What is a Share Purchase Agreement?
A share purchase agreement is a legally binding contract whereby the shareholder of a private limited company (the seller) agrees to sell a specified number or ratio of his shares in the company to a proposed purchaser, on such terms as set forth in the share purchase agreement.
A typical provision in a share purchase agreement defines a "share" as any share that a party may hold in the share capital of a company, and includes "ordinary shares", "preference shares", and any other class of shares in the capital of the company.
The seller sells the shares with all rights and benefits attached to the shares, including any dividends declared but not yet paid, and is normally not liable for any loss or damage suffered by the buyer if the buyer acquires the shares subject to any defect, whether known or unknown, in the title of the seller to such shares . However, the seller usually must make representations and warranties to the buyer in a share purchase agreement, which make him liable for any loss or damage caused by any breach of those representations and warranties. A claim pursuant to representations and warranties is usually capped at a percentage of the purchase price. Both parties may need to give undertakings regarding doing or refraining from doing certain specified acts for a certain period after the closing of the transaction. For example, a seller usually will agree not to compete with the business of the company sold for a certain period of time following the sale.
Key Elements of a Share Purchase Agreement
The key components of a share purchase agreement (SPA) incorporate the critical terms between the parties that will govern the sale and purchase of the shares in the target company. Some of the components include the following key terms:
Parties to the agreement – the names and particulars of each seller (i.e. the current holder(s) of the shares) and purchaser (i.e. the purchaser of the shares);
Price – the purchase price payable by the purchaser to the seller for the sale of shares;
Conditions Precedent – the conditions to be satisfied (or waived) before completion of the sale and purchase of shares (e.g. approvals by shareholders or the relevant Governmental Authority);
Representations and Warranties – a representation is an assertion of fact regarding the target company. Representations are generally made as at the date of the agreement and may also be made with reference to a specified date or time. A warranty is a contractual term (usually a promise) intended to provide assurance as to the quality of a party’s representation. Breach of a warranty may entitle the injured party to make a claim for damages. For example, a warranty may state that the seller has good title to its shares in the target company and if any of its representations and/or warranties are found to be untrue, the purchaser should have a right to sue the seller in respect of any losses that it suffers;
Indemnities – an indemnity is a promise to compensate another for a specified loss or damage. It is generally broader than a right of damages as it may provide an answer to a claim from a third party against the purchaser, which could otherwise potentially fall under the representations and warranties of the seller. An indemnity may, therefore, be included in addition to representations and warranties.
Legal Considerations in Singapore
In Singapore, share purchase agreements (SPAs) must be drafted and executed with reference to a number of legal requirements under the Companies Act (Cap. 50) (the Companies Act), the Business Registration Act (Cap. 32) (the BRA), the Income Tax Act (Cap 141) (the ITA), the Stamp Duties Act (Cap. 312) (the SDA), the Conveyancing and Law of Property Act (Cap. 61) (the CLPA) and the Employment Act (Cap. 91) (the EA).
Under the Companies Act, all companies must have at least one shareholder (section 4(6) of the Companies Act). Additionally, as a matter of good governance, the management of a company should be in the hands of directors and the management of its funds in the hands of its officers (section 157 of the Companies Act).
Part 18 of the Companies Act allows the shareholders of a private company to enter into a unanimous shareholders’ agreement on certain terms. Section 182(1) of the Companies Act states that the transfer of shares or an interest in a company’s shares may be made by a deed (section 182(3) of the Companies Act). Subject to the articles of association of a company, shares or an interest in shares can be transferred by means of an ordinary instrument of transfer in the prescribed form (section 182(4) of the Companies Act).
Under section 182(5) of the Companies Act, the transfer of shares must be accompanied by the certificate, which is a document issued by a company certifying the fact that a person named in the certificate is the owner of money paid up on shares to which the certificate in question relates and that such person is entitled to the shares specified therein. In PRA Group (the "Purchaser") v Avaloq Asia Pacific Pte. Ltd. (the "Vendor") [2018] SGHC 197, the High Court of Singapore found that a contract for the sale of shares was not unenforceable as a result of the endorsement of the relevant certificate of shares being wrongly executed, where the intent of the parties could be established.
