I’m selling my business…how do you negotiate a share purchase agreement?
What is a Share Purchase Agreement?
A share purchase agreement or “SPA” is the main contract by which a seller sells the shares they own in a company known as the “target” to a buyer for a specified price.
What is in an SPA?
If heads of terms were agreed the SPA usually reflects those terms and additional rights and obligations that the buyer and seller each are required to observe in relation to the deal. Regardless as to whether there are heads of terms most SPA’s include, the number of shares being sold, the purchase price for those shares and when it is to be paid, the proposed date to complete the deal by, whether the purchase price is subject to adjustment after completion, warranties (or promises) given by the seller to the buyer about the history and existing affairs of the target, indemnities given by either party to pay the other party in respect of a particular loss caused to that other party, the remedies available for a breach of the terms of the SPA and any limitations to those remedies, restrictive covenants that the buyer must comply with and confidentiality obligations that the buyer and seller are to observe.
What may need to be negotiated?
Often the purchase price is fixed before the deal completes with the buyer and seller agreeing whether it will be paid in full at completion or whether any of it is to be deferred. If due diligence reveals significant risk to the buyer, the buyer may seek to negotiate the purchase price down or defer more than what the seller originally anticipated in order to mitigate against that risk.
Sometimes the purchase price is calculated after completion with reference to the target’s accounts prepared up to the date of completion (the “completion accounts”) with the buyer, the seller and their respective accountants agreeing that the purchase price may be adjusted (upwards or downwards) by an agreed method in the event the target’s financial position in the completion accounts is not what the buyer was expecting. The seller may argue being best placed to prepare the completion accounts based on familiarity with the target’s financial history, however, the buyer may state it is more suited to prepare the completion accounts as it will acquire control of the target’s records at completion and the seller’s ongoing access to those records would be intrusive.
The seller will be required to give numerous warranties about the target to provide the buyer with assurance that is it not entering into the deal with any undue risk such as, holding suitable insurance and valid licences to operate the business, confirming there isn’t any litigation affecting the target and it has never sold defective products or services and that its tax and accounting obligations having been carried out on time and in accordance with the law.
All warranties need to be reviewed and many are negotiated to some degree, however, a commercially-minded negotiating strategy takes into consideration the degree of importance attached to each warranty based on the nature of the business. A hard negotiating strategy over environmental compliance warranties is likely to be of little benefit to the buyer, the seller or the conduct of negotiations where the target is a city centre office-based marketing business with a core business that processes large volumes of personal data where its major risk is non-compliance with data protection laws.
If there are multiple sellers the extent to which liability is apportioned may be negotiated. It is unlikely to be realistic for a minority shareholder with no day-to-day control over the business of the target to be expected to give warranties based on how the business of the target has been run.
Buyers expect the seller to provide indemnities to the buyer where there are specific areas of risk, e.g. where the target has breached data protection legislation given that resulting fines can be significant. It can be challenging for a seller to argue against an indemnity where there has been a known breach, however, where possible the seller should resist indemnities on the basis the seller is required to pay the buyer for the specific loss caused without the buyer having to bring a claim and prove a decrease in the value of the shares bought. Warranties and indemnities are a strongly contested aspect of an SPA.
Where the seller breaches a warranty the measure of damages is to put the claimant in the position had the contract been performed, the usual measure being the difference in the value of the shares had the warranty been true and the market value of the shares in light of the breach.
Limitation of Claims
The seller can reduce its exposure under the SPA by introducing a timeframe within which the buyer can bring a claim. Seller’s do not want to be on the hook for “open-ended” claims and timeframes tend to be negotiated between 18-36 months except for tax related claims which can take time to become apparent. Seller’s do not want to potentially deal with numerous spurious low value claims from the buyer or face unlimited exposure in relation to a particular claim, therefore the buyer and seller usually negotiate a minimum threshold under which claims cannot be brought (known as the “de minimis”) and a cap on the seller’s liability under any potential claims.
Another way in which the seller will seek to limit their liability is to negotiate a procedural requirement to seek recovery from an insurance provider first (where such protection exists) to ensure warranty claims against the seller are brought as a last resort.
Restrictions on the Seller
The buyer will want to protect the goodwill and business of the target and it is highly likely the seller will be required to agree to some restrictions that prevent the seller from setting up, or having an interest in, a business that competes with the target in addition to certain non-solicitation of target employees, clients and suppliers. The duration and geographical reach of those restrictions are usually negotiated, however, multiple sellers will be keen to avoid joint liability for a breach of the restrictions on the basis one seller is unlikely to be able to control the conduct of another.
Given the sensitive information that is provided during negotiations the seller and buyer are often required to give each other undertakings not to disclose information learned about the target and buyer (in the case of the seller) and seller (in the case of the buyer). There can be a divergence of opinion where a buyer company wants to publicise the acquisition of the target and in such circumstances the seller may wish to keep certain information such as the purchase price confidential and the buyer’s press announcement may need to be agreed before it is circulated.
Need more help?
Negotiating an SPA requires specialist advice as it is a legal document that contains significant risk regardless as to whether the purchase price is deemed to be low, high or otherwise. This article is not intended to be interpreted as advice. If you would like any help and advice on your proposed sale or negotiating an SPA please contact our specialist corporate team on 0151 305 9650 or email firstname.lastname@example.org