A Sale and Purchase Agreement (SPA) is a legally binding contract outlining the agreed-upon conditions of the buyer and seller of a property (e.g., a 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. 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. Among the terms typically included in the agreement are the purchase price, the closing date, 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 one of the most important documents 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.
Common features and provisions of a Sale and Purchase Agreement (SPA)
#1 Parties to the Agreement
In the simplest form of a sale, where a 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 may be involved when, for example, there are multiple shareholders in the company being sold. In these cases, each of the shareholders will need to enter into a sale and purchase agreement to sell their shares.
#2 Agreement to Sell and Purchase
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 of 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). This provision also normally states 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 promissory note issued by the buyer), shares in the buyer, or a combination of these.
#4 Restrictive Covenants
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 sale and purchase agreement will, therefore, contain restrictive covenants that prevent the seller (for a specified time 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.
#5 Warranties and Indemnities
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 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 sale and purchase agreement, under which the seller promises to reimburse the buyer on a pound for pound basis for the indemnified liability.
#6 Conditions Precedent
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 and purchase agreement falls away if all of the conditions specified are not satisfied by an agreed upon 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 is obliged to use 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 for completion to affect the deal.
#8 Post Completion
Following completion, the sale and purchase agreement 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 may remain very relevant.
Generate a Purchase Agreement Online
If you’re looking to generate your own business purchase agreement online, visit the Law Depot to get a free template!
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