Ultimate Guide to Share Purchase Agreements

What is a Share Purchase Agreement?

A Share Purchase Agreement (SPA) is a contract between a buyer and a seller for the sale and purchase of company shares. It outlines terms for the transaction, including share valuation, payment conditions, and both parties’ obligations. In India, SPAs must consider the Companies Act, 2013, and the Indian Contract Act, 1872, ensuring the agreement aligns with national legal standards. Thorough due diligence is essential for the buyer to assess the company’s health and liabilities, influencing SPA terms to safeguard the buyer’s interests.

Key Parties Involved in a SPA

The key parties in an SPA include:

• Seller(s): Shareholders of the target company selling their shares. They must provide accurate information about the company and comply with the closing conditions.
• Buyer: The entity acquiring the shares, responsible for due diligence and fulfilling payment obligations.
• Target Company: Central to the transaction, its assets and liabilities are the transaction’s focus.

Essential Elements of a Share Purchase Agreement

Within the framework of Indian legislation, Share Purchase Agreements (SPAs) are pivotal in facilitating the transfer of shares from one party to another. These agreements are detailed documents that cover every aspect of the sale, ensuring both the seller’s and buyer’s rights are protected under the Companies Act, 2013, and other relevant laws.

Sale and Purchase of Shares

The core of an SPA centres on the sale and purchase of shares, detailing the number of shares being transferred and the conditions under which the sale occurs. This clause is fundamental as it sets the transaction’s scope within the boundaries of Indian corporate law, specifically under the provisions of the Companies Act, 2013. It outlines the responsibilities of both parties and ensures the transfer process adheres to statutory requirements.

Determination of Purchase Price

Determining the purchase price involves a complex evaluation of the company’s financial standing, assets, liabilities, and potential for future earnings. The SPA must explicitly state the price per share and the total consideration involved. In India, valuation methods must comply with the Income Tax Act, 1961, and the rules set forth by the Securities and Exchange Board of India (SEBI), when applicable. The agreement may include adjustments based on due diligence findings or future financial performance, making this clause crucial for financial fairness and transparency.

Transfer of Shares and Closing Details

The transfer of shares and the closing details specify the transaction’s completion process, including the timeline, documentation, and conditions precedent to closing. This section aligns with the Companies Act, 2013, requirements for transferring share ownership, necessitating the submission of share transfer forms (Form SH-4) and board resolution approvals. Closing details ensure a clear roadmap to finalizing the transaction, incorporating provisions for escrow arrangements, if any, and detailing the obligations of both parties to fulfil the conditions precedent to closing.

Core Clauses in a Share Purchase Agreement

Share Purchase Agreements (SPAs) in India are governed by the Indian Contract Act, 1872, and the Companies Act, 2013. These legal documents are crucial in the sale and purchase of shares between the buyer and seller, outlining the terms and conditions of the deal. Key clauses include:

• Representations and Warranties: These clauses provide assurances about the current state of the company, its financials, legal standing, and other material facts.
• Conditions Precedent: Conditions that must be fulfilled before the transaction can be completed. This may include regulatory approvals, consent from third parties, or the completion of due diligence.
• Indemnification: Outlines the indemnity provisions, allowing the buyer to seek compensation for losses resulting from breaches of the agreement or warranties.
• Confidentiality: Protects the confidential information shared during the negotiation and due diligence process.
• Non-compete and Non-solicit Clauses: These restrict the seller’s ability to start a competing business or solicit customers and employees for a specified period.
• Governing Law and Dispute Resolution: Specifies the governing law of the agreement and the mechanism for resolving disputes, often including arbitration as a preferred method.
• Assignment: Both parties desire the ability to freely assign their respective rights and obligations. Sellers may be open to allowing buyers to assign their obligations to third parties, whereas buyers typically insist that the seller’s obligation to sell shares be non-assignable.

