ContractsStructure of Share Transfer Agreements – II

INTRODUCTION

A Share Transfer Agreement (STA) is a binding Agreement signed between a member of the company holding shares (the Seller) and the Buyer for the purpose of transferring shares to the Buyer who may either be a new or an existing shareholder of the company. This 2^nd part of the article seeks to explain the structure of an STA through a discussion about the standard Clauses to be incorporated therein.

STRUCTURE OF THE STA

1. Parties to the Agreement

This is the primary clause of an STA which clearly sets out the parties to the Agreement which, in this case, are the member of the company (Seller), on the one hand, and the Buyer, on the other hand. Before entering into the Agreement, it is essential for the Buyer to conduct sufficient Due Diligence in order to confirm that the member intending to transfer his shares is the legal owner of the specified shares and possesses the legal capacity to enter into a Share Transfer transaction.

2. Recitals Clause

The Recital Clause of an Agreement – in this case, an STA – is also referred to as its Preamble because it sets out the context of the Agreement and assist in comprehending the nature, purpose and the very basis of the STA. Generally, the Recital Clause is not binding upon the parties to the Agreement unless the parties mutually agree on making this Clause operative by making it legally binding. While drafting the Recitals, the parties must ensure that it neither contravenes the other Clauses of the STA nor creates any obligations which have not been intended by the parties.

3. Share Type and Share Value

This Clause sets out the subject matter of the STA by clearly providing the type of shares (equity or preference) and the quantity that the member of the company or the Seller is intending to sell to the Buyer at a mutually agreed value.

4. Definition and Interpretation of Important Terms

The Definition and Interpretation Clause sets out the meaning of concepts or terms pertaining to the Agreement, especially those that are used multiple times therein, in order to make sure that such terms or concepts are interpreted in the same manner and attributed the same meaning throughout the Agreement.

The definitions of such terms and concepts can either be included at the beginning of the Agreement or by attaching a separate Annexure thereto. The purpose of the Interpretation Clause, on the other hand, is to reduce repetition by setting out a specific context to the terms and concepts used in the Agreement multiple times.

5. Representations and Warranties Clause

Representations and Warranties are one of the most essential clauses in an STA. Representation refers to an assertion made by the party to the Agreement:

• In case of the Seller, affirming the state of the company on the specific date and his/her title and rights to transfer the shares;
• In case of the Buyer, affirming that he/she has the legal capacity to enter into an STA.

Warranty, on the other hand, refers to the assertion that a fact is true, accompanied with an implied promise of indemnity if the assertion is later discovered to be false.

6. Confidentiality Clause

The Confidentiality Clause prohibits the parties to the Agreement from disclosing Sensitive and Confidential Information exchanged between them with any other person not being a party to the Agreement or using such information against the party sharing such information without its/their consent.

A Confidentiality Clause is included in the STA in cases where the parties thereto have exchanged Sensitive and Confidential Information and, in particular, where the transaction involves Listed Companies. The application of this Clause is limited for a time period ranging between 18 months to two years, as mutually decided between the parties.

7. Indemnification Clause

The Indemnification Clause is linked to the Warranty Clause wherein the parties to the STA agree to indemnify the aggrieved party if the assertion made by them under the Warranty Clause turns out to be false. Additionally, the Indemnity Clause also protects the parties from potential litigations that may arise in future. While drafting the Indemnity Clause for the Seller, the indemnification can be limited by setting out upper threshold limits and time limitations.

8. Dispute Resolution Clause

The Dispute Resolution Clause sets out the method of Dispute Resolution mutually agreed by the parties to the STA for any form of dispute that may arise in relation to the Agreement in the future. While drafting this Clause, it is very important to prefer an Alternate Dispute Resolution (ADR) method rather than litigation because under the ADR methods, the disputes can be resolved amicably between the parties in a less time frame as compared to litigation.

The parties can prefer either of such ADR methods like Arbitration, Mediation, Conciliation, Negotiation or Expert Determination. While choosing a form of Dispute Resolution, the Clause should also specify the manner of choosing the Arbitrator, Mediator, Conciliator or the Expert as well as the Seat and Venue of the Dispute Resolution method.

9. Jurisdiction and Governing Law Clause

The Jurisdiction and Governing Law Clause clearly sets out the jurisdiction of the competent Court that can be approached to resolve disputes. Further, this Clause also sets out the law that will govern the Agreement and the Share Transfer transaction. This clause is of utmost importance especially in case where the parties to the Agreement belong to different jurisdictions or countries.

AMLEGALS REMARKS

The STA forms the very basis of executing and giving effect to the Share Transfer transaction. Therefore, it becomes important to draft every Clause of the STA with utmost caution as it can have greater implication on the title, rights and obligations of the parties thereto which may become a cause of future disputes.

Further, in order to protect Sensitive and Confidential Information exchanged during the transaction being used against the Seller, adding the Confidentiality Clause along with a provision for damages should be preferred.

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For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.