Share Purchase Agreement - Detailed Explanation and Pitfalls

The purchase or sale of a company through the transfer of shares is a complex process, with the Share Purchase Agreement (SPA) serving as the central contractual document. This article provides a detailed explanation of what an SPA is, its components, and the typical pitfalls you should avoid.

What is a Share Purchase Agreement (SPA)?

A Share Purchase Agreement is the purchase contract concluded between buyer and seller when acquiring company shares (stocks, GmbH shares, or other equity interests). Unlike an asset deal, where individual assets are transferred, in a share deal the buyer acquires the company shares and thus becomes the indirect owner of all the company’s assets and liabilities.

The SPA governs all terms of the transaction and forms the legal basis for the business acquisition. It protects the interests of both parties and allocates the risks associated with the transaction.

What are the essential components of an SPA?

A comprehensive Share Purchase Agreement typically includes the following elements:

1. Contracting Parties: Precise identification of buyer and seller with all relevant details
2. Object of Purchase: Exact description of the shares to be transferred
3. Purchase Price and Payment Terms: Amount, payment method, due date, and any adjustment mechanisms
4. Closing Conditions: Preconditions for the final execution of the transaction
5. Representations and Warranties: Seller’s assurances regarding the company
6. Indemnities: Provisions on liability for certain risks
7. Covenants: Obligations of the parties between signing and closing
8. Non-Compete Clauses: Restrictions on future competition by the seller
9. Corporate Governance Provisions: Transitional arrangements for the period after closing
10. Governing Law and Dispute Resolution: Applicable law and jurisdiction for conflicts

The scope and complexity of an SPA can vary significantly depending on the size and structure of the transaction. In large M&A deals, SPAs can easily run to several hundred pages.

How is the purchase price structured in the SPA?

The purchase price clause is often one of the most complex parts of an SPA. It addresses the following questions:

The purchase price can be structured in various ways:

1. Fixed Purchase Price: A non-adjustable sum paid regardless of subsequent developments
2. Closing Accounts Mechanism: Purchase price adjustment based on financial metrics (e.g., net assets, working capital) at closing
3. Locked Box Mechanism: Fixed price based on historical financial data with protection against value leakage
4. Earn-Out: Additional future payments contingent on the company’s post-closing performance
5. Vendor Loan: Partial deferral of the purchase price as a loan

The Closing Accounts Mechanism, in particular, carries significant potential for disputes, as the precise calculation of relevant financial metrics can be interpreted differently. Therefore, a clear definition of calculation methods and accounting principles is essential.

What warranties should an SPA include?

Warranties (Representations and Warranties) are assurances by the seller about certain characteristics of the company and constitute a central risk transfer mechanism. They answer the question: Which attributes of the company does the seller guarantee?

Typical warranties include:

1. Legal Validity of Shares: Confirmation that the seller is the lawful owner of the shares
2. Financial Warranties: Assurances regarding the accuracy of financial statements
3. Compliance Warranties: Assurance of compliance with legal regulations
4. Tax Warranties: Assurances concerning tax matters
5. Asset Warranties: Assurances about ownership and condition of assets
6. IP Warranties: Assurances regarding intellectual property
7. Employee Warranties: Assurances regarding employment contracts and conditions
8. Material Contracts: Assurances concerning important agreements
9. Environmental Warranties: Assurances regarding environmental aspects
10. Litigation Warranties: Assurances about ongoing or threatened litigation

Warranties are often qualified by disclosure letters or due diligence reports in which the seller discloses known exceptions.

What are typical liability limitations in the SPA?

