The SPA M&A is a legal document that regulates the conditions under which the shares of a company are transferred in M&A. As a rule, the agreement involves minimum two parties to that agreement: a selling entity that holds the title to the shares, as well as a buying entity. However, there is also a possibility to pay using stocks, payment-in-kind or media for equity.
The term sale and purchase agreement usually comprises the following:
- share purchase agreement (“SPA”)
- asset purchase agreement (“APA”)
- enterprise purchase agreement (“EPA”)
Structure of a Share Purchase Agreement
The content of a share purchase agreement depends on a type of the transaction. Nevertheless, there are certain core elements that every SPA M&A contains:
- Preamble and Interpretation – Description of the parties, transaction and key terms
- Subject of the agreement – Definition of the sales object of the transaction
- Purchase Price – Description of price and the manner of payment
- Closing – Actions of the parties before transferring the title to the shares
- Representations, warranties and indemnities
- Terms and conditions of the seller’s liability
- Terms and conditions of the purchaser’s liability
- Additional obligations of the parties – do-not-compete, non-solicitation, confidentiality.
- You wish to guard against price erosion by potential acquirers, both through the determination of consideration to be paid and through any post completion mechanism;
- You are making an acquisition and wish to ensure that potential ‘debt-like’ items and other financial risks have been identified and appropriately addressed, either by way of a reduction in consideration, through a completion pricing mechanism within the sales and purchase agreement, or through warranties and indemnities;
- The transaction may include a post completion pricing mechanism. You are seeking to position the sales and purchase agreement to your benefit and to minimize your partner’s potential to manipulate price.
Warranties, Representations & Indemnities
The sales and purchase agreement should include a detailed list of the warranties presented by the parties to each other. There are 2 key purposes of giving warranties:
1) Provide the buyer with a remedy in case of breach,
2) Get information about the target from the seller. As the seller will want to avoid any liability for breach of warranty, it will attempt to disclose all relevant information before the sales and purchase agreement is signed.
Warranties are usually closely connected with indemnities. The indemnity basis is usually compensation for the loss the buyer has suffered. However, a threshold and maximum may be fixed in the agreement. The amount recoverable is far more favourable to the buyer, because it is not only the cost of fixing the problem, but also any costs or expenses relating to it that may be indemnified. The buyer generally wants indemnities wherever they are possible, but the seller is reluctant to give them. The final draft of the sales and purchase agreement is therefore the end result of negotiations between the two parties, based on each side’s bargaining power. Therefore, unless the buyer has a particularly strong bargaining position, it is only likely to obtain indemnities for tax liabilities (in a share acquisition) and certain areas where a specific problem has been identified from the due diligence process. Some of these areas may be environmental risks, potential litigation for infringement of IP rights, specific book debts, loans of the target and product liability claims.
A warranty may also be a representation where it was made by the seller in pre-contract negotiations, and it induced the buyer to enter into the agreement. Therefore, if a warranty has induced the buyer to enter into the contract, it will be deemed a representation, and breach will entitle the buyer to rescind the contract, especially in situations where there is a gap between exchange of contracts and completion of the acquisition.
The buyer may also be entitled to damages in the case of misrepresentation. The nature of an acquisition agreement makes it likely that any representations made by the seller in the pre-contract stage, and which have induced the buyer to proceed with the agreement, will be included in the sales and purchase agreement as warranties. In such a situation, the buyer’s legal representatives seek to have such representations included in the agreement as warranties. In contrast, the seller’s representatives seek to limit this by inserting an acknowledgment in the agreement that the buyer has not relied on any representations. In order to rely on such a clause, the seller must prove that the provision itself if clearly drafted, that the buyer intended for the provision to be acted upon and that the seller belied the statement to be true.
In other words, it must be obvious that the buyer was not relying on any other representations except those expressly incorporated into the agreement. If the seller knows this statement to be untrue, then he cannot rely on it against the buyer. Finally, another way of protecting the seller is to include an “entire agreement” clause in the sales and purchase agreement. It should be noted that such a clause can never exclude liability for fraudulent misrepresentation.
The disclosure letter forms an integral part of the acquisition transaction, and is closely linked to the sales and purchase agreement. Its purpose is to disclose matters which have to do with the target, which if they were not disclosed would result in the seller’s breach of warranty. The letter is usually prepared by the seller’s legal advisers, who identify and go through each of the warranties in the agreement to ensure that the seller has disclosed all known facts which may give rise to a warranty claim by the buyer. Disclosure serves a purpose for both parties. For the buyer, it supplements the Due Diligence process, and gives the buyer a fuller picture of the target. The buyer may use the disclosure letter to identify additional risks and re-negotiate the purchase price, ask for further indemnities to cover a specific risk, or even walk away from the transaction. For the seller, disclosure essentially means that the seller is negating its liability under a warranty. In other words, it is in the seller’s best interests to disclose as much as possible, to avoid future argument as to whether the buyer knew or not about certain facts which give rise to a breach of warranty. Full disclosure will also provide the seller with a successful defence against a breach of warranty claim.