Share purchase agreement: key clauses explained

For many clients, a share purchase agreement (SPA) can feel lengthy and technical, but each clause serves a practical purpose, and understanding those purposes helps you negotiate confidently and avoid unpleasant surprises later.

This article explains the key terms commonly found in a typical SPA and why each is important from a commercial and legal perspective. However, this list is by no means exhaustive, and an SPA must be tailored to meet your specific needs.

If you have questions about share purchase agreements or a business sale, contact our solicitors for clear, practical advice tailored to your transaction.

1. Parties, background, and definitions in a share purchase agreement

At the start of a share purchase agreement (SPA), it’s important to clearly identify all parties involved, explain the purpose of the transaction, and define key terms used in the document.

Legal definitions can differ from everyday language or industry-specific terms. By clearly defining important terms upfront, both sides can avoid ambiguity and reduce the risk of misunderstandings or disputes later in the process.

2. Sale and purchase of shares

This section outlines the core terms of the transaction and should clearly specify:

• The amount and classification of shares being sold.
• The rights attached to those shares, such as voting rights or dividend entitlements.
• The purchase price and how it will be paid – for example, in cash, through security, by exchanging assets, assuming certain debts or liabilities, or a combination of these.
• The time and place the transaction will be completed.
• Whether the execution of the SPA and transaction completion will be simultaneous or deferred.
• Confirmation that the shares are being transferred free of any encumbrances, such as charges or third-party rights.

This clause makes clear exactly what each party is transferring and what rights or obligations they will assume on forfeit as part of the deal.

3. Purchase price adjustments and earn-outs

This clause explains whether the purchase price will change based on the company’s future performance. Buyers want to ensure they do not overpay for the business; sellers want certainty that they will receive the full price.

Since the price is usually calculated using the target company’s latest financial statements, purchase price adjustment mechanisms help protect the buyer if the company’s performance shifts between the valuation date and completion of the transaction.

Earn-outs are additional, contingent payments made after completion if the target company meets agreed performance milestones within a set timeframe, such as future revenue or profit targets, or the retention of key clients. They help reduce risk for the buyer while giving the seller the opportunity to earn a higher overall price if the business performs well.

They address uncertainty around the company’s future prospects when the target is a start-up with limited financial history but strong growth potential, or when the seller will continue managing the business, and the buyer wants to encourage strong post-closing performance.

Price adjustments and earn-outs can bridge valuation gaps, but, as they rely on future performance metrics, they carry significant risks that may trigger disputes. Therefore, they require careful drafting to prevent later disputes and should include:

• Clear and specific milestones.
• A defined earn-out period.
• A clear formula.
• A secure payment mechanism, such as escrows (a third-party holding the funds related to the transaction) or guarantees.
• Post-closing obligations tailored to the earn-out structure.

4. Material adverse effect (MAE)

This clause determines the threshold for measuring the negative effect resulting from events that have caused detriment to the target company between execution of the SPA and completion. MAE clauses are often used to qualify representations, warranties, and covenants.

They can also be included as a condition precedent, enabling a party to refuse to complete the deal if the other party experiences a significant negative change between signing and closing.

This is supported by what’s known as a bring-down provision, which requires the seller to confirm at closing that all representations and warranties made at signing remain true. If a material adverse effect has occurred and those statements are no longer accurate, the buyer may be entitled to walk away from the transaction.

By examining the MAE clause, it should be possible to discern:

• Whether all conditions precedent have been met.
• The scope of the seller’s disclosure obligations.
• Whether any misrepresentations or breach of warranties have occurred.
• What losses, if any, arose from a misrepresentation or breach.

5. Conditions precedent

Conditions precedents are requirements that must be met or waived before the transaction can complete. Any failure to satisfy a conditions precedent typically gives the other party the right to walk away from the transaction without any liability.

Conditions precedents protect both parties. Buyers get comfort that the business is in an acceptable state before they pay for it. Sellers ensure that any external approvals are secured before they part with their shares.

6. Representations and warranties in a share purchase agreement

Representations and warranties are statements made by each party disclosing information material to the transaction.

A representation is a statement of fact made before the contract is signed. It provides information that helps the other party decide whether to enter into the agreement. Generally, misrepresentations enable a contract to be rescinded.

A warranty is a contractual promise that something is true and will remain true. A breach of warranty means the party giving the warranty usually must compensate the other party for any resulting loss.

These are detailed statements made primarily by the seller about the company, covering areas such as:

• Financial accounts.
• Contracts and liabilities.
• Employees and pensions.
• Tax compliance.
• Intellectual property.
• Litigation.
• Environmental and regulatory matters.

Warranties are the buyer’s main protection against hidden problems. If a warranty turns out to be untrue, the buyer can claim compensation. For sellers, negotiating the warranties helps them limit their exposure to future claims. A well-balanced warranty package reduces the risk of disputes and promotes transparency on both sides.

7. Disclosure letter

The disclosure letter accompanies the warranties and outlines any exceptions or issues that the seller has explained to the buyer.

This protects the seller from warranty claims for matters that have already been brought to the buyer’s attention. For buyers, disclosures provide vital insight into potential risks, such as litigation, tax exposures, or customer issues. Together, the warranties and disclosures act as a key risk-allocation tool in the transaction.

8. Indemnities

Indemnities are promises by the seller to compensate the buyer for specific known risks, such as:

• Pending tax investigations.
• Particular ongoing lawsuit.
• Environmental liabilities.
• Obtaining change of control consent from key suppliers and customers.

Unlike general warranty claims, indemnities typically provide for direct recovery of any losses from the seller. Exclusive indemnities typically waive the buyer’s right to pursue other legal remedies typically available, except in cases of fraud, intentional breaches, or wilful misconduct. However, non-exclusive indemnities permit the buyer to pursue additional legal remedies if the indemnification provisions do not fully cover unexpected losses.

