Every major investment or acquisition begins with one key question: how will ownership change hands safely and legally? The answer usually comes through a Share Purchase Agreement (SPA), a document that defines the terms of the deal and protects both sides.
In mergers, acquisitions, and private investments, the SPA gives structure to the transaction. It ensures that everyone agrees on what is being sold, how the payment will be made, and what each party must do before and after the transfer of shares. It turns business intent into clear, enforceable terms that reduce the risk of misunderstandings later.
For the business owners, investors, and legal teams, understanding how an SPA works is essential. This guide will explain what a share purchase agreement includes, why it matters, and how it helps companies complete transactions with clarity and confidence.
What is a Share Purchase Agreement (SPA)?
A Share Purchase Agreement (SPA) is a legally enforceable contract that lays down the terms and conditions under which the shares of a company are bought and sold by the buyer and the seller. It is the primary legal document in a share transfer agreement, which outlines how ownership of the shares will be transferred and under what conditions.
The SPA is usually prepared after both sides have completed due diligence and agreed on key commercial terms such as price, valuation, and closing conditions. It transforms these business decisions into a legally enforceable agreement that governs how and when ownership passes to the buyer.
The purpose of an SPA is straightforward: to bring clarity, structure, and legal protection to a complex business transaction.
What makes an SPA critical for any enterprise desiring to buy shares is the protection it offers. The buyers gain assurances through the representations and warranties made by the seller that the company’s financial and legal information is accurate. On the other hand, it provides boundaries to the sellers through clauses like indemnities and liability caps, which protect them from open-ended exposure once the share purchase is finalised.
Beyond compliance, an SPA also acts as a strategic tool. It aligns commercial intent with enforceable legal terms, minimizes ambiguity, and helps maintain trust between the parties. This transparency is essential for firms to close deals with confidence and efficiency, especially in high-value or cross-border transactions where even small mistakes can have major repercussions.
Key Parties Involved in a Share Purchase Agreement
There are a number of people involved in every Share Purchase Agreement (SPA) who are vital to executing the deal successfully. While the exact number involved may vary, the following are involved in most of them:
1. Buyer
The buyer is the person, business, or investment firm that buys shares. People who buy shares may want to take control of the company, get a strategic interest, or make a financial investment. Sometimes, a group of investors or a holding company may be the buyer.
For example, a private equity group buys 60% of a logistics startup.
2. Seller
The seller is the person who has the shares and is selling them. It could be a founder, a group of promoters, or another investor. The seller’s main obligation is to give the buyer correct information about the company being sold and to transfer the shares without any encumbrances.
For example, a founding partner sells some of their stake to a venture capital investor.
3. The Company
In some large SPAs, the company whose shares are being sold may also be included as a “conforming” or “acknowledging” party for procedural and compliance reasons. In such a case the company may be required to provide representations about its operations, assets, and compliance to reassure the buyer.
4. Guarantors or Promoters
In larger or more complex deals, the promoters or group entities may act as guarantors, to ensure that the seller’s obligations are fulfilled. Their inclusion provides additional comfort to buyers when the transaction involves multiple shareholders or potential risks.
5. Advisors and Middlemen
Though not a formal party to the contracts, legal, financial, and tax consultants often help with the deals by writing, reviewing, and negotiating the SPA. Their job isn’t just to follow the rules; they also find possible risks, make sure the agreement follows the rules, and help organise the deal in a way that works best.
These groups make up the core of the SPA. Their synchronised duties make sure that ownership changes hands legally, commitments are honoured, and the deal shows that both the company and the law are being followed.
Core Clauses and Terms Explained
A Share Purchase Agreement (SPA) includes much more information than just the names of the buyer and seller, and the valuation of the shares. It clearly defines how the risks are going to be handled, the assurances each side will provide, and how disputes will be resolved.
The following clauses appear in most of the Share Purchase Agreements:
1. Purchase price and payment method
This specifies the total purchase price, payment method, and any adjustments that may be made based on the company’s financial status at the time of closing the deal. These changes are made to ensure that the buyer pays for the firm as it stands on the date of transfer, rather than how it was previously appraised.
