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Share Purchase Agreement

What is Share Purchase Agreement?

A Share Purchase Agreement (SPA) is a legal contract between a buyer and a seller where the seller agrees to sell, and the buyer agrees to purchase, a specific number of shares of a company, usually at an agreed price and under defined terms and conditions.

It is one of the key documents in mergers & acquisitions (M&A) and private equity deals, outlining the rights, obligations, representations, and warranties of both parties.

Purpose of an Share Purchase Agreement

The SPA formalizes the transaction and ensures that:

  • Both parties understand what is being sold and at what price.
  • The risks and liabilities are clearly allocated.
  • Any conditions or approvals are outlined in advance.
  • Legal and financial protections are in place for both sides.

Key Elements of an Share Purchase Agreement

1. Parties to the Agreement

The buyer(s) and seller(s), often including company details and roles (e.g., promoters, investors).

2. Purchase Price

The total consideration to be paid for the shares and the payment method (cash, deferred, earnout, etc.).

3. Number and Class of Shares

Specifies how many shares are being transferred and of what type (e.g., equity, preference).

4. Closing Conditions

Conditions that must be fulfilled before the transaction can be completed (regulatory approvals, due diligence, etc.).

5. Representations and Warranties

Assurances provided by both parties about the company’s status, finances, ownership, and compliance.

6. Covenants

Obligations on both sides to do or not do something before or after the closing (e.g., non-compete, maintaining business operations).

7. Indemnities

Protection for the buyer if losses arise due to breaches or undisclosed liabilities.

8. Termination Clause

Conditions under which the agreement can be cancelled before closing.

9. Governing Law and Jurisdiction

Specifies which legal system will apply in case of a dispute.

Example

Let’s say Investor A is buying a 20% stake in Company XYZ from Promoter B for ₹10 crore. They will sign an SPA that:

Details the number of shares (say 2 lakh shares)

Specifies the price per share (₹500)

Includes representations by Promoter B about the company’s financials and compliance

Outlines closing procedures and payment schedule

Share Purchase Agreement vs. Shareholders’ Agreement (SHA)

  • SPA is for executing a transaction, buying/selling shares.
  • SHA governs the rights and responsibilities of shareholders after the transaction, such as voting rights, board seats, and transfer restrictions.

In the Indian Context

In India, SPAs are commonly used in:

  • Private equity and venture capital deals
  • Strategic acquisitions and buyouts
  • Secondary share sales
  • Promoter exits

They must comply with laws like the Companies Act, SEBI regulations, and the Foreign Exchange Management Act (FEMA) (in case of cross-border deals).