Indemnities give buyers stronger protection in high-risk areas. Sellers, on the other hand, need to ensure these indemnities are narrowly drafted to avoid unlimited liability. Identifying and negotiating indemnities early in the process helps both parties understand the major risks.

Sellers can reduce their indemnity liabilities by including:

• Materiality and knowledge qualifiers to narrow the scope of representations, warranties, and covenants.
• Time limitations for when a purchaser can bring claims.
• Caps on the seller’s total liability.
• Indemnity baskets (deductibles), so small claims do not trigger indemnification.
• Requirements for the purchaser to claim insurance first for insurable losses.
• Restrictions on purchasers claiming indemnification for matters they learned about during due diligence or otherwise knew about.

9. Pre-completion covenants

Covenants are promises to do or not do certain things. They are especially common in deals with a deferred completion to protect the value of the target business between signing the SPA and completing the transaction.

These covenants ensure that both parties take the necessary steps to complete the deal. The agreement should specify the standard of effort required, whether it be “best efforts”, the highest level of obligation, or “commercially reasonable efforts”, a more moderate standard of obligation.

These clauses prevent the seller from taking actions that could undermine the business's value after the sale. They typically cover:

• The standard of effort required from the seller to close the transaction.
• No-shop provisions which prevent the seller from seeking better offers.
• Requirements for the seller to conduct business as normal.
• Protection of confidential information.

After completion, the buyer needs to ensure that the seller does not start a rival business or poach key staff. The restrictions imposed must be reasonable and proportionate to be enforceable. Getting the balance right is crucial.

10. Termination rights

Where there is a split exchange and completion, termination rights permit a party to end the SPA before the transaction closes. Commonly negotiated termination rights include the ability to terminate:

• By mutual agreement.
• For breach of warranty, a material misrepresentation, or failure to perform a covenant.
• Failure to satisfy closing conditions by the agreed deadline.
• For legal impediments, if a government or regulatory authority enacts a law or rule that makes completing the transaction illegal or otherwise prevents it.

These provisions give both parties clarity and protection if unforeseen issues arise before closing.

11. Ancillary documents and agreements

Ancillary documents and agreements are additional documents listed in a schedule attached to the SPA that must be delivered by the parties prior to completion of the transaction.

These often include:

• Non-disclosure, non-compete, and non-solicitation agreements with the selling shareholders.
• Board minutes and resolutions approving the transaction and authorising the execution of transaction documents.
• Shareholders’ agreements, if the purchase is not for 100% of the company.
• Employment or consulting agreements, to retain selling shareholders as employees or consultants in the target company.
• Guarantees, if the purchaser requires a guarantor for any of the seller’s obligations.
• Loan notes, if part of the purchase price involves issuing loan notes by the purchaser to the seller.
• Escrow deeds, when funds are held in escrow for purposes such as earn-outs or indemnification claims.
• Deeds of contribution, to apportion liabilities if there are multiple selling shareholders.

12. Post-completion covenants

Similar to pre-completion covenants, post-completion covenants are promises to do or not to do something after the transaction has completed. Post-completion covenants should typically include provisions for:

• Non-compete restrictions.
• Non-solicitation of employees.
• Non-solicitation of customers or suppliers.
• Providing information to regulators.
• Assisting with the finalisation of accounts.
• Ongoing cooperation during transitional periods.

A business sale rarely ends at completion. These obligations help ensure a smooth transition and allow both sides to meet legal and operational requirements.

13. Confidentiality and non-disclosure

An NDA sets the rules for handling sensitive, proprietary, and confidential information during a transaction. An SPA usually includes provisions that treat the agreement and its terms as confidential, preventing the information from being shared with third parties.

These provisions should also include reference to any prior non-disclosure agreements (NDAs) signed during earlier stages of the transaction, such as the term sheet or due diligence phase. The SPA can either add to, partially supersede, or fully replace prior NDAs as appropriate.

The SPA should also include restrictions on public announcements, such as press releases, conferences, or advertisements relating to the transaction, which generally require consent from all parties.

Key elements typically include:

• Definition of confidential information and exceptions (i.e. what is protected information and what is not).
• Covenants to maintain confidentiality, outlining the obligations of the parties to keep information secret.

Sellers generally prefer broad definitions of confidential information to protect their proprietary data, while buyers often prefer narrower definitions to limit potential liability.

14. Governing law and dispute resolution

Finally, the SPA should set out:

• Which country’s laws will govern the transaction and any resulting disputes.
• The forum for any disputes, whether they will be resolved through courts or arbitration (private resolution).

In cross-border deals, this clause is vital. Clear dispute resolution terms reduce uncertainty, legal costs, and the risk of protracted litigation.

Guidance from our corporate solicitors

A well-drafted SPA cannot turn a bad commercial deal into a good one. However, when supported by a carefully negotiated term sheet and thorough due diligence, an SPA is a crucial tool to help manage and reduce risk in M&A transactions.

Stewart Dickens, corporate solicitor, says:

“A share purchase agreement does much more than record the price of a business. It sets out how risk is allocated between the buyer and seller and provides protection if issues emerge after completion. Careful drafting at the outset can prevent costly disputes later.”

Our corporate solicitors advise business owners, entrepreneurs, and investors on share purchases, company sales, and acquisitions. We work closely with accountants, tax advisers, and other professional advisers to ensure transactions run smoothly from negotiation through to completion.

With offices in London, Brighton, East Sussex, and Cumbria, we support clients nationwide with business sales and acquisitions.

Get in touch to speak with our team.