Pursuant to section 198(1) of the Companies Act, unless the articles of association of a company provide otherwise, the transfer of shares in the company shall be free from any restriction. However, under section 198(3) of the Companies Act, the articles of association of a company may give the directors power to refuse to register a transfer of shares in certain situations, for example, if the transfer is not accompanied by the certificate or the payment of a fee exceeding S$100 (section 198(3)(a) of the Companies Act).
Pursuant to section 120 of the BRA, a business is required to be registered even if the business is only transacted periodically, occasionally, or in some other manner. Accordingly, the parties to the sale and purchase of shares may wish to check whether the business carried out by the company would require registration or not. If so, the SPA parties will need to discuss the issue of who will be responsible for doing the filings under Part 12 of the BRA.
Part 12 of the BRA sets out the provisions for courts to trace the proceeds of disposition, gain, or profit acquired by a person in connection with the disposition of property (including shares), if the person has participated in the disposition of the property as a result of misrepresentation, fraud, or misappropriation of the property (sections 15 and 16 of the BRA). In addition, section 17 of the BRA demonstrates the provisions for tracing a person who has knowingly received a thing from a person who has obtained it by wrongful means, and is therefore liable for the restitution or to account for what they have received.
Section 10(5) of the ITA gives the Purchaser the right to make inquiries as to the existence of a withholding obligation in relation to the Vendor and the Vendor is obliged to furnish such information on request (see Digi Telecommunications Sdn Bhd & Anor v Director General of Income Tax (No. 2) [2019] 4 MLJ 1). Given that the Purchaser will be required to withhold tax from an outgoing vendor, the Purchaser will need to assess whether any tax would be withheld from the amount payable under the SPA.
If relevant, the parties to the SPA may wish to state that the Purchaser will be entitled to withhold the amount of any potential withholding tax from the amount payable to the Vendor at closing. Alternatively, the parties can agree that the Vendor will remit the amount of any withholding tax payable to the Singapore Inland Revenue Authority. Under the SDA, section 13(2) states that stamp duty will be payable on the instrument of transfer of shares in shares, stocks, bonds, etc. under the Laws of Singapore. The rate of stamp duty is 0.2% of the price or consideration payable or amount secured (whichever is higher) for the sale of the shares or stocks (section 16(1) of the SDA). The parties are required to stamp the instrument of transfer of shares within 14 days of the date of the instrument of transfer (section 42(2) of the SDA). The Purchaser should ensure that the instrument of transfer of shares is stamped within the said period, else the Purchaser (as the transferee) may be liable to pay the penalty (section 46(1) of the SDA).
The Purchaser is permitted to register a change of ownership of the shares in the company’s register of members (section 37(1) of the CLPA). The Purchaser may apply to the court for a declaratory order giving effect to a transfer of shares and substituting the name of a transferee for that of a transferor in the register (section 37(2) of the CLPA).
Part III of the EA provides that employees of the company will automatically transfer to the Purchaser on completion of the sale and purchase of shares in a business. Section 33(1) of the EA requires the Purchaser to give notice of termination of the employment of the employees to the respective employees and their trade union at least 30 days before the date on which the sale and purchase is entered into. It is also provided that section 33(2) of the EA shall not apply if the transfer of shares in a company is not dismissed. As such, if the shares in the company are merely transferred from one shareholder to another, section 33(2) of the EA will apply, and a 30-day notice period will be required.
Steps in Drafting a Share Purchase Agreement
The initial step in doing a share purchase agreement is engaging in negotiations. The initial terms of the deal can either be informal or formalised into a single comprehensive document which contains all of the information about the shares being sold, including the price. Next, an agreement to agree or letter of intent may be prepared before the legally binding agreement is drafted.
The second phase commences when the lawyers of the parties get involved. They will usually draft a share purchase agreement based on what the parties have previously negotiated. Parties may also have lawyers at the negotiations and such a process may not be necessary.
