1. The basic details
Before you get into the intricacies, it’s important to get the fundamentals right. Check all the details of the parties are correct, including spellings of names, and ensure addresses are up to date.
Check that the shares are correctly described. Usually shares are sold with ‘full title guarantee’ which confirms that the seller owns the shares and has the right to sell them. Check that there are no complications, such as any restrictions or third-party rights, which may affect the transaction.
2. The obligations of the buyer and seller
The agreement should clearly set out the obligations on the buyer and seller on completion of the sale of the shares. This may include documents to be entered into such as stock transfer forms, and the recording of the transaction in board minutes. If the seller or sellers of the shares remain in the business following the sale, new employment agreements may also be needed.
3. The price and payment
SPAs must be clear about the financial details including the purchase price of the shares, the method of payment, and when payment is to be made. For example, if there is an agreement that payment be deferred, the SPA must set out when it must be made. Likewise details must be recorded if the sale is an ‘earn out’ based on future performance of the business.
The buyer will want the right to ‘set off’ any future payments against any money they are owed, or will potentially be owed, by the seller under the sale agreement.
4. Any adjustments to price that are to be made
The agreement should take into account any changes to the purchase price of the shares that may occur between the document being drawn up and the completion of the sale. Completion accounts are usually required to determine the financial position of the company at the time of the sale. The principles of these adjustments need to be carefully calculated, and the method used to do this should be documented in the SPA.
5. Warranties and covenants
The SPA should be precise about the protections afforded to the buyer of the shares. These include:
- These are key protections for a buyer to give comfort about the business being purchased, and a remedy against the seller if unexpected issues arise after completion
- Any limitations on those warranties
- Tax This protects the buyer against tax liabilities arising in respect of the seller’s period of ownership
- Restrictive covenants. These prevent the sellers from being involved in a competing business, dealing with customers or poaching employees for a reasonable time after sale – this is typically two to three years.
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