Some common reasons for doing price adjustments are:
Working capital adjustment: Compares the actual working capital at closing with a pre-agreed target. Any difference increases or decreases the final price.
Debt or cash adjustment: The purchase price of the shares may be adjusted if the company has more debt or less cash than expected.
Earn-out provisions: These mention that a portion of the purchase price may be paid out to the seller at a later date, only if the company is able to meet certain targets in the future.
For example: The buyer agrees to pay INR 20 crore at the time of closing the deal. After reviewing the closing balance sheet, both sides find that working capital is INR 1 crore above the agreed target, so the seller receives an additional INR 1 crore.
2. Representations and Warranties
At the time of negotiations the seller may make some factual statements about the company’s ownership. The representations and warranties clause records those in the contract. If any of these statements are found to be untrue at a later date, the buyer can seek compensation.
For example, if the seller confirms that all taxes have been paid and that at a later date some undisclosed liabilities are found, then the buyer will have the right to seek compensation from the seller.
3. Conditions Precedent
These are some specific actions that must be completed or approvals that must be taken before the transaction can be closed. This clause helps ensure that all the regulatory and commercial obligations are met.
For example, the company might be required to get approval from the Reserve Bank of India in case it is a foreign investment or approval from key customers before the deal is completed.
4. Indemnities
The indemnity clause explains how any loss that may arise from the breach of certain representations and warranties will be compensated. It sets limits on the liabilities that can arise, the timelines within which the claims can be raised, and the methods of payment that can be used.
For example, the seller may agree to indemnify the buyer for any unreported tax liabilities discovered within two years of closing the deal.
5. Covenants
Covenants are commitments that the parties to a share purchase agreement may make to maintain the value of the business before and after the deal is closed. These covenants may restrict the buyer or seller from taking certain actions or require specific conduct of the terms of the contract.
For example, the seller may agree not to take on any new debt or make any major capital expenditures before the deal is completed, without the consent of the buyer.
6. Closing and Post-Closing Obligations
This section defines the steps that must be completed before the deal is completed. Some steps are: paying the purchase price, transferring the shares, and handing over the company records. It may also mention other post-closing tasks, like notifying the regulators, getting statutory registers updated or releasing any guarantees.
7. Jurisdiction
This section specifies how any disputes that may arise from the deal will be resolved by the parties. It also specifies the jurisdictions and the specific laws that will apply to the contract.
For example: “Any dispute arising from this Agreement shall be settled by arbitration in Mumbai under the Arbitration and Conciliation Act, 1996.”
8. Additional Common Clauses
Other than the clauses mentioned above, the following additional clauses are added to every share purchase agreement.
Confidentiality: this provision is added to prohibit the parties from sharing any business, financial, or negotiation details, with any third party.
8. Additional Common Clauses
Other than the clauses mentioned above, the following additional clauses are added to every share purchase agreement.
Confidentiality: this provision is added to prohibit the parties from sharing any business, financial, or negotiation details with any third party.
Right of termination: This clause outlines the circumstances, like failure to meet the closing conditions of the deal or any material breach of the terms of the contract, in which either party can withdraw from the agreement.
Force majeure: This clause protects both parties in the event of any unforeseen events, like regulatory bans, natural disasters like floods or earthquakes, and political unrest, which may prevent the deal from being completed.
Notices and communication: Either party to the deal might need to communicate with the other either before, during, or after the deal is closed. This clause specifies how the official notices must be sent and when they will be deemed to have been received.
Miscellaneous provisions: This covers the standard legal elements such as amendment procedures, assignment rights and the binding nature of the agreement.
Common Points Of Negotiation
Properly negotiating a Share Purchase Agreement (SPA) is often as important as drafting it. During the negotiation, both sides try to secure their commercial interests while keeping the deal viable. It has been seen that the points that are debated most relate to the valuation of the business, risk allocation and retention of control of the business whose shares are being transferred.
1. Purchase Price Adjustments
Like in the case of any purchase, the buyers in a spa also want to ensure that they pay a fair price for the shares, based on the current financials of the business. On the other hand, the sellers prefer to charge a fixed price since they want to be certain about the price they will be getting. The negotiations may involve agreeing on a target working capital or using a locked box pricing (i.e., fixing the price as of a particular date).
