INTRODUCTION
In 2021, the government entered into a share purchase agreement with Tata Sons to divest its stake and transfer management control of the national carrier (see here). This transaction represented a significant milestone as it marked the first privatization effort in nearly two decades.
Recently, as per the report by the Economic Times (see here), the Board of Directors of IPCA (an Indian multinational pharmaceutical company) has approved to proceed with a Share Purchase Agreement (SPA) to acquire 2,35,01,440 fully paid-up equity shares, representing approximately 33.38% of the paid-up equity share capital of Unichem Laboratories, a publicly listed company. The shares will be purchased from one of its promoter shareholders, resulting in a total aggregate value of Rs 1034.06 crore.
A Share Purchase Agreement (SPA) sets out the details of the transaction, including the number and type of shares being sold, the purchase price, payment terms, conditions precedent, and any warranties or representations made by the parties. It ensures that both parties have a clear understanding of the transaction and reduces the risk of misunderstandings or disagreements and is a legally binding contract that outlines the terms and conditions of the purchase or sale of shares in a company.
Team Your Legal Career Coach (YLCC) brings out the best practices for drafting a Share Purchase Agreement to ensure a smooth transaction!
THE ESSENTIAL ELEMENTS OF A SHARE PURCHASE AGREEMENT: A COMPREHENSIVE GUIDE
Sale, Purchase, and Subscription of Shares Clause
This clause governs the transfer of ownership in a company. While the sale and purchase of shares involve the transfer of existing shares from a seller to a buyer, the subscription of shares refers to the issuance of new shares by a company to a subscriber.
Key points to keep in mind:
- The sale and purchase of shares: This involves the transfer of existing shares from the seller to the buyer. Within the SPA, the following aspects are typically addressed:
- The SPA should identify the shares being sold, including the class, type, number of shares, and any specific rights or restrictions attached to those shares.
- The SPA establishes the purchase price for the shares and outlines the payment terms. It may specify whether the payment will be made in a lump sum or instalments, the agreed-upon currency, and the method of payment.
- The SPA may include representations and warranties made by the seller regarding the shares being sold. These statements ensure the accuracy and completeness of the information provided by the seller, protecting the buyer from potential issues or misrepresentations.
- The SPA may address indemnification provisions to allocate risk between the buyer and the seller. Indemnities protect the buyer from losses or liabilities arising from breaches of the seller’s representations and warranties. Limitations on the seller’s liability, such as caps or survival periods, may also be included.
- The SPA specifies the mechanics of the closing, including the date, time, and location of the share transfer. It outlines the required documentation, such as stock transfer forms, share certificates, or any necessary filings or registrations.
- Subscription of Shares: The subscription of shares involves the issuance of new shares by a company to a subscriber and occurs when an individual or entity purchases shares directly from the company, typically at the time of incorporation or during subsequent financing rounds.
- Key points to remember:
- The SPA outlines the terms and conditions of the subscription, including the number of shares being subscribed, the subscription price, payment terms, and any specific rights or restrictions attached to the subscribed shares.
- The SPA specifies the process of issuing the subscribed shares, including the required documentation, such as share subscription agreements, share certificates, and any necessary corporate approvals or filings.
- The SPA may include warranties and representations made by the subscriber, confirming their eligibility to subscribe for the shares and their compliance with applicable laws and regulations.
- The SPA may outline the circumstances under which the subscription agreement may be terminated, such as non-payment or breach of subscription obligations.
Please note that the sale, purchase, and subscription of shares may be addressed within the same SPA, or they may be separate agreements depending on the specific circumstances and the structure of the transaction.
Escrow Clause
An Escrow clause in a SPA is a provision that establishes an escrow arrangement to hold a portion of the purchase price or other assets in trust until certain conditions are met or obligations are fulfilled. The purpose of an escrow clause is to provide a level of protection and assurance to both the buyer and the seller. The buyer is assured that a portion of the purchase price will be set aside to cover any potential losses or liabilities that may arise after the transaction. At the same time, the seller gains confidence that the buyer will fulfil its obligations and that funds will be available to address any claims or breaches of warranty or representations. This clause is commonly used in mergers and acquisitions (M&A) transactions to protect the interests of both the buyer and the seller.
Some key points to remember:
- The parties involved agree to establish an escrow account with a third-party escrow agent, such as a bank or a law firm. The escrow agent holds the funds or assets until the specified conditions are satisfied.
- The agreement determines the specific amount or percentage of the purchase price that will be held in escrow. This amount is usually negotiated based on the potential liabilities, indemnifications, or contingent obligations that may arise after the transaction.
