In the world of corporate finance and M&A, a Share Purchase Agreement (SPA) is not just paperwork-it is the legal backbone of a major transaction. If you are buying or selling a stake in a company, this document dictates every critical term, safeguarding your interests and ensuring a seamless transfer of ownership. Leveraging the expertise of professionals like Praman Advisors Private Limited is essential to navigate the complexities and ensure your SPA is robust, compliant and perfectly tailored to your deal.
1. Overview:
A Share Purchase Agreement (SPA), often referred to as a Stock Purchase Agreement, is a legally binding contract between a seller (the existing shareholder or shareholders) and a buyer for the sale and transfer of a specific number of shares in a company.
Unlike an Asset Purchase Agreement, which deals with specific assets and liabilities, an SPA transfers ownership of the company itself through its shares. When a buyer acquires shares, they essentially step into the seller's shoes, inheriting the company-including all its existing assets, contracts, permits and, most critically, all its liabilities (known and unknown).
The primary purpose of the SPA is to:-
- Define the Transaction: Clearly state the number and class of shares being transferred.
- Establish Price and Payment: Detail the purchase price, payment mechanism and any adjustments (like an earn-out or working capital true-up).
- Allocate Risk: Provide contractual protections through Representations and Warranties and Indemnities, which are crucial for the buyer to mitigate the risk of inheriting undisclosed liabilities.
2. Benefits:
Engaging legal advisors like Praman Advisors to draft or review your SPA provides significant benefits, ensuring your transaction is secure and compliant.
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Benefit
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Description
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Clarity and - Certainty
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Removes ambiguity by clearly setting out the terms of the sale including the exact price, payment date and number of shares transferred.
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Legal -Protection (Warranties)
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The seller provides Representations and Warranties—statements of fact about the company’s health (finances, compliance, litigation). If these prove untrue, the buyer has legal recourse (an indemnity claim) to recoup losses, acting as a critical risk shield.
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- Risk Allocation - (Indemnities)
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Clearly defines which party is liable for specific, pre-identified risks or breaches of warranties, protecting the buyer from unforeseen post-closing costs.
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- Conditions -Precedent/Subsequent
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Specifies the necessary steps that must be fulfilled before the transaction can close (e.g. regulatory approvals, third-party consents).
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- Non-Compete and - Confidentiality
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Includes restrictive covenants to protect the business value post-sale, such as preventing the seller from competing with the acquired business for a set period.
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Ensures the transaction and documentation adhere to relevant laws, such as the Companies Act 2013 FEMA and SEBI regulations, which is vital for any transaction in India.
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3. Documents Required:
While the exact list is transaction-specific, the following core documents and information are typically required for a Share Purchase Agreement and the overall process:-
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Category
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Key Documents & Information
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Memorandum & Articles of Association (MoA/AoA), Statutory Registers (Member, Director, Charge), Audited Financial Statements, Share Certificates/Transfer Forms, Details of all current liabilities and pending litigations.
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Draft of the SPA (the main contract), Disclosure Letter (where the seller reveals exceptions to the warranties), Board Resolutions approving the transfer, Non-Disclosure Agreement (NDA), Letter of Intent (LOI) or Term Sheet.
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- Due Diligence - (Buyer Side)
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Reports on Financial, Legal and Operational Due Diligence, Certificates from statutory auditors, all material contracts and employee records.
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Evidence of required regulatory approvals (if any), Tax clearance certificates, Consent letters from third parties (e.g. lenders or partners).
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4. Process to Apply:
Securing a professionally drafted or reviewed SPA with Praman Advisors typically involves a structured, multi-stage process:-
Step 1: Initial Consultation & Needs Assessment.
Contact Praman Advisors with the basic details of your transaction (Buyer, Seller, Target Company, type of shares, preliminary valuation). The team conducts a detailed assessment of the deal's complexity and your specific legal protection needs.
Step 2: Due Diligence Coordination.
The buyer's legal team (often including Praman Advisors) initiates a thorough Due Diligence of the target company. The findings of this investigation directly inform the drafting and negotiation of the SPA's warranties and indemnities.
Step 3: Drafting and Negotiation.
- Drafting: Typically, the buyer's counsel drafts the initial SPA. Praman Advisors ensures the document reflects the Term Sheet, due diligence findings and provides maximum protection for their client.
- Negotiation: Both parties' legal teams negotiate critical clauses like purchase price adjustment, conditions precedent and the scope and limits of Representations and Warranties and Indemnities.
Step 4: Finalization and Signing.
Once all terms are agreed upon, the SPA is finalized. The parties then execute the agreement and the deal moves to the Closing phase where conditions precedent are met and the transfer of shares and payment is executed.
Step 5: Post-Closing Formalities.
Praman Advisors assists with the necessary post-closing compliances, such as updating the company’s statutory registers and filing the requisite forms with the Registrar of Companies (ROC) to reflect the new shareholding.
5. Fees and Timelines:
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Element
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General Estimate
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Influencing Factors
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- Legal Fees -(Drafting/Review)
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Highly variable. Can range significantly based on deal size and complexity. Firms typically charge a fixed fee or an hourly rate.
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Transaction value, complexity of corporate structure, number of negotiations, scope of warranties.
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Applicable as per the relevant state laws where the document is executed.
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State government regulations on financial documents.
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- Timeline (from -LOI to Closing)
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Simple Transaction: 04 to 08 weeks. Complex M&A: 03 to 06 months or more.
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Speed of due diligence, number of regulatory approvals needed (Conditions Precedent) and complexity of negotiations.
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For a precise quote and tailored timeline, it is best to Contact Praman Advisors directly with your transaction details.
Manju Laur: 📞 +97119 9404
Frequently Asked Questions
In most cases, the buyer’s legal counsel drafts the initial SPA. This is because the buyer is taking on the greater risk (inheriting the company’s liabilities) and thus requires a document heavily structured to protect their interests through strong warranties and indemnities.
Representations are statements of fact made by the seller about the target company as of a specific date (e.g. "The financial statements are accurate"). Warranties are assurances that if the representations are false, the buyer has a claim for damages. They are the buyer's primary mechanism for contractual protection against hidden liabilities.
The Disclosure Letter is a document prepared by the seller to qualify the warranties in the SPA. It explicitly lists exceptions, risks or issues known to the seller that would otherwise breach a warranty. By disclosing these, the seller limits their liability for those specific, disclosed items.
It is strongly advised against using generic templates for significant transactions. A Share Purchase Agreement must be meticulously tailored to the specific company, its liabilities, the jurisdiction's laws and the unique risks identified during due diligence. A poorly drafted SPA can expose both parties to enormous, costly liabilities. Always consult with professional advisors like Praman Advisors.
