A Share Purchase Agreement (“SPA”) is a business contract which sets out the terms and conditions with respect to the purchase and sale of shares of a company. This agreement is entered into between the seller, the company and the purchaser of the shares of the company. An SPA is considered to be a very detailed agreement listing down in detail all the rights and obligations of the parties to the agreement. The sole purpose for entering into an SPA is to ensure that the transaction or the deal has been completed, as stipulated in the SPA and is in conformity with the anticipation made for the particular deal by the parties.
B. IMPORTANT CLAUSES WHICH ARE TO BE NEGOTIATED BY THE SELLER:
1. Seller’s Representations and Warranties:
Representations and warranties in general terms means the stating of facts by the seller to the purchaser and stating that such facts are completely true. These statements made by the sellers in the representations and warranties clause usually deal with the various facets of the company and the shares being sold by them to the purchaser. The representations and warranties are broadly categorized into fundamental and business representations and warranties.
This clause contains terms with regard to the title of the seller on the shares of the company, status of consistence with the applicable law, any pending or undermined suit or litigation, data on credits, loans etc and other related agreements, financial, tax related and all the other information provided by the seller to the purchaser. It is a decent practice to express that the seller has the unhindered title to sell the shares to the purchaser and that there are no court orders restricting the seller from selling shares to the purchaser. The warranties in detail include title, all taxation related warranties, compliance with law, employment and labour related warranties, all documents, records, statutory books maintained by the sellers, the business practices of the company, the assets, all financial matters, complete details of litigation and claims if any, all contractual matters, intellectual property related warranties, insurance related warranties, borrowings, investigations, power of attorney if any, insolvency related warranties, and various licenses and consents which have been obtained.
The sellers shall be very cautious while negotiating the representations and warranties clause and should limit the persons or entities, whom they would be indemnifying in the event of a breach.
The sellers shall ensure the provision of a disclosure letter detailing the non-compliances, if any, to the purchaser, with regard to the business warranties. This is a protection to the seller from the claim of any indemnification by the purchaser, as the sellers by way of the disclosure letter disclose such non-compliances and absolve themselves from any liability in this regard.
SPAs have an indemnity clause incorporated in them solely for the purpose of managing risks with respect to the losses and damages under the agreement. Frequently intensely discussed and haggled upon in SPAs, this clause is applicable to the sellers trying to constrain future liabilities just as the purchasers planning to cover themselves against any losses or liabilities that emerge, fundamentally, out of the representations made by the seller during deal, or because of any occasion which may have happened under the responsibility of the seller, or because of an occasion which may have occurred post the completion of the deal, not completely attributable to the seller. This clause is the most negotiated and scrutinized clause in an SPA and plays a vital role in the event of any dispute which may arise between the parties under the SPA. The seller shall push back while negotiating this clause, as the seller is already held responsible with respect to the fulfillment of the conditions precedent and the exhaustive set of representations and warranties provided by the sellers under the SPA.
The clause is usually drafted in such a manner that it may mention terms such as “upon the occurrence of any other event prior to closing”, in such a situation, the sellers shall negotiate thoroughly as the sellers are already indemnifying the purchaser for the detailed set of representations and warranties.
The clause usually also mentions, terms such as “jointly and severally liable”, when there are other individuals who may also be involved, in such cases, the sellers shall negotiate thoroughly as well.
3. Limitation of Liability:
The limitation of liability can be negotiated based on the time period as well as the monetary claims with respect to indemnification. The sellers shall ensure that the purchaser shall have the right to claim indemnity with respect to representations and warranties and other clauses in the SPA only up to a specified time period and shall ensure that this has been thoroughly negotiated with the purchaser. Negotiation shall also be done with respect to the monetary indemnification claims by setting an overall cap, wherein the seller shall be held liable only to the extent of the overall purchase consideration that is payable by the purchaser to the seller. In case of intellectual property and tax representations and warranties, the seller shall push back in the event the seller has been strictly complying with all the relevant and required compliances. The seller shall limit the exposure as the purchaser shall have no reason for claiming a higher amount towards indemnification for any such losses incurred. However, the seller shall also ensure that there is a clear mention that the seller would be liable only when there has been a significant loss to the purchaser. Further, the seller’s liability can also be limited by mentioning di minimis (a cap on a lower amount) i.e., only after a minimum loss has been incurred, the seller would be held liable. The seller can also seek protection under the concept of aggregation of claims, where the purchaser shall be responsible for bearing all the risks until the same has exceeded a certain amount which has been predetermined after which the seller shall be liable.
An SPA is a document which ensures the smooth completion of a transaction or a deal. However, it differs at length based on the intensity and the complexity of the transaction. It has both pros and cons. The purchaser becomes the new owner of the shares and there is no third party involvement with respect to such sale of shares and all the liabilities, debts and obligations of the sellers are completely dissolved and shall become the responsibility of the purchaser, once the shares are sold. However, a disadvantage could be that the purchaser would inherit all the outstanding and underlying risks and problems which would be associated with the company. Therefore, on the whole, it becomes essential to ensure that the SPA, when drafted is a full-proof document. However, as detailed herein-above, the seller shall negotiate thoroughly with respect to the representations and warranties, indemnification and limitation of liability apart from the other standstill clauses.
Authors: Anita Dugar, Senior Associate; Kriti Sanghi, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) firstname.lastname@example.org (ii) email@example.com.
Updated as on April 18, 2020.
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