In this phase, the lawyer(s) will adjust the clauses previously discussed to ensure that the applicable law have been accounted for, as well as to draft clauses which are acceptable to the legal framers of the corporation laws, if necessary. This phase can take a while because the parties may need to provide additional disclosures, amend some of the negotiated terms and basically review the entire document to ensure that it is agreeable to both parties.
While most clauses in a share purchase agreement are standard provisions, the parties will also need to consider if there are any special provisions which are applicable to their individual transaction. The purpose of a share purchase agreement is to define and govern the sales of shares in the company and to make explicit the terms of the transaction.
The negotiations and drafting process can take several weeks before the parties reach an amicable solution.
Common Mistakes to Avoid
One common problem with often-encountered Share Purchase Agreements (hereafter called "SPA"), is the inadequate or hurried due diligence process which tends to result in a less-than-satisfactory review of important matters. These include existing contracts, financials, or other agreements which would give the buyer an opportunity to value the shares at a discount, or to obtain indemnities and warranties from the seller. Otherwise, the SPA will need to provide warranties in respect of these or other issues, giving the buyer certain rights to chase damages, or to renegotiate the purchase price. This can be extended even for related party transactions as well, which can raise additional legal hurdles should the SPA not pass due diligence.
Another common pitfall is the overlooking of crucial clauses such as buy/sell agreements or price adjustment and earn-out clauses. In particular, this can affect the timing of cash payment under the SPA, where a portion is held back under escrow pending the satisfaction of certain milestones. SPA’s require an understanding of the long-term commercial realities, or what is within the control of parties even some time after completion, which are not always statutorily or legally enforceable. Instead, such provisions are best understood as equitable or moral obligations of the parties.
The purchase agreement must also include an accurate depiction of the persons or entities involved, and their respective rights and liabilities . This becomes particularly important in the context of companies with series or classes of stock, and the existence of pre-emptive rights and other outstanding shares options.
In addition to providing clarity on the agreement, SPA’s should also be forward-looking following their execution, such as providing for further inspection, or for post-completion covenants including the making of business forecasts or the disclosure of trade secrets. This could involve the interesting and often contentious issue of Euro-Asian convergence in the somewhat anti-trust or merger-control orientated Singapore legal environment, as opposed to the more US style competition driven environment.
Further, many SPA’s appear at first sight very standardised, but when examined by an experienced practitioner, are found to include what can arguably be explosive terms that could come back to haunt the unwary purchaser, such as a right of first offer or right of first refusal in favour of the seller, or a clause for waiver. The latter includes the right of the seller or its agents to waive certain conditions or covenants, or permitting the seller by waiver to amend the definitions used in the SPA.
Buyers should also be aware that these terms can often be drastically altered during negotiations, such as the extent to which the seller may or may not be liable for a breach of its warranties. Experienced and competent legal representation will be necessary to identify which terms ought to be waived, amended or adapted according to the unique situation.
The Role of Attorneys in Share Purchase Agreements
The role of lawyers in share purchase transactions
Share purchase agreements (or SPA) are legal documents that set out detailed agreements by which the seller and the buyer of a company set out the terms on which the seller will sell its shares in the company to the purchaser. The overall agreement between the parties would be that the seller is selling its shares in the company and the purchaser is buying the shares.
Generally, the purchase price for the shares will need to be paid at some point (usually later). Share purchase agreements may sometimes be more complex than just a simple transfer of shares from seller to purchaser and payment of the purchase price by the purchaser to the seller for the shares that it has bought in the target company. Often, there are other terms between shareholders of the company and the purchaser and seller may need to ensure that those other terms are adhered to so as not to cause some issues to arise in the future.
In this regard, it is important to have a legal professional represent the parties to the agreement and ensure that it is compliant with all relevant laws, regulations and guidelines in Singapore and the rights and interest of the parties to the deal are adequately protected and not prejudiced.
