Share Purchase Agreement

1. Recitals (Preamble / Background)

This clause sets the factual and commercial background of the transaction. It outlines who the parties are, their relationship to the target company, and the broad structure and rationale behind the deal. It contains:

• Identity of buyer and seller
• Description of the target company
• Number and class of shares to be transferred
• Intent to enter into a binding agreement

2. Definitions and Interpretation

This clause ensures clarity and consistency by defining key terms used throughout the agreement. It contains:

• Definitions of “Shares”, “Consideration”, “Closing Date”, “Material Adverse Effect”, “Encumbrance”, etc.
• Rules of interpretation (e.g., gender neutrality, plural vs. singular, statutory references)

3. Sale and Transfer of Shares

This clause provides the commercial heart of the agreement—what is being sold, and how. It contains:

• Number and class (equity/preference) of shares
• Percentage of shareholding being transferred
• Whether full or partial acquisition
• Share transfer mechanics:
  • Physical shares (Form SH-4)
  • Demat shares (via DP instructions)
  • Date and method of delivery
  • Transfer of share certificates or DP slips

4. Consideration Clause

This clause specifies the financial terms of the deal.

It contains:

• Total purchase price and price per share
• Currency and mode of payment (bank transfer, cheque, etc.)
• Payment structure:
  • Lump sum
  • Deferred payments
  • Earn-outs or performance-based tranches
• Adjustments:
  • Price recalibration for net debt or working capital at closing
  • Contingent liabilities

5. Conditions Precedent (CPs)

This clause outlines the actions or approvals that must be completed before the transaction can be closed. It can be:

• Board and shareholder resolutions
• Regulatory approvals (e.g., SEBI, RBI, CCI)
• No existing litigation or legal impediments
• Completion of satisfactory due diligence
• Clearance of encumbrances or charges on shares
• Execution of ancillary agreements (e.g., SHA, NOC from lenders)

6. Representations and Warranties

This clause lists the legal assurances provided by each party regarding themselves and the target company.

a. Seller's Representations:

• Legal and beneficial ownership of shares
• Full authority and capacity to sell
• Shares are free of encumbrances
• The company is validly incorporated and compliant
• No undisclosed liabilities or pending litigation
• All material contracts and licenses disclosed

b. Buyer's Representations:

• Authority and financial capability to purchase
• No legal or contractual restrictions
• If foreign, compliance with FEMA and FDI norms

c. Company's Representations (if applicable):

• Accurate financial statements
• Compliance with tax, labour, and corporate laws
• Validity of licenses and permits
• No material adverse change since the balance sheet date

7. Covenants

It is the forward-looking promises by the parties to perform or refrain from specific actions.

a. Pre-Closing Covenants:

• Seller shall not enter into new contracts or sell company assets
• Maintain operations in the ordinary course
• Cooperate in obtaining approvals

b. Post-Closing Covenants:

• Non-compete and non-solicitation by the seller
• Transfer of contracts, licenses, and bank accounts
• Continued support or transition services by the seller

8. Indemnity Clause

This clause covers compensation mechanisms for breach of warranties or undisclosed liabilities. It includes:

• Scope: Breach of representations, warranties, covenants
• Indemnity cap: Maximum liability limit (often linked to purchase price)
• Basket: Minimum claim threshold before liability arises
• De minimis: Minimum claim size for inclusion in aggregate
• Survival period: Duration for which warranties and indemnities survive (e.g., 2–5 years, 7 years for tax matters)
• Claim procedure and timelines

9. Termination Clause

This clause outlines the circumstances under which the agreement can be terminated and the consequences of such termination.

Termination Triggers:

• Non-fulfillment of CPs by the long-stop date
• Mutual consent
• Breach of material obligations
• The occurrence of a material adverse effect

Consequences:

• Refund of advance payments
• Return of confidential information
• Survival of key clauses (e.g., confidentiality, indemnity)

10. Confidentiality Clause

This clause protects sensitive information shared during negotiations and post-closing.

It includes:

• Scope of confidential information
• Permitted disclosures (e.g., legal or tax advisors, regulators)
• Duration of confidentiality obligations (e.g., 1–3 years)
• Injunctive relief in case of breach

11. Governing Law and Dispute Resolution

This clause determines the jurisdiction and forum for resolving disputes.

It includes:

• Governing Law: Usually Indian law (or another mutually agreed jurisdiction)
• Dispute Resolution Mechanism:
  • Arbitration under the Arbitration and Conciliation Act, 1996
  • Number of arbitrators (one or three)
  • Seat and venue of arbitration (e.g., Mumbai, New Delhi)
  • Language of proceedings
  • Allocation of arbitration costs

Alternative: Courts of [City] to have exclusive jurisdiction (if parties opt out of arbitration)

12. Miscellaneous Clauses

This clause covers residual and boilerplate legal provisions to ensure completeness.

It includes:

• Entire Agreement: Supersedes prior discussions or term sheets
• Amendments: Must be in writing and signed by all parties
• Notices: Method, address, and deemed receipt rules
• Force Majeure: Exemption from liability due to unforeseeable events (natural disasters, war, regulatory changes)
• Assignment: Restrictions on the transfer of rights and obligations without consent
• Severability: If any clause is invalid, the remainder of the agreement remains enforceable
• Counterparts: Execution in