolute ownership over his shares and can sell out these to the purchaser.

viii. Buyer’s Representation & Warranties

This clause is generally repetitive and intends to protect the interest of the purchaser. It contains information such as

Protection of buyer’s rights, his ability to make payment of the compensation and enter subsequent agreements, etc. In case the buyer is a business entity, the legal status of the business entity is also provided.

ix. Confidentiality

This is one of the crucial elements of the share purchase agreement. Since it is only natural to guess that the parties may have communicated the business confidential information to each other. Therefore, it is important to maintain the secrecy of the information from any unauthorized disclosure to any third party which could be time-barred anywhere between eighteen months to twenty-four months.

x. Indemnification

A share purchase agreement involves the indemnification clause that specifies information such as claim amount, timeframe, process, & the subject matter. Additionally, it may also provide for an exclusive or non-exclusive remedy, manner of bringing claims for indemnification, period, exclusions, and limitations on claims. Normally, the share purchase agreement includes general indemnity clauses, but the buyer could seek any specific indemnity based on due diligence findings.

xi.  Notice

Though clauses like notice and communications between parties are usually underestimated clauses in a share purchase agreement it is almost as important as any other clauses in the agreement. It provides for the manner of sending notices and preferred mode of delivery on the address of the parties.

xii. Dispute Resolution & Arbitration

Disputes are common in any business relationship and it is wise to prepare for their resolution in advance. Besides, now parties do not need to be suffered in the long court battles as there is plenty of out-of-the-court settlement means available such as arbitration & conciliation. Therefore, if the parties choose arbitration as the primary means of dispute resolution, they could decide on the procedural law, the number of arbitrators, and the seat of arbitration language.

xiii. Jurisdiction and General Clause

Finally, the parties must decide and specify the jurisdiction of the local courts situated within the vicinity of the registered office of the vendor as their applicable jurisdiction. The share purchase agreement should also include other general clauses such as the assignment & the relationship clause, which shall provide that the agreement doesn’t create any specific relationship between the seller & the buyer except as specified under the provisions of the Agreement.

Enforcement of a Share Purchase Agreement

Since a share purchase agreement is a legally binding agreement and it isn’t a complex process for fulfillment. It only requires fulfillment of only two basic concepts – offer & acceptance of the offer. However, it is important to note that it should be written in a clear language with no uncertainty with all the important details including the shares, shareholding, and the company.

Conclusion

Therefore, a share purchase agreement is one of the most effective legal tools to ensure the protection of interests of the concerned parties apart from ensuring the successful transfer of shares between parties. It is legally binding and could be used as prima facia evidence of the terms & conditions mutually agreed by parties in the event of any breach of the terms & conditions during the legal proceeding.  Therefore, the share agreement must be inclusive covering all crucial aspects of share transfers between the parties.

Though a share purchase agreement seems simple in its terms, however, to draft it efficiently, it needs professional experience with proficiency in writing down the agreement. It could be either short, long, complex, or detailed, in length, but what is most important of all is its balanced approach and enforceability.

Before signing a share purchase agreement, it is always advised for the parties to draw up and negotiate a term sheet that would address the crucial terms of the Share Purchase Agreement informally which could help the parties to get a better understanding of each other’s intentions and ease the process of drafting and negotiations of the Agreement as all the substantial terms would be already addressed and decided between the parties. Moreover, the requirements and terms of the agreement might vary for each agreement as there is no one-size-fits-all standard agreement to be used while drafting a Share Purchase Agreement (SPA). It ensures that the given transaction adheres to utmost transparency, which creates the foundation for a healthy buyer-seller relationship.