Critical Clauses in Share Purchase Agreements (SPAs) in Australia | GRM LAW

Critical Clauses in Share Purchase Agreements (SPAs) in Australia

A Share Purchase Agreement (SPA) is the cornerstone document in any transaction involving the sale and purchase of shares in a company. It legally binds the buyer and seller, meticulously outlining the terms, conditions, rights, and obligations of each party. Given the complexities and potential risks inherent in acquiring a company entity (including all its assets and liabilities), certain clauses within the SPA are particularly critical. Understanding these key provisions is essential for both buyers and sellers navigating a share sale in Australia.

1. Identification of Parties and Shares

While seemingly basic, absolute clarity here is fundamental.

• Parties: Clearly identifies the full legal names and details of the seller(s) (current shareholders) and the buyer(s).
• Shares: Precisely describes the shares being sold, including:
  • The exact number of shares.
  • The class of shares (e.g., ordinary, preference).
  • The name of the company whose shares are being sold (the Target Company).
  • Confirmation that the shares represent the entire (or agreed percentage) issued share capital of the Target Company.

2. Purchase Price and Payment Terms

This section details the financial heart of the transaction.

• Purchase Price: Specifies the total amount payable for the shares. This can be a fixed sum or determined by a formula (e.g., based on completion accounts or an earn-out mechanism).
• Payment Mechanics: Outlines how and when the purchase price will be paid (e.g., lump sum on completion, instalments, deposit).
• Adjustments: May include provisions for adjusting the purchase price post-completion based on the Target Company’s financial position at completion (e.g., adjustments for net debt or working capital targets).

3. Conditions Precedent (CPs)

CPs are specific conditions that must be satisfied or waived before the obligation to complete the share sale becomes binding. They protect parties from being forced to close the deal if critical requirements aren't met.

Common CPs include:

• Obtaining necessary regulatory approvals (e.g., FIRB, ACCC).
• Securing key third-party consents (e.g., from landlords or major contracting parties if required by change of control clauses).
• The buyer obtaining satisfactory financing.
• No material adverse change occurring in the Target Company's business before completion.
• Satisfactory completion of buyer due diligence.

4. Representations and Warranties

These are statements of fact made by the seller (and sometimes the buyer) about the Target Company and the shares as of a particular date (usually signing and completion). They form a crucial basis upon which the buyer agrees to purchase the shares and underpin potential post-completion claims.

• Seller Warranties: These are extensive and cover areas such as:
  • Title to the shares (confirming the seller owns them free from encumbrances).
  • Accuracy of financial statements.
  • Compliance with laws and regulations.
  • Status of material contracts.
  • Employee matters.
  • Tax compliance.
  • Litigation status.
  • Environmental matters.
  • Intellectual property ownership.
• Buyer Warranties: Usually less extensive, confirming the buyer's capacity to enter the agreement and fund the purchase.
• Disclosure: Sellers typically qualify warranties through disclosures made against them (often in a separate Disclosure Letter or schedules). Properly disclosed matters generally cannot form the basis of a warranty claim by the buyer.

5. Indemnities

Indemnities are promises by one party (usually the seller) to compensate the other party (usually the buyer) for specific, identified potential losses or liabilities, often on a dollar-for-dollar basis. They differ from warranties as they cover specific known or potential risks, whereas warranties cover broader statements of fact.

Common indemnities might cover:

• Specific tax liabilities identified during due diligence.
• Particular legal proceedings.
• Environmental remediation costs.

6. Limitations on Seller Liability

Given the extensive warranties provided, sellers will negotiate limitations on their liability for breaches.

• Time Limits: Claims must usually be brought within a specified period after completion (e.g., 1-2 years for general warranties, longer for tax warranties).
• Financial Caps: The seller's total liability may be capped (e.g., at the purchase price).
• Thresholds (De Minimis / Basket): Claims may only be brought if they exceed a certain individual amount (de minimis) and/or only once the aggregate value of claims exceeds a larger threshold (basket).

7. Completion Mechanics

This clause details the practical steps required to finalise the transaction on the completion date.

• Date and Location: Specifies when and where completion will occur.
• Deliverables: Lists the documents and actions each party must provide/perform at completion (e.g., seller delivers signed share transfer forms and company statutory books; buyer pays the purchase price).

8. Restrictive Covenants (Restraints)

To protect the goodwill and value of the business acquired, buyers typically require sellers (and sometimes key individuals) to agree to certain restrictions post-completion.

• Non-Compete: Prevents the seller from establishing or working for a competing business within a defined geographical area for a specified period.
• Non-Solicit: Prohibits the seller from soliciting employees, customers, or suppliers of the Target Company for a set duration.

These restraints must be reasonable in scope, duration, and geographical area to be enforceable.

9. Confidentiality

Obliges both parties to keep the terms of the SPA and sensitive information exchanged during the process confidential, both before and after completion.

10. Governing Law and Dispute Resolution

Specifies the jurisdiction's law that will govern the agreement (e.g., the laws of Queensland) and outlines the process for resolving disputes (e.g., mediation, litigation, arbitration).

Conclusion

A well-drafted Share Purchase Agreement is vital for mitigating risk and ensuring clarity in a share transaction. Each clause carries significant weight, and the interplay between them – particularly warranties, indemnities, and limitations – requires careful negotiation. Both buyers and sellers should seek experienced legal counsel to navigate the complexities of an SPA and ensure their interests are adequately protected throughout the process.

Disclaimer: This article provides general information only and does not constitute legal advice. You should seek specific legal advice tailored to your circumstances.