Sellers understandably seek to limit their liability under the SPA. The following limitations are common and answer the question of how far the seller’s liability extends:

1. De Minimis Thresholds: Exclusion of trivial damages
2. Basket/Deductible: Aggregate threshold for claims (either as a deductible or retention amount)
3. Liability Caps: Maximum liability amount, often expressed as a percentage of the purchase price
4. Statute of Limitations: Shortening of statutory limitation periods
5. Exclusion of Indirect and Consequential Damages
6. Knowledge Clauses: Exclusion of liability for circumstances known to the buyer
7. Duty to Mitigate Damages
8. Procedural Rules for Warranty Claims

Negotiating these limitations is often a key focus in SPA negotiations and requires careful balancing of buyer and seller interests.

How do Signing and Closing differ in the SPA process?

The business acquisition process is typically divided into two phases: Signing and Closing. These answer the question of when various aspects of the transaction become effective.

Signing refers to the execution of the SPA. From this point, the parties are legally bound to complete the transaction under the agreed terms.

Closing refers to the actual completion of the transaction, i.e., the transfer of ownership and payment of the purchase price.

In simple transactions, signing and closing may occur on the same day (simultaneous signing and closing). More commonly, weeks or months separate these events, as certain conditions must be fulfilled, such as:

1. Regulatory Approvals (e.g., antitrust clearance)
2. Third-Party Consents (e.g., customers, suppliers)
3. Financing Commitments
4. Restructuring Measures

The SPA details how the company is to be managed during this interim period (covenants) and which events may trigger a termination right (MAC clause – Material Adverse Change).

Which covenants are particularly important in the SPA?

Covenants are obligations of the parties under the SPA and answer the question: Which actions are permitted, required, or prohibited?

Particularly important are:

1. Ordinary Course Covenant: Obligation to operate the business in the ordinary course until closing
2. Information Duties: Regular updates on significant business developments
3. Consent Requirements: Certain actions require the buyer’s approval
4. Cooperation Obligations: Support in obtaining regulatory approvals
5. Exclusivity Agreements: Prohibition of negotiations with other potential buyers
6. Confidentiality Obligations: Confidential handling of the transaction
7. Non-Compete Clauses: Restrictions on the seller’s future activities
8. Cooperation Duties: Collaboration on transition matters

Breaches of covenants can give rise to claims for damages or, in serious cases, a right of withdrawal.

What are the most common pitfalls in SPAs?

There are numerous pitfalls in drafting and negotiating SPAs that can lead to later disputes. They answer the question: What should be paid special attention to?

1. Insufficient Due Diligence: Inadequate review leads to incomplete warranty catalogs
2. Unclear Purchase Price Adjustment Mechanisms: Lack of precision in definitions and calculation methods
3. Gaps in the Warranty Catalog: Not all relevant aspects are covered
4. Inappropriate Liability Limitations: Excessively generous caps or too short limitation periods
5. Unclear Tax Clauses: Missing provisions on allocation of tax risks
6. Lack of Security: Missing guarantees for warranty or indemnity claims
7. Weak MAC Clauses: Insufficient protection against material adverse changes
8. Incomplete Closing Conditions: Missing termination rights for important events
9. Cultural and Language Misunderstandings: Especially in international transactions
10. Missing Escalation Mechanisms: Unclear procedures for dispute resolution

Thorough preparation and experienced legal advice are crucial to avoid these pitfalls.

How do SPAs differ across legal systems?

SPAs are heavily influenced by the respective legal system and answer the question: Which regional peculiarities should be considered?

1. Common Law vs. Civil Law: In Anglo-Saxon countries (USA, UK), SPAs are typically more extensive and detailed than in continental European legal systems
2. Warranty Law: Different statutory regulations affect the scope of necessary contractual warranties
3. Formal Requirements: In some countries (e.g., Germany), share transfers must be notarized
4. Tax Aspects: Significant differences in the tax treatment of share deals
5. Labor Law Particularities: Different rules on business transfers and employee protection
6. Antitrust Approvals: Varying thresholds and procedures

In international transactions, involving local legal experts is essential to adequately address regulatory and legal particularities.

What role do escrow agreements play in the SPA?

Escrow agreements are an important security instrument in SPAs and answer the question: How can warranty and indemnity claims be secured?

