Share Purchase Agreement (SPA)

Overview

A share purchase agreement (SPA) is the principal transaction document for the sale and purchase of the entire issued share capital (or a controlling stake) of a private limited company, used for arm's-length transactions where the buyer needs contractual protection against undisclosed liabilities in the target company. It is a materially more detailed document than a simple share transfer agreement: where that shorter template suits a low-risk transfer with minimal warranties, this SPA is designed for genuine M&A transactions with meaningful warranty and indemnity protection, typically negotiated with legal advisers on both sides. When to use it: for the sale of a private limited company (or a business carried on through one) where the buyer wants assurance about the company's financial position, contracts, litigation, employees, tax history, and compliance — matters a simple transfer agreement does not address at all. Structure: an SPA typically comprises (1) the sale and purchase provisions themselves (shares being sold, consideration, and how it is calculated — a fixed price, a completion accounts mechanism, or an earn-out tied to future performance); (2) conditions to completion (if any regulatory or third-party consents are needed); (3) warranties — a comprehensive set of statements about the company given by the seller, covering matters such as accounts, title to shares, material contracts, litigation, employees, pensions, tax, intellectual property, and compliance with law; (4) a disclosure letter, delivered alongside the SPA, in which the seller discloses specific facts against the warranties — anything properly disclosed cannot later be the basis of a warranty claim, which is why disclosure letter drafting is such a critical, heavily negotiated part of the process; (5) indemnities for specific known or quantifiable risks (e.g. a particular tax exposure or litigation matter) which, unlike warranties, do not require the buyer to prove loss flowing from a breach in the same way — an indemnity is a promise to make good a defined loss pound-for-pound; (6) limitations on the seller's liability (time limits for claims, financial caps, a de minimis threshold per claim, and an aggregate threshold before claims can be brought); and (7) restrictive covenants preventing the seller from competing with, or soliciting employees or customers of, the target business post-completion. Warranties vs indemnities — why the distinction matters: a warranty claim requires the buyer to show breach and quantify loss (subject to normal contractual damages principles, including mitigation), whereas an indemnity is a direct promise to reimburse a specified loss, generally easier and more certain for the buyer to enforce for the specific risk it covers, which is why buyers often negotiate indemnities for known, quantifiable exposures uncovered in due diligence, and rely on the broader warranty package for general assurance about matters not specifically investigated. Common pitfalls: relying on warranties alone without seeking specific indemnities for known risks identified in due diligence; a disclosure letter that is too generic to properly qualify the warranties (a 'general disclosure' of, say, the data room is much weaker protection for the seller than specific, cross-referenced disclosures); no clear mechanism for adjusting the price for the target's actual financial position at completion (completion accounts, or a locked-box mechanism with appropriate leakage protections); and liability caps or time limits set without regard to the specific risk profile of the transaction (e.g. tax warranties often warrant a longer limitation period than general commercial warranties, tracking HMRC's own assessment time limits).

Information to customize

• Target company name

• Target company registration number

• Seller's name or company name

• Seller's address

• Buyer's name or company name

• Buyer's address

• Description of shares being sold (class, number, percentage of issued capital)

• Consideration structure (fixed price, completion accounts, or earn-out)

• Conditions to completion (if any)

• Summary of warranty categories given

  E.g. accounts, title, material contracts, litigation, employees, pensions, tax, IP, compliance.

• Reference to the disclosure letter delivered alongside this agreement

• Specific indemnities (for known/quantified risks, if any)

• Cap on the Seller's aggregate liability for warranty/indemnity claims

• Time limit for general warranty claims

• Time limit for tax warranty/indemnity claims

  Often longer than general claims, tracking HMRC assessment time limits.

• De minimis threshold per claim and aggregate basket before claims can be brought

• Post-completion restrictive covenants on the Seller (non-compete, non-solicit)

• Completion date

• Date of signature

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Frequently asked questions

How is a share purchase agreement different from a simple share transfer agreement?

A simple share transfer agreement suits low-risk transfers with minimal protection. This SPA is for arm's-length transactions where the buyer needs meaningful contractual protection through warranties, a disclosure letter, and often specific indemnities for known risks — it is a substantially more detailed and heavily negotiated document.

What is a disclosure letter and why does it matter so much?

The disclosure letter, delivered alongside the SPA, is where the seller discloses specific facts that qualify the warranties. Anything properly and specifically disclosed cannot later form the basis of a warranty claim, so how precisely (or how generically) the letter is drafted materially affects how much real protection the buyer actually has.

What is the difference between a warranty and an indemnity?

A warranty claim requires the buyer to prove breach and quantify loss, subject to ordinary contract damages principles including mitigation. An indemnity is a direct promise to reimburse a specified loss pound-for-pound, generally simpler and more certain to enforce for the specific risk it covers — buyers typically seek indemnities for known, quantifiable risks found in due diligence.

Why do tax warranties usually have a longer time limit than other warranties?

Tax claims are often given a longer limitation period that tracks HMRC's own statutory time limits for raising tax assessments, since a tax liability relating to the pre-completion period can come to light well after general commercial matters would otherwise be time-barred.

What are de minimis and basket thresholds?

A de minimis threshold sets a minimum value below which an individual claim cannot be brought at all. A basket (or aggregate) threshold requires the total value of all claims to exceed a set amount before any claim can be brought — both are common ways of filtering out trivial claims and are heavily negotiated.

What happens to the seller's competing activities after completion?

Post-completion restrictive covenants typically prevent the seller from competing with, or soliciting employees or customers of, the business sold, for a defined period and geographic scope — these must go no further than reasonably necessary to protect the legitimate business interest (the goodwill bought) or risk being unenforceable as a restraint of trade.

Does completion happen automatically on signing the SPA?

Not necessarily — where there are conditions to completion (e.g. regulatory clearance or third-party consents), signing and completion can be separated in time ("sign and complete later"), with completion only occurring once the conditions are satisfied or waived.

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