- The share purchase agreement outlines the conditions under which the escrowed funds or assets will be released. These conditions may include the resolution of any pending legal disputes, the expiration of a certain period, or the fulfilment of certain contractual obligations.
- The agreement establishes the timeframe within which the escrowed funds will be held. This period may vary depending on the nature of the transaction, industry practices, and the potential risks involved.
Tag Along and Drag Along Rights
Tag Along and Drag Along clauses are provisions commonly included in SPA to protect the rights and interests of minority shareholders in the event of a sale or transfer of shares. These clauses help regulate the sale process and ensure that minority shareholders are not disadvantaged or left out.
Tag Along Clause:
A Tag Along clause grants minority shareholders the right to ‘tag along’ with majority shareholders and sell their shares on the same terms and conditions as the majority shareholders. If a majority shareholder receives an offer to sell their shares to a third party, the Tag Along clause allows minority shareholders to join the transaction and sell their shares as well. This provision helps protect minority shareholders from being left with illiquid or less valuable shares if the majority shareholders decide to sell.
Example: If a majority shareholder receives an offer to sell their shares and exercises their right under the Tag Along clause, the minority shareholder can choose to sell their shares to the same buyer, receiving the same price and terms.
Drag Along Clause:
A Drag Along clause empowers majority shareholders to ‘drag along’ minority shareholders if they find a buyer for their shares and want to sell the company. This clause ensures that a buyer can acquire all shares and gain full control of the company without being hindered by minority shareholders who may not want to sell.
Example: If a majority shareholder receives an offer to sell the company and exercises their right under the Drag Along clause, minority shareholders are obligated to sell their shares to the buyer on the same terms and conditions as the majority shareholders. This enables the buyer to acquire 100% ownership of the company.
The Tag Along and Drag Along clauses aim to provide protection and fairness to majority and minority shareholders in a share purchase agreement. The inclusion and specific terms of these clauses can vary depending on the negotiations and the specific needs of the parties involved. It is essential for shareholders to carefully review and understand the Tag Along and Drag Along provisions to ensure that their rights and interests are adequately addressed and protected.
Pre-Closing Covenants Clause
This clause sets forth the obligations and commitments that the parties must fulfil before the closing of the share purchase transaction. These covenants typically address various actions and responsibilities to be undertaken by the buyer and the seller to ensure the smooth completion of the transaction. The specific provisions may vary depending on the nature of the deal and the parties involved, but the following are some common elements found in Pre-Closing Covenants clauses:
- The clause may outline the conduct of the seller’s business from the signing of the SPA until the closing. It may include provisions to ensure that the seller operates the business in the ordinary course, refrains from taking certain actions without the buyer’s consent, or maintains certain financial and accounting practices.
- The parties may agree to cooperate in obtaining all necessary consents, approvals, permits, licenses, or waivers from third parties or regulatory authorities that are required for the completion of the transaction. This may involve seeking approvals from government bodies, industry regulators, or contractual counterparties.
- The clause may address matters related to employees, such as the seller’s obligations to provide necessary notifications, consultations, or benefits to employees in connection with the transaction. It may also restrict the hiring or termination of key employees during the pre-closing period.
- The parties may commit to complying with all applicable laws, regulations, and agreements throughout the pre-closing period. This can include maintaining compliance with Environmental regulations, Antitrust laws, Intellectual Property Rights, or any other relevant legal obligations.
- The clause may require the seller to provide regular updates, financial statements, and reports to the buyer during the pre-closing period.
- The seller may be required to maintain the condition of its assets, properties, and inventory and to prevent any material changes, damage, or disposal of assets without the buyer’s consent.
- The parties may agree to restrictions on the seller’s ability to compete with the buyer or solicit customers, employees, or suppliers for a specified period after the closing of the transaction.
CONCLUSION
Drafting a Share Purchase Agreement (SPA) is crucial for buying and selling shares with confidence. It ensures that both parties have a clear understanding of the transaction and reduces the risk of misunderstandings or disagreements. Key clauses to consider include the sale, purchase, and subscription of shares, escrow arrangements, tag-along and drag-along rights, and pre-closing covenants. These clauses provide important protections, define the terms of the agreement, and address the responsibilities of the parties involved and by carefully drafting and reviewing these clauses, parties can ensure a smooth and successful share purchase transaction.
Disclaimer: This article is for information purposes only. You are advised to consult a legal professional for drafting such crucial documents for your business.
This article has been written by Team YLCC. For any other queries, reach out to us at: queries.ylcc@gmail.com
