Analysis Of Share Purchase Agreement

Key Takeaways

• A Share Purchase Agreement is a written agreement between the buyer and seller of a share. It is written when one of the firm's shareholders want to sell his or her stock to another shareholder and exit the company.
• A corporation can offer two classes of shares to prospective shareholders, according to section 43 of the Companies Act 2013
• The offer and acceptance are the initial requirements that must be met for any agreement to be legally binding.
• It is significant since it is a legally enforceable written agreement that will reduce misunderstandings between the parties. This agreement can be used to show the sellers' ownership, which provides the buyer confidence.

Share Purchase Agreement- Meaning

A Share Purchase Agreement is a written agreement between the buyer and seller of a share. It is written when one of the firm's shareholders want to sell his or her stock to another shareholder and exit the company. The buyer can be an individual or a business.

The following scenarios are included in the Share Purchase Agreement:

1. Either the old promoters or the new promoters will sell the shares.
2. Alternatively, new investors will buy existing shares to give them a way out.

We can imagine an agreement in which shares are transferred from one party to another based on the name alone. Shares provide shareholders ownership in the firm, which can be obtained by acquiring a share from the company or from any current shareholders. It is usually advisable to get into an agreement to make any transfer legally binding.

Purpose-The main purpose of this share purchase agreement is to demonstrate that both parties agreed to the terms and conditions, as well as how many shares will be transferred from the seller to the buyer and at what price. This also provides different details on the company whose shares are being purchased, as well as the rights that the buyer will have as a result. The type of shares that are transferred from the seller to the buyer is one of the most crucial points included in this agreement.

Types of Share Purchase Agreement

A corporation can offer two classes of shares to prospective shareholders, according to section 43 of the Companies Act 2013. Equity shares as defined in section 43(a) and preference shares as defined in section 43(b) are the two types of shares. Both of these shares have their own set of advantages and disadvantages. In short, the former gives a shareholder the right to attend meetings and vote on every resolution brought before the company, which we commonly refer to as voting rights, whereas the latter gives a shareholder the right to receive dividends from the company but no voting rights except in a few circumstances.

Is a Share Purchase Agreement Legally Binding

The offer and acceptance are the initial requirements that must be met for any agreement to be legally binding. For example, if firm A needs money, he invites investors to participate in the company. B, an investor who wishes to invest in Company A, delivers 100 crores, and in exchange, Company A gives B 100 crores worth of shares. B will have some ownership in Company A as a result of this. As can be seen, A made an offer, which was duly accepted by B, resulting in a contract between the two parties.

Because the investor wants to protect his interests, he will enter into a contract with the corporation, in this case a share purchase agreement. Share purchase agreements, like any other legally enforceable contract, will have sections such as the parties' names, consideration, warranties and indemnities, requirements precedents, and so forth. This will aid the parties in resolving any future disputes that may arise, as this agreement covers all aspects of the share transfer.

Important Provision Relating to Share Purchase Agreement.

1. Parties: The most important aspect in any contract is the parties to the agreement. The seller and the buyer are the contracting parties in a share purchase transaction. Occasionally, a company is formed only for the purpose of a share purchase agreement or as a shell business with no financial history. In most of these circumstances, a guarantor is chosen to cover the claims and obligations made in the contract.
2. Recitals: The recitals should clearly clarify the transaction's factual basis and objectives, as well as each party's involvement.
3. Definitions and interpretations: Definitions of the terms used in the agreement should be defined in terms of what they imply in the context of the agreement, and clauses should be interpreted in the same way that the definitions of the terms and phrases are presented. A definition should, in theory, be limited to the term's meaning.
4. Considerations and the sale of shares: The payment structure should be detailed. Concerning the amount due at closure, the deposits to be made at the time of execution, and the amount to be set off in the event of a breach of the indemnification amount or warranties. The payment will be made in instalments or as a single complete payment when it is triggered. All of these minor issues should be specified openly in the terms of consideration.
5. Condition precedent: This clause should specify who is responsible for authorisation, licences, and permits in detail. This clause should also include the agreement's representations, warranties, obligations, and execution.
6. Closing: This section should include all facts, including minor ones, such as the time, location, and method in which the transaction will be completed.
7. Condition subsequent: In the rarest of cases, this condition would be required because it is unnecessary in a share purchase agreement. A later purchaser should act as a safety net in the event of a condition being broken.
8. Covenant by the parties: The parties' agreement is accommodated in order to provide a level of comfort to the parties. It is needed of the seller in regards to the company's management.
9. Seller's representations and warranties: Vendor's representations and warranties on the amount of shares they possess and the board of directors. Account transparency, pending dispute, and loan information are examples of affirmative information offered by the seller. As a result, the vendor's right to sell their portion to the purchaser should be clear in the provision.
10. Purchaser's representations and warranties: This is a common provision that repeats itself to protect the parties' interests.
11. Confidentiality: One of the premium provisions in the share purchase agreement is confidentiality. Because the parties have disclosed the company's sensitive information at this point, this provision aids in the sealing of the information, which cannot be exposed without both parties' consent. Confidential provisions usually have a time limit of 18 months to two years.
12. Indemnification: The amount of the claim, the procedure, the time limit, and the subject matter are all addressed in this clause.
13. Notice: The location of the parties to whom the notice will be sent, the method in which the notice will be sent electronic or otherwise, and the format of acceptance must all be disclosed.
14. Force majeure: This sort of clause is used to protect the parties in a share purchase agreement against unforeseen crises. It has to do with market volatility and the financial crisis.
15. Resolution of dispute and arbitration: Arbitration is not very popular in India, but the Supreme Court has declared that if both parties are Indian, they can opt to have a seat in India, and if one party is an outsider, they can choose to have a seat outside India. The procedural law, the seat of arbitration language, and the number of arbitrators should all be included in this clause.
16. General clause and jurisdiction: Indian laws will apply. Jurisdiction will be in the city of the buyer's court.
17. Termination: The clause should spell out how the contract can be ended.

Why use a Share Purchase Agreement

I. It is a legally binding document.
II. There's a better chance of increasing revenue through business.
III. Before signing, the seller and buyer can make the final decision.
IV. Benefit from the tax system.

Significance of a Share Purchase Agreement

It is significant since it is a legally enforceable written agreement that will reduce misunderstandings between the parties. This agreement can be used to show the sellers' ownership, which provides the buyer confidence.

It contains all of the necessary details for a share transfer. The seller's warranties are prefixed to the dispute resolution form.

Is there a problem with the warranty in a Share Purchase Agreement

The purchaser of the share purchase agreement has sole responsibility for conducting due diligence prior to the transaction. Purchasers are unsatisfied even after thorough due diligence and examination, thus they want the seller to provide a warranty in the share purchase agreement, but this is unpleasant and burdensome for the seller. It is preferable to have fewer warranties. It becomes an issue for the parties when the agreement is reached at the negotiation table.

Steps to file a Share Purchase Agreement

I. Both parties must review the share purchase agreement.

II. Both parties must sign the document. In the event that the purchaser is in doubt, a witness can also be a signatory.

III. Copies should be created for the buyer, the seller, and the business.

IV. After the payment, the certificate is given.

V. If you meet specific requirements, it will register.

Conclusion

The side that a lawyer represents determines the drafting of a share purchase agreement. Similarly, the quantity of warranties and representations varies. The beauty of the agreement, on the other hand, is in the transaction that rules it. As the final document, every corporate lawyer wishes to draught a share purchase agreement.In order to sell or purchase a share, one must enter into an agreement, but it is usually beneficial to give such transactions a formal form, i.e. construct an agreement, in order to avoid future complications.