In an escrow agreement, a portion of the purchase price (typically 5-15%) is deposited into a trust account and serves as security for potential claims by the buyer. The following aspects must be regulated:

1. Amount and Duration of the escrow
2. Release Mechanisms: Schedule and conditions for release
3. Claims Procedures: Process for asserting claims against the escrow
4. Dispute Resolution: Procedures in case of disagreement over claim entitlement
5. Interest and Costs: Interest on the escrow amount and allocation of costs

Alternatives to escrow include bank guarantees, group guarantees, or purchase price withholdings. The choice of the appropriate security instrument depends on various factors, including the seller’s creditworthiness, transaction volume, and risk assessment.

How do compliance risks affect the SPA?

Compliance risks have gained significant importance in recent years and answer the question: How are compliance violations handled in the SPA?

The following aspects are particularly relevant:

1. Specific Compliance Warranties: Assurances regarding compliance with anti-corruption, anti-money laundering, data protection, and antitrust laws
2. Enhanced Due Diligence: Intensified review of compliance aspects before contract signing
3. Special Indemnities: Indemnification of the buyer for past compliance violations
4. Higher Liability Limits: Often higher or unlimited liability for compliance breaches
5. Extended Limitation Periods: Longer claim periods for compliance-related warranty breaches
6. Pre-Closing Compliance: Obligation to remedy identified compliance deficiencies before closing

Compliance aspects are especially critical in international transactions and regulated industries for SPA structuring.

Which digital developments influence modern SPAs?

Digitalization has also impacted M&A transactions and increasingly influences SPA design. This answers the question: How is digitalization changing transaction practice?

The following trends can be observed:

1. Cybersecurity Warranties: Specific assurances regarding IT security and data protection
2. Digital Signatures: Electronic execution of SPAs (except where notarization is required)
3. Virtual Data Rooms: Digital due diligence with automated reporting
4. Smart Contracts: Early approaches to automating certain SPA elements
5. Blockchain-Based Transactions: Particularly in startup investments
6. AI-Supported Due Diligence: Use of artificial intelligence for contract review
7. Digital Assets: Specific provisions for digital assets such as cryptocurrencies or NFTs

Digital transformation requires adapted SPA clauses to adequately address new risks and opportunities.

How should an SPA negotiation process be structured?

The SPA negotiation process is complex and time-consuming. A structured approach answers the question: How can the process be conducted efficiently?

A recommended approach includes the following steps:

1. Term Sheet/Letter of Intent: Early agreement on the fundamental parameters of the transaction
2. Due Diligence and First SPA Draft conducted in parallel
3. Prioritization of Negotiation Points: Focus on economically significant aspects
4. Issue Lists: Systematic documentation of open points and negotiation progress
5. Coordinated Meetings: Efficient negotiation rounds with clear agendas
6. Involvement of Experts: Early consultation of tax advisors, auditors, and specialized lawyers
7. Drafting Sessions: Joint revision of critical clauses
8. Closing Checklist: Early preparation of a comprehensive overview of all closing conditions

Professional process management and clear communication among all parties are crucial for a successful closing.

Conclusion: What really matters in an SPA?

The Share Purchase Agreement is the central document in company acquisitions through share purchase and requires the utmost care in drafting. The key success factors are:

1. Thorough Preparation through comprehensive due diligence
2. Precise Wording without room for interpretation
3. Balanced Risk Allocation between buyer and seller
4. Complete Warranty Catalog with appropriate liability limitations
5. Clear Purchase Price Provisions with unambiguous adjustment mechanisms
6. Professional Legal Advice from M&A-experienced specialists
7. Consideration of Industry-Specific Particularities
8. Adequate Security Mechanisms for warranty and indemnity claims

A well-structured and balanced SPA provides legal certainty for all parties and minimizes the risk of future disputes. Investing in careful contract drafting pays off in the long term and significantly contributes to the success of the transaction.