Understand Share Purchase Agreement (SPA): Complete Guide

What is a  Share Purchase Agreement?

A Share Purchase Agreement is a contract made by a buyer and a seller wherein the sale of an interest in a company takes place. A very formalized receipt, if you will.

Business buying or selling isn’t always about exchanging buildings, products, or logos; it is often all about shares. When shares are traded, there is one document that makes that whole process clear and official: the Share Purchase Agreement.
This agreement does far more than mention what is being sold and for how much-it says who is involved, what is promised, and what will happen in the event of a breach.

The importance of  Share Purchase Agreements cannot be stressed enough since they bring clarity and protection for all parties involved. Without one, you are merely left with a handshake and fingers crossed. In business, that’s pretty risky.

Why It Matters in the UK?

Buying shares means buying part of a company, maybe very small or even a whole one. The SPA takes care of everyone, knowing what is happening. This is especially important for private limited companies, where shares are not traded on the stock market. It is more personal and carries a greater risk if things are not written down properly.

British concern is Very Much: Purchasing shares in the UK relates to owning pieces of a company. A tiny slice of it can be, or even the whole pie. But whether or not it delivers the goods, the SPA takes care of everybody, knowing what is going on. This is said to be more important with private limited companies, as their shares are not traded in the stock exchange. Such deals are more personal with more risk than if it is not properly stated.

SPA vs Shareholder Agreement

A Shareholder Agreement talks about how the holders will behave with the shares after they have bought them-like their voting rights, dividends, or what happens if one wishes to leave. A Share Purchase Agreement appears to be the sale and purchase of the shares. One is the deal, and the other is life post-deal.

A Process of Sale of Shares in the UK

The stages of share transfer in the UK are not a mere “give me my shares after I pay” transaction.

Step 1: Due Diligence

Before anything gets signed, the buyer usually checks the company. This process is called due diligence. They look at finances, debts, contracts, and employees.

Step 2: Drafting the SPA

After the buyer is satisfied, it will now prepare the SPA. It is conventional for the buyer’s solicitor to draw the first draft. Because the buyer is taking most of the risk.

Step 3: Signing and Completion

Both parties sign the SPA. Now we finally arrive on completion day, the day when the shares are officially transferred. Buyer pays, seller transfers the shares, and the company updates its records.

Share Purchase Agreement Template UK

If the transaction is straightforward, there are free SPA templates available online. LawDepot and Wonder. Legal sites are where users can download SPA templates made in Microsoft Word and Adobe PDF. Such templates are quite useful for small, simple transactions.

For larger or more complicated transactions, it would be wise to get a solicitor involved. Templates are useful, but will not cover all eventualities.

Share Purchase Agreement – Template, Sample Form Online

Key Clauses in a UK SPA

Every SPA consists of a few key clauses that are not legalese but keep the transaction fair and safe.

Warranties and Indemnities

Warranties are the representations made by a seller. For instance, the seller may represent that the company has no undisclosed debts. When found to be untrue, the buyer is entitled to be compensated.
An indemnity goes further in providing that if any such matter occurs, e.g., unpaid tax liability, then the seller will be liable for it.

The Non-Compete and Confidentiality Clauses

The seller may also undertake not to establish a competing business for a certain time; that is, a non-competition clause. A confidentiality clause is also included, which will prevent either party from giving away proprietary information about the company.

The Mechanics of Completion

This part describes the events on the day of completion. It lays down clearly who does what, when the money is paid, and how the shares are transferred.

Stamp Duty and  Legal Requirements

A Stamp Duty is a tax on shares in the UK. The tax is at 0.5% of the price of the shares being bought. If the total price is more than £1,000, you must complete a stock transfer form and submit it to HMRC.

Filing with Companies House involves notifying Companies House about changes after the company updates its register of members. More or less, whoever wants to conduct business officially or legally will keep a record.

Benefits of Share Purchase Agreement

Transfer of Entire: Ownership Upon purchase of shares, one is acquiring ownership in the corporation, and consequently, you get everything the company owns: contracts, licenses, employees, and goodwill, without the need to transfer each and every asset individually.

Business Continuity: All contracts with suppliers, customers, and employees remain unchanged for all intents and purposes. Thus, there cannot be any disruption in this area.

Less Burdensome Tax: Treatment Share purchases in the UK are exempt from VAT. Also, the stamp duty rate is only 0.5% of the purchase price, which in most cases is less than the taxes charged on asset purchases.

Less Documentation: The company being intact means that there will be no assignment of contracts or licenses. This way, the process moves faster and normally makes life much easier.

The “Risks and Limitations of Share Purchase Agreements”

The cons of the Share Purchase Agreements are as follows:

Take on Liabilities: The buyer assumes all of the company’s liabilities, whether they are known or unknown. These include debts, lawsuits, or tax matters. Even with diligent due diligence, some risks may just remain.

Detailed Due Diligences Rightly so, the full-company acquisition will warrant the buyer to conduct an in-depth look into the company’s financials, contracts, and legal histories. This could be a lengthy and costly process.

No Selection of Assets: Unlike an asset purchase, you can’t select what you want to buy. You get the whole company, in all its glory and imperfections.

Risks of Change of Control: There may be contracts with clauses for “change of control.” If so, that entitles the other party to terminate the contract in the event of the company’s sale. This could be a serious risk where key suppliers or major clients are crucial to the company.

Disputes after the Sale: Where an SPA is poorly drafted, disputes may arise after the sale with regard, in particular, to warranties, payments, or performance.

Conclusion

The Share Purchase Agreement may seem like nothing but a dull legal document, yet it is one of the most paramount aspects of buying or selling a business. It keeps everything clear, fair, and secure. So, whether you are buying a single share or the whole company, do not get away from it. For smaller deals, a free SPA template could suffice. But if real money matters-or just for peace of mind-get a solicitor. It is worth it.

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