Examples: Share Purchase Agreements in Practice
To illustrate the ways in which share purchase agreements can be utilized in practice to achieve a variety of business needs, we present below the following representative and hypothetical examples of how they may be used to effect a business acquisition or restructuring transaction:
Acquisition of an Existing Subsidiary
The shareholders of XYZ Ltd have negotiated an agreement to sell all of their shares in the company to the sole subsidiary of ABC Pte Ltd, a Singapore company.
The agreement provides for (i) the sale of all of the shares held by the shareholders of XYZ and (ii) the purchase of all of those shares by the buyer and the acquisition and consolidation by the buyer into the second company of the business of XYZ. The agreement expressly includes the rights and obligations, and any contracts or liabilities, of the target company from the acquisition date.
In addition to a number of other provisions that are typical in most share purchase agreements, the agreement is designed to provide for the continuation of the existing management team at the target company after the closing. To that end, the management team will enter into continuing employment agreements with the target on terms that are acceptable to the buyer. The agreement also provides for a buy-out of a minority shareholder of the target as a means of ensuring that the remaining shareholders become shareholders of the buyer following the acquisition.
Joint Venture Agreement
A Singapore company and a U.S. company have agreed to form a new joint venture company located in Singapore. The joint venture will be owned (i) 60% by the Singapore company and (ii) 40% by the U.S. company. A share purchase agreement has been drafted to provide for the subscription and issuance of shares of the new joint venture company to the U.S. company in consideration for its funding of initial working capital of the joint venture in the amount of S$2 million. The share purchase agreement also provides for a 5% share premium to the purchase price to be paid to the Singapore company in connection with the purchase of the shares by the U.S. company. Under the agreement, the U.S. company agrees to fund this additional amount in return for a right of first refusal to exclusively purchase any additional shares that may be issued in the future by the new Singapore joint venture company. In addition to certain other representations, conditions and warranties, the agreement provides for a closing (or issuance of the shares) within 90 days from the date of execution of the share purchase agreement.
Some other possible case studies to consider might include the following:
The options available to parties to a share purchase agreement are numerous. It is critical to consider your specific business goals and the various other factors unique to your circumstances before entering into share purchase agreements to ensure that you accomplish your intended objectives.
Q & A
What is the purpose of a Share Purchase Agreement?
A Share Purchase Agreement (SPA) is used when a buyer is acquiring shares in a private limited company. It records the agreement between the Parties with regard to the terms upon which the Seller is selling the shares to the Buyer.
What information should be included in an SPA?
The essential information to be included in a Share Purchase Agreement includes:
Whether the agreement is for the sale of shares or assets of a company
The names, addresses and shareholding of Seller(s), Buyer(s) and Company
The number and class of shares being transferred
The consideration payable for the shares being sold
Representations, warranties and indemnities
What are representations, warranties and indemnities?
Representations, warranties and indemnities are usually given by the parties to the agreement to protect each other from unforeseen matters that may arise after the signing of the SPA and which the parties had no knowledge of before the signing of the SPA.
Representations are statements of fact as of the date of signing of the SPA.
Warranties are representations of fact with respect to the future performance of the company.
Indemnities provide a right of recourse against the party breaching the SPA .
What obligations are imposed on the Buyer of the shares?
The Buyer is usually obliged to pay the purchase price in accordance with the schedule in the SPA.
To assist the company in the completion of its obligations to obtain the requisite shareholder approval of the sale of the shares, the Buyer is generally obliged to provide the Seller with a copy of the shareholders’ resolution approving the transaction within 5 working days of signing of the SPA.
What obligations are imposed on the Seller of the shares?
The Seller is usually obliged to procure the share certificates, a board resolution authorising the transfer of shares, an executed instrument of transfer and the statutory register of the company and hand them over to the Buyer. The Seller must also deliver copies of the Company’s documents which the Buyer may have requested, within the time specified in the SPA.
What happens if either the Buyer or Seller fails to adhere to his obligations?
The agreement usually contains a clause providing for compensation to be claimed by the innocent party for such breach. A majority of SPAs contain a clause which entitles the Buyer or Seller to terminate the SPA if the other party materially breaches its obligations.