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Pankaj Tyagi
| Updated: 10 May, 2021 | Category: Legal Agreements

Essential Clauses in a Share Purchase Agreement: A Detailed Overview

Essential Clauses in a Share Purchase Agreement

Share purchase agreements have a widespread utilization in the business domain as it legalizes the process of share transaction. Such agreements come into existence when there is an element of risk associated with share transactions. Share purchase agreements overcome inherent risk, particularly when the share is being sold outside the regime of the trading platform or being sold out to entities in two different regions under two unique legal systems. In this article, you will learn about essential clauses in a share purchase agreement.

Relevance of Share Purchase Agreement in a Business Realm

In general, such an agreement contains details such as the company’s info, members involved in the share transaction, the clause of dispute resolution, type and number of share, termination clause, and payment. The share purchase agreement is outlined in such a way that it can provide maximum statutory protection to the members involved in the transaction.

It is essential because it is a written contract that is binding. Such agreement mitigates any chance of confusion that may occur between the parties. Such agreement renders the legal base to the Sellers’ ownership- thereby instills faith in the purchaser regarding the transaction. It manifests all the detail about the transfer of shares. Dispute resolution form for share purchase agreement stands prefixed, including the warranties by the seller.

Listicle of Essential Clauses in a Share Purchase Agreement

Some fundamental clauses in a share purchase agreement are as follows:-

Listicle of Essential Clauses in a Share Purchase Agreement

Parties

In the share purchase agreement, the seller and the purchaser are the parties to the agreement. Sometimes the company is just established for such an agreement or a shell company with fiscal history.  In these cases, usually, a guarantor is entrusted with an obligation for the claims post & promises appended in the agreement.

Recitals

Recitals specifics the role of the parties to the agreement along with factual background & goal related to the transaction.

Read our article:Buyback of Shares and other Securities: A Complete Overview

Definitions and Interpretations

Definitions of the words must render clear-cut meaning and intention of its use in the agreement. The same thing goes with clauses as well. Ideally, a definition should stick around with the core meaning of the term.

Condition Precedent

This particular clause manifests each person who is accountable for the permission, authorization, and permits. This clause must encompass the warranties, representations, obligations, & execution of the agreement.

Consideration & Sale of Shares

As per this clause, there must include a clear illustration of the payment structure in the agreement. The details given below should find their way in the agreement under the consideration terms.

  • Amount payable on closing
  • The sum to be given during the execution,
  • The sum to be set off during the violation of the indemnity amount or warranties.
  • Payment method

Closing

This clause must cover all the information, even the delicate ones, including the place, time, & manner in which closing shall occur.

Covenant by the Parties

Covenant clause act as a risk-allocating device for the parties. It protects the buyer from undertaking certain tasks that the vendor can do between signing to the expiry of the agreement (vice-versa).

Condition Subsequent

In some cases, there would be a requirement for this clause because, in the share purchase agreement, it becomes worthless. In case of contravention of a condition, a subsequent purchaser must be protected.

Seller’s Representations and Warranties

This clause encloses detail such as the number of shares available with the seller and list of active director in a company.

Other affirmative details rendered by the seller include pending dispute, accounts transparency, loan information. Thus the clause must be open about the right of the vendor to sell out their share to the purchaser.

Confidentiality

It is certainly one of the vital clauses in a share purchase agreement. At this stage, parties to the agreement have communicated the company’s classified information, so this clause preserves the secrecy of the information, and its disclosure seeks parties’ consent. Confidential clauses are usually kept time-barred from eighteen months to twenty-four months.

Purchaser’s Representations and Warranties

It is typically a repeating clause, and it protects the interest of the parties.

Indemnification

This clause encloses information regarding claim amount, time limit, procedure, & the subject matter.

Notice

Notice is an underrated clause in a share purchase agreement but equally important as other clauses in this list. This clause talks about the delivery of the notice on parties’ location. Besides, it also emphasizes the use of the medium through which the notice will deliver to the parties.

Resolution of Dispute and Arbitration

Arbitration has yet to achieve popularity in the business domain, but it still adheres to utmost significance as it helps parties overcome procedural law issues while resolving certain disputes. This clause revolves around procedural law[1], a number of arbitrators, and the seat of arbitration language.

Force Majeure

It is indeed one of the most essential clauses in a share purchase agreement that provides much-needed resistance against unforeseen crises that occurred due to fluctuating market conditions.

Termination

The termination clause specifies the conditions for the termination of an agreement.

Jurisdiction and General Clause

Indian laws shall be applicable & the honorable courts situated within the vicinity of the registered office of the vendor shall have the jurisdiction. The basic & standard clauses ought to be outlined, but primary stress must be given to the assignment & the relationship clause, which shall clearly manifest that the agreement does not create or aim to create any specific form of relationship between the buyer and the seller, except as other provided in the agreement. No principal-agent or employer-employee relationship is deemed to be created.

Conclusion

The share purchase agreement is all about protecting the parties’ interest for a given share transaction. Such an agreement ensures that the transfer of shares will be completed securely without hurting anyone’s interest. Also, it acts as prima facia evidence, i.e., it can be admissible to the court during the legal proceeding.  It is a way to legalize the share transfer process. It ensures that the given transaction adheres to utmost transparency, which creates the foundation for a healthy buyer-seller relationship.

Read our article:What is Share Purchase Agreement in NBFC?

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Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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