In this article I will give you some practical experience about the Share Purchase Agreement (SPA) and more importantly the role of the lawyers in getting this document signed. Lawyers play a crucial role in drafting the share purchase agreement. Especially since this is normally the latest stage of a transaction and both sides hope and expect to finish this hurdle in a positive way.
I am interested to hear your thoughts and practical experience with share purchase agreements as there must be many interesting stories that can be very useful for our clients, business owners and buyers of companies.
A Share Purchase Agreement is the legal document that describes and determines the details around a transfer of shares of a legal entity from the seller to the buyer. It is one of the final legal documents in a transaction and probably the most important one. A Share Purchase Agreement is being constructed based on the LOI (Letter of Intent) that is prepared earlier in the process. The Share Purchase Agreement is often (almost always) abbreviated as SPA. Business owners of smaller companies (valuation <5m Euro) often see the Share Purchase Agreement as a very complicated and detailed document.
Here are some of the main items that are normally incorporated in a Share Purchase Agreement:
The role of the lawyer is crucial in the process to get to a signed SPA. The custom is that the buyer has the obligation, or the right, to draw up the content of the Share Purchase Agreement. This can be seen as a right as by drafting the SPA, the buyer has an influence on what to incorporate in the SPA. To have a Share Purchase Agreement prepared a buyer almost always uses an external (sometimes in very rare occasions also an inhouse) legal firm. There are many legal firms that dedicate itself purely to M&A law. In almost all cases the seller also hires a lawyer to defend and support in the legal part of the transaction.
The role of the lawyers on both sides of the table is to get to a SPA that is in line with the intentions of the LOI and the expectations of both the buyer and seller. This is a very delicate task as lawyers often have not been involved in the process leading up to the SPA.
For a small business owner (especially one that wants to retire) getting to a signed SPA is often a painful process. Let’s face it: a person has worked 30 or sometimes 40 years in building a company. Often his business contains a large part of his or her pension. Legal items, and especially very detailed ones, are not the most favourite of most business owners. Now you have a contract (a Share Purchase Agreement) that demands many items from a business owner and requests a large array of warranties. This can be seen by a business owner as very demanding. Hence, it might seem wise to hire an experienced lawyer.
For small transactions (up to a value of 2m or 3m Euro) it might sometimes be smart just to use the experienced M&A advisor that has been involved in the whole process of the sales transaction. A business owner can decide to use it’s M&A advisor to defend the legal parts in line with the previous discussions and signed LOI.
A Share Purchase Agreement can often be a deal breaker in a M&A transaction. All detailed legal items of a transaction need to be incorporated into this legal agreement. During the process until the SPA both side have stayed at a relatively high level and looked at the positive aspects of a transaction. Examples of items that have been discussed are the future of the company, the sales proceeds for a seller, the new market position for a buyer, etc. During the discussions about the content of the share purchase agreement both parties need to defend their own position and they are more or less opponents of each other. The legal advisors have limited background about the transaction once they get in. They don’t know the conversations and were not involved in the meetings that took place prior to starting the SPA process. Hence, legal advisors, in my opinion need to be advisors that have broad people skills. They need to be able to judge the situation and understand the atmosphere around a transaction. Giving in on some of the items and listening well to the client as well as the other side is crucial. Having advisors that have these people skills is probably more important than their legal knowledge. What I have seen over the last decade is that lawyers sometimes try to make a SPA very detailed and complicated by incorporating details on many exceptions and circumstances One has to understand that legal advisors can be major deal breakers in a M&A transaction when the share purchase agreement gets prepared.
Example 1 of a practical project (2m Euro transaction in the forwarding industry)
A business owner of a forwarding company had spoken to many interested parties brought by me while being his advisor. A first interested party submitted a SPA but then got internal issues and left the transaction lie idle. A second interested party, also a strategic buyer from the forwarding industry, met with the owner a few times and a LOI was agreed and signed. Based on these discussions a preliminary due diligence was performed. The atmosphere between the buyer and seller was friendly and spirits were good. Given the size of the company, the stable environment and yearly annual growth of the company the SPA was expected not to cause to much issues. Taking into account that the company was asset light and it’s administration well managed there was more reason to believe that signing the share purchase agreement would be a phase that could be passed successfully. The owner asked support of a legal advisor that had experience in much larger transactions. During the discussions about the share purchase agreement more and more issues were brought up by the sellers lawyer. This started to annoy the buyers internal legal advisor and their financial people. At the same time the seller and his wife started to become uncomfortable with the demands of the buyer. They started to see the buyer’s team as inflexible and feared this would have an effect on the future of the company. Before all people (inclusive myself) involved in the transaction realized the momentum was gone. The result was a deal that seemed a perfect match in the beginning had gone sour. Had I, as advisor of the seller, need to be more on top of things? Was the seller’s legal advisor to prominent and running his own ‘one man’ show? Was the sellers, very experienced, team to inflexible?