Strategic Considerations in SPAs

SPAs are governed by a combination of statutory regulations and contractual agreements between the parties. Here, we delve into three pivotal aspects: Due Diligence and Disclosure Requirements, Restrictive Covenants (Non-compete and Non-solicit clauses), and Governing Law and Jurisdiction, outlining their importance and impact on SPAs in India.

Due Diligence and Disclosure Requirements

Due diligence is a cornerstone of SPAs, offering a clear window into the operational, financial, and legal health of the company whose shares are being acquired. In India, due diligence encompasses a thorough review of corporate documents, contracts, litigation history, regulatory compliance, and financial statements, as mandated under the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations for listed entities.

The Companies Act, 2013, necessitates the disclosure of material facts and figures that can influence the decision-making of the acquirer. Similarly, SEBI’s (Listing Obligations and Disclosure Requirements) Regulations, 2015, impose stringent disclosure norms on listed companies, ensuring transparency and fairness in transactions. The due diligence process, thus, mitigates risks, informs valuation, and influences the negotiation of the SPA.

Read our detailed blog post on Due Diligence Checklist in M&A transactions for further reading.

Restrictive Covenants: Non-compete and Non-solicit

Restrictive covenants, namely non-compete and non-solicit clauses, are pivotal in protecting the buyer’s investment and the company’s proprietary interests post-transaction. In India, such clauses are enforceable subject to reasonable limitations regarding their duration, geographical scope, and the nature of restrictions, in line with the Indian Contract Act, 1872.

Non-compete clauses prevent the seller from starting or engaging in a similar business that competes with the company being sold, while non-solicit clauses prohibit the solicitation of clients, employees, or suppliers. The enforceability of these clauses hinges on their necessity to protect the legitimate interests of the business and ensuring they do not impose excessive restrictions on the seller’s ability to earn a livelihood.

Governing Law and Jurisdiction

The choice of governing law and jurisdiction is a strategic element in SPAs, dictating the legal framework and courts that will adjudicate any disputes arising from the agreement. In India, parties typically choose the Indian legal system as the governing law for transactions involving domestic entities, as stipulated by the Arbitration and Conciliation Act, 1996, for arbitration clauses, and the Civil Procedure Code, 1908, for litigation.

Challenges in Share Purchase Agreements

Negotiating Key Terms and Conditions

Share Purchase Agreement (SPA) requires a deep understanding of the Indian Contract Act, 1872, and the Companies Act, 2013. These laws govern the formation, execution, and enforcement of SPAs in India.

1. Valuation and Purchase Price: The agreement must specify the methodology for valuing the shares, which could include book value, discounted cash flow, or a mutually agreed formula. The Companies Act, 2013, offers guidelines for share valuation, to be conducted by a registered valuer in certain cases.
2. Representations and Warranties: These are factual statements and promises made by the seller regarding the company’s status, including its financial position, legal compliance, and absence of litigation. The specificity of representations and warranties can significantly reduce post-transaction disputes. The Indian Contract Act, 1872, and specific regulations under the Companies Act, 2013, may dictate the enforceability of these clauses.
3. Indemnification: These clauses protect the buyer against losses due to breaches of warranties and representations. Negotiating the scope, duration, and limitations of indemnity obligations is crucial. The Indian Contract Act, 1872, outlines the general principles of indemnification, but specific terms will vary by agreement.

Managing Risks and Dispute Resolution

1. Due Diligence: Comprehensive due diligence is paramount in managing risks. It involves verifying the company’s legal, financial, and operational aspects. The Companies Act, 2013, mandates certain disclosures that can be a starting point for due diligence.
2. Dispute Resolution: Clearly defined dispute resolution mechanisms are essential. Many SPAs include arbitration clauses, given the Arbitration and Conciliation Act, 1996, which supports arbitration as a speedy and confidential means of resolving disputes. Parties may choose the arbitration institution, rules, and the seat of arbitration, which determines the applicable procedural laws.
3. Regulatory Approvals: Depending on the sector, transactions may require approvals from regulators like the Competition Commission of India (CCI) under the Competition Act, 2002, or the Reserve Bank of India (RBI) for foreign investments. Understanding these requirements is crucial to managing regulatory risks.