2. Representations, Warranties, and Indemnities
This is one of the most sensitive parts of any share purchase agreement. The buyers ask for broader warranties and longer indemnity periods that will safeguard them from any undisclosed issues being detected later. On the other hand, the sellers negotiate hard to narrow down the scope of the agreement, add financial caps and reduce the time window for making claims.
3. Conditions Precedent and Closing Timeline
During the negotiation process, the parties need to agree on the approvals and consents that they need to take before closing the deal, and how much time will be allowed to obtain them. While the buyers generally insist on strict timelines to avoid any delays, the sellers prefer a flexible time frame so that the deal gets closed.
4. Non-Compete and Non-Solicitation Clauses
These clauses restrict the seller from competing with the business being sold, once the sale is completed. It also prohibits them from poaching employees and customers from it.
The scope of the non-compete clause and the duration are negotiated to ensure that the buyers get a fair opportunity to do business without hindrances while giving the sellers a fair opportunity too.
5. Dispute Resolution and Governing Laws
Choosing the appropriate forum and governing legislation can save time and money for both the buyer and seller later. In India, it is seen that arbitration is the preferred mode of dispute resolution in both Indian and cross-border transactions since it ensures secrecy and enforceability.
6. Earn-outs and deferred payments.
When a portion of the price is contingent on future performance of the business, both parties must agree on how the success will be determined. Having clear formulas for calculating the price and reporting duties mentioned in the SPA will help in preventing any disagreements later.
Some Practical Tips for Smooth Negotiations
Successful Share Purchase Agreement negotiations depend on the preparation, clarity, and cooperation between the buyer and seller. When both parties understand what truly matters to the other, deals close faster and relationships last longer.
Prepare early: Both the buyer and seller must complete their due diligence activities before drafting the contract. This will minimise the chance of a rework and help close the deal faster.
Stay transparent: The parties must communicate with each other openly about financials and liabilities. This will help in building trust and enhance mutual respect between them.
Balance legal and commercial goals. Do not try to make the contract so perfect that it ends up killing the deal.
Record every change: Track that all negotiated terms have been included in the contract to prevent inconsistencies in the final draft.
Conclusion
A Share Purchase Agreement (SPA) is the fundamental legal document governing any transaction involving the transfer of the ownership of a company.
It records all the important terms of the deal, defines the rights and duties of each party, and ensures that the sale is carried out transparently and lawfully.
A well-drafted SPA gives both sides confidence that the deal they agreed to will hold up in the courts after signing. It reduces ambiguity, manages financial and legal risks, and defines the rights and obligations of the buyer and seller.
We hope that this guide has given you a clear idea about how share purchase agreements work. To know more about contracts and how to manage them digitally, read our other guides.
You can also explore Legistify’s Contract Lifecycle Management (CLM) solution to see how we are helping many leading enterprises manage their contracts digitally.
Frequently Asked Questions
1. When is a Share Purchase Agreement signed?
An SPA is typically signed after the buyer finishes due diligence and both sides have agreed on the main terms, like price, valuation, and the timeline for closing. It is one of the last documents to be signed before the ownership of shares officially changes hands.
2. Can a Share Purchase Agreement be amended after it is signed?
Yes, a signed share purchase agreement can be changed in certain cases. However, all the parties to the contract must agree to it in writing. Changes usually happen when something in the deal shifts, e.g., a delay in regulatory approval or an update to the payment schedule.
3. What documents go along with a Share Purchase Agreement for a share transfer in India?
The parties to the contract need to execute a share transfer form, pay the applicable stamp duty, and make sure the company’s Register of Members is updated. The company’s Board Of Directors usually passes a resolution to approve the transfer, and proof of payment is attached.
4. What does locked-box pricing mean in a Share Purchase Agreement?
In locked-box pricing, the share price of an agreed date is fixed as the price at which the share transfer transaction will take place. From that date onward, any profits or losses belong to the buyer. This gives both sides certainty about the final price of the shares and avoids last-minute changes.
5. How long do representations and warranties remain valid?
It depends on how the deal has been negotiated, but most of them last between one and two years after closing. Some contracts, such as tax or ownership-related warranties, can continue for a longer period if both parties agree.
