ContractsOverview of Share Purchase Agreements – I

August 17, 20210

In this two-Part Series, we shall take a comprehensive look at all one must know about Share Purchase Agreements, from features, grey areas and safeguards required to the clauses one must negotiate and the issues borne out of such agreements.

Part I throws light on the concept of Share Purchase Agreement, its features, its important features and components and safeguards both parties must ensure before entering into one.


A Share Purchase agreement (SPA) is an agreement used for transfer of shares from one party to another with the purpose of acquiring stake in a company. The SPA is a quick method of acquiring such stake as no allotment and issue of shares takes place. A SPA also does not dilute the stake of the existing shareholders as no new process of issue is initiated.

SPA is a drafted proof comprising the details of buyer and seller, number of shares to be transferred, value of the shares, rights and warranties of the buyer and seller, covenants and undertaking of the company and termination procedure. SPA distinguishes between partial sale of shares and sale of complete shares of the company. A letter of intent is created prior to the SPAand the letter has to be in conformity with the SPA.

An SPA is drafted for:

1. A new investor to purchase shares from existing shareholders of the company or;

2. An existing promoter to sell the shares of the company in order to procure an exit.

Importance of Share Purchase Agreement

A SPA is important for the following reasons:

1. Due Diligence: SPAs ensure execution of due diligence. A lack of due diligence can cause unwanted consequences on the business functioning and it leaves parties legally vulnerable.

2. Protect both the Parties: The SPA gives an opportunity to both the Parties to protect their interests before the shares are transferred. Moreoever, the liability is dissolved as it covers each part of the transaction along with indemnification guarantee.


Though the contents of an SPA vary according to the complexity of the transaction being governed by it, the basic structure remains largely the same, which is:

1. Parties to the Agreement:

There are two Parties to a SPA, i.e., the seller of the shares and the buyer of the shares. The Parties that are involved in the transaction should be stated in the name clause clearly.

In cases where the companies are incorporated with the intention to run as a shell company, a guarantor is to be appointed. It is the responsibility of the buyer to conduct due diligence of the seller, company, shares, price of the shares in comparison to the market value.

2. Recitals:

Recitals comprise of the background of the transaction and the Parties entering into the SPA, with the role of each Party defined extensively.

3. Definitions and Interpretation:

The terms used in the SPA are to be defined in the document itself in order to provide a clear context and meaning to such terms and to specifically restrict interpretation to the exact connotation.

The manner in which the clauses and terms are to be interpreted in case of conflicting conditions forms part of Interpretation.

4. Sale of Shares and Consideration:

An exhaustive structure of payment is encapsulated in a SPA. It is required to explicitly disclose each and every relevant detail, such as:

  • The deposit to be surrendered while execution of the agreement;
  • The mode of payment and whether it shall be made in tranches or as a lump sum amount;
  • The amount to be provisioned for breach of the indemnity amount or in case of warranties;
  • The sum that is payable on closing;
  • Consideration payable for each share constituting aggregate consideration.

5. Special Conditions and consequence of failure to comply with the conditions:

Condition Precedent

Clause of condition precedent should state every person who shall be responsible for the authorisation and permissions, including representations, warranties, obligations and execution of the agreement.

Condition Subsequent

Though this clause isn’t crucial in case of SPA, for the safeguard of the seller in case of a subsequent breach, this clause is incorporated.

6. Representation and Warranties of the Seller:

Representations and warranties must include, but are not limited to, the following:

  • The status of the company and the goodwill they hold in the market;
  • The number of shares held by the seller;
  • That said shares are free from all the liens;
  • That the seller has full corporate authority to enter into the SPA;
  • Also, this clause contains an assertion regarding the title and rights of the seller on the shares/property of the company, compliances to be followed, information on loans and related agreements and fairness of accounts and so forth as provided by the seller.

7. Representation and Warranties of the Buyer:

On part of the buyer, the following representations and warranties need to be included in the SPA:

  • That the buyer has full authority to enter into such SPA and is free from any legal liability that might hamper his ability to do the same.
  • That the buyer has the ability to pay the compensation and enter into any subsequent agreements.

8. Confidentiality Clause:

This clause becomes crucial to be included in the SPA when:

  • Parties have exchanged confidential information and/or
  • Listed entities are involved in a transaction.

A Confidentiality Clause specifies that the terms of the SPA cannot be revealed without the consent of both Parties.

9. Indemnification:

Indemnification clauses encapsulate the threshold limit on claims, time period, subject matter and the procedure inter se the Parties for dealing with disputes and reimbursement for the claims ensuring that the buyer’s interest are completely covered.

10. Notice:

Notice is an important clause where the location of both the Parties and the manner in which the SPA is to be dispatched is mentioned.

11. Arbitration and Dispute Resolution:

Though not the most sought after method of Dispute Resolution, Arbitration is not gaining momentum as an efficient tool for cordial dispute resolution with changing times. The Supreme Court has ruled that when two firms based in India enter into a SPA, the arbitral award delivered in connection with the same shall be a Domestic Award.

The procedural law, the seat of Arbitration language, Number of Arbitrators in a panel and Venue of Arbitration is conveyed in this clause.


1. A Non-compete Clause:

A Non-compete Clause is a clause wherein the Parties agree not to enter into business or transactions of a competing nature. A buyer usually enforces it to prevent the seller from working for a competitor’s company or from opening up a new competing business. If a buyer is buying trade secrets, patents, formulas, and more, the seller has the right to enforce concealment of the said information for a definite amount of time as asked by the Seller.

2. Indemnification Clause:

As per the Indemnification Clause, the Seller has to indemnify the claims as raised by the buyer against the Company. It is the liability of the Seller to safeguard the Buyer from any illegal activities undertaken during the seller’s tenure in the business, like tax evasion, shareholder’s right infringement or fraud.

3. Confidentiality Clause:

Confidentiality Clause provides a standard legal framework to not disclose legal, financial and social interest governing the sale of business. This right is available to the Buyer to secure his assets from external competitors.


Share Purchase Agreements are fast gaining popularity as the preferred method of execution of transfer of shares between parties, owing to its swiftness of process and its ability to be moulded as per the needs and wants of the parties involved. Though essentially exhaustive, it is always best for the parties to ascertain the inclusion of certain clauses in order to ensure safeguarding of his/her interests, like a non-compete clause, an indemnification clause and a confidentiality clause. SPAs give the parties the freedom to choose every aspect that shall govern the contractual relationship between them, from representations and warranties on behalf of both the buyer and the seller to the mode of dispute resolution that both parties want to opt for in case any conflict arises.

In the next part, we shall take a look at the various nuances involved in SPAs in the form of predominant grey areas, problems arising out of SPAs and the important clauses the seller must negotiate before finalising a SPA.



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