Amendments, Waivers, and Confidentiality Agreements

1. Amendments: Any changes to the SPA post-execution must be in writing and signed by all parties. The specific process for amendments should be outlined in the agreement, adhering to the principles of the Indian Contract Act, 1872.
2. Waivers: A waiver clause allows parties to forego certain rights under the agreement. Waivers should be explicit and in writing to avoid unintended relinquishments of rights, following the Indian Contract Act’s requirements for contract variations.
3. Confidentiality: Confidentiality clauses prevent the unauthorized disclosure of sensitive information shared during the transaction. The Indian Information Technology Act, 2000, also offers protections against data breaches and unauthorized data sharing, complementing the SPA’s confidentiality provisions.

Closing a Share Purchase Agreement Successfully

Pre-closing and Closing Checklist

The pre-closing phase of a Share Purchase Agreement (SPA) in India requires meticulous preparation to ensure compliance with Indian legislation. Key actions include:

1. Due Diligence Completion: Verifying all due diligence aspects are satisfactorily addressed, including legal, financial, and operational aspects.
2. Obtaining Necessary Approvals: Ensuring all requisite approvals are obtained, which may include regulatory approvals from bodies such as the Competition Commission of India (CCI) under the Competition Act, 2002, if applicable.
3. Finalizing Transaction Documents: Reviewing and finalizing all transaction documents, ensuring they reflect the agreed terms, especially in light of the Companies Act, 2013, which governs share transfers.
4. Compliance Checks: Ensuring compliance with relevant laws, including FEMA regulations for cross-border transactions, and tax implications under the Income Tax Act, 1961.

Effective Transfer of Shares

For the effective transfer of shares:

1. Execution of Share Transfer Form: Transferors must execute Share Transfer Forms (Form SH-4 under the Companies Act, 2013) for each share transfer.
2. Payment of Stamp Duty: Compliance with stamp duty requirements as per the applicable state laws where the registered office of the company is situated is essential. The rate varies across states.
3. Board Approval: Obtaining board approval for the transfer and recording the transfer in the company’s register of members is mandatory as per Section 56 of the Companies Act, 2013.

Post-closing Adjustments and Follow-ups

Post-closing, several adjustments and follow-ups may be necessary:

1. Adjustment of Purchase Price: Depending on the SPA terms, adjustments based on closing accounts or specific indemnity claims may need to be addressed.
2. Fulfillment of Conditions Precedent: Ensuring any conditions precedent that are to be fulfilled post-closing are completed.
3. Regulatory Filings: Making necessary filings with regulatory authorities, such as the Registrar of Companies (RoC), and complying with post-transaction notification requirements under applicable laws.
4. Integration and Operational Handover : Smooth transition of control and integration processes to ensure operational continuity.

Final Words

Executing Share Purchase Agreements (SPAs) demands a thorough understanding and adherence to the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations for listed entities. Furthermore, transactions involving foreign investment are scrutinized under the Foreign Exchange Management Act (FEMA), 1999, while those with potential competition law implications must consider the Competition Act, 2002.

The legal framework in India requires parties to engage in comprehensive due diligence, craft detailed representations and warranties, and navigate regulatory approvals with precision to ensure the legality and enforceability of SPAs. Arbitration, as facilitated by the Arbitration and Conciliation Act, 1996, remains a preferred dispute resolution avenue, underscoring the need for legal strategies that accommodate the nuances of Indian corporate law.

Thus, the successful negotiation and implementation of SPAs in India necessitate a strategic approach that meticulously incorporates the relevant legal provisions and regulatory requirements. Parties must stay informed of the evolving legal frameworks to mitigate risks effectively and execute agreements that are both compliant and conducive to their commercial objectives. In doing so, a robust understanding of the governing laws and an ability to anticipate legal challenges become indispensable assets, ensuring that share purchase transactions are executed smoothly and efficiently within the bounds of Indian law.