Example 2 of a share purchase agreement for a practical project (35m Euro transaction)
In this case I represented an international buyer that is a supplier in a specific industry. After various visits to one interested seller we negotiated a LOI between a relatively small team consisting of the buyer and the owner of the company. This was not really easy as the company had quite some debt and had invested heavily in future growth. This obviously had a clear effect on the deal multiple which was finally agreed in a LOI. Only then both parties hired very experienced and expensive M&A law firms. These advisors are paid on an hourly basis and have no direct financial incentive if a transaction gets completed or not. Their interest is of course to get to a transaction and to get to a share purchase agreement that is signed. However, they also want to show their added value and be able to send an interesting invoice. Hence, in practice this can sometimes make legal advisors to bring up, minor, items where they can spend their time on. In this case the advisors on both sides of the table tried to show how smart they were. They wanted to show their legal experience which resulted in the transaction running a major risk to be put on ice. The buyer realized this at a certain moment and clearly took control of the process and finally the transaction was closed successfully.
A share purchase agreement is a very important document in any M&A transaction. Although this document gets signed in a relatively later stage of the transaction it is still a major milestone and a possible risk of a transaction not be consummated. Having legal advisors in place that can appreciate and understand the position of both sides of the table is of crucial importance. Choosing the right legal M&A advisor and giving them the right mandate is an important task for each buyer and business owner.
Here some final questions and discussion items:
What do you think is crucial in a share purchase agreement?
How should a legal advisor support during the SPA process?
What makes a good legal M&A advisor?
Please gives us your thoughts and opinion on this article or describe a story that you have been involved in a share purchase agreement.
Pekka Salo | Saturday 2 December 2017 | website: www.casalaw.fi
As a lawyer, I recommend paying extra attention on the dispute resolution clauses in SPAs. The arbitration is a normal way to handle the disputes, because it is fairly quick and confidential process which is contrary to the public court process where the process is public unless the court agrees to treat it confidential. However, a big problem of the arbitration is the cost which can be many times higher than in the public courts. I would recommend using at least the local trade association arbitration clauses with expedited process and with only one arbitrator. This way the costs are significantly lower than having full arbitration process with three arbitrators. Also the arbitration judgement usually still requires a public court to confirm it before it can be enforced. So there is an extra step to get enforcement for arbitration judgements. One way to handle the dispute resolution is to refer to the local public court jurisdiction and agree in the contract that parties will ask for confidentiality and no appeals from the lower court judgements are allowed. This way the arbitration process can be simulated in the public court, which is normally the most cost-effective way to handle the dispute resolution in contracts. Anyway without an effective dispute resolution there is no effective contract.
Anoop Kumar Jain | Wednesday 10 January 2018 | website: marsrecycling.co.uk
This article is very Insightful, deep thinking, sensible information for M & A Thanks
Damian Ryan | Wednesday 10 January 2018 | website: www.moorestephens.com
Smart, intelligent piece of copy. Too many investors flirt with chance and can often disregard or defer SHA's. Stakeholders will only end up respecting you more if you insist on proper governance. Congrats.
Enno Schets | Thursday 11 January 2018 | website: www.schetsadvocatuur.nl
Very important Govert!
Frank Peeters | Friday 12 January 2018 | website: www.aexisgroup.com
My view is somewhat different then what I read here. Having bought or sold off about 20 of my own companies, my experience is that you should not leave an SPA in the hands of lawyers. My experience is with smaller companies (between 2M euro and 25M euro of revenue), that lawyers tend to make things very detailed and difficult. It is important that the seller and the buyer clearly state what they want to do and get out of the deal, in a lot more detail then teh letter of intent. In my first deals, I was using lawyers, and I got drawn by them in a lot of detailed, and very often unimportant, legal discussions, with a big risk of losing sight of the important things. I agree with the points that should be in an SPA, see list in the white paper, but once this is clearly stated, then only get a lawyer involved to answer the unclear parts.
Mark | Monday 17 December 2018 | website: https://enterslice.com/share-purchase-agreement
Thanks for Sharing a Blog Like this it always gives an information which can only be collected through these types of stuff appreciate it