The Sale and Purchase Agreement (SPA) is a legally binding contract outlining the agreed conditions of the buyer and seller of a property (e.g. corporation). It is the main legal document in any sale process. In essence it sets out the agreed elements of the deal, includes a number of important protections to all the parties involved, and provides the legal framework to complete the sale of a property. The SPA is therefore of critical importance to both sellers and buyers.
Essentially, the sale and purchase agreement spells out all the details of the transaction so that both parties share the same understanding. Terms typically included in this agreement include the purchase price, the closing date, and the amount of earnest money that the buyer must submit as a deposit and the list of items that are and are not included in the sale.
The sale and purchase agreement is possibly the most important document in an owner’s business life. For this reason, it should be approached carefully and rigorously, with legal experts guiding both the seller and the buyer.
In the simplest form of a sale where the company being sold is wholly owned by a single person or parent company and is being bought by a single buyer, there are only two parties to the agreement. However, additional parties will be involved where, for example, there are multiple shareholders in the company being sold. In these cases, each of the shareholders will need to enter into the SPA agreement to sell their shares.
This is often the shortest and simplest provision in the SPA. However, it is one of the most important as it ensures that full legal ownership to the shares (also known as “title”) is properly transferred together with all the relevant rights that attach to the shares (e.g. rights to dividends). The provision will also normally state that the shares are free from any encumbrances, giving the buyer comfort that the seller has not pledged any of the shares to a bank or other lender.
Consideration for an acquired company is paid by buyers to a seller in the form of cash, debt (such as a loan note issued by the buyer), shares in the buyer, or a combination of these.
The buyer will want to prevent the seller from establishing any new competitive business that will impair the value of the company being sold. The SPA will therefore contain restrictive covenants that prevent the seller (for a specified period and within specified geographic regions) from soliciting existing customers, suppliers or employees and from competing generally with the company being sold. These restrictive covenants must be reasonable in geography, scope and duration otherwise they may contravene competition law.
Warranties are statements of facts made by a seller in the SPA relating to the condition of the company being sold. If a warranty subsequently proves to be untrue and the value of the company is reduced, the buyer may have a claim for breach of warranty. Warranties will cover all areas of the company including its assets, accounts, material contracts, litigation, employees, property, insolvency, intellectual property and debt.
If more specific risks are identified during due diligence, it is likely that these will be covered by an appropriate indemnity in the SPA under which the seller promises to reimburse the buyer on a pound for pound basis for the indemnified liability.
Simultaneous signing and completion of a deal (where the parties sign the SPA and complete the sale on the same day) is the preferred and simplest way of concluding a deal. Sometimes however there is a need for a time gap between signing and completion in order to satisfy certain final outstanding conditions. These are known as “conditions precedent” and commonly include tax authority clearances, merger approval by authorities, and consent from third parties (for example, where a change of control provision exists in a material contract of the company being sold). Unless the parties agree otherwise, the sale agreement falls away if all of the conditions precedent are not satisfied by an agreed date (the “longstop date”). It is therefore critical that the SPA sets out how to determine when the conditions precedent have been satisfied, and when they are no longer capable of being satisfied. It should also specify which of the parties is responsible for satisfying each particular condition precedent. The relevant party will be obliged to use its reasonable endeavors to satisfy the relevant conditions precedent by the longstop date.
Completion is when legal ownership of the shares transfers to the buyer, resulting in the buyer owning the target company. A completion schedule in the SPA will normally list all of the documents to be signed and other actions necessary at completion to effect the deal.
Following completion the SPA continues to be an important document for reference as it covers how any earn-out is to work and contains restrictive covenants, confidentially obligations, warranties and indemnities, all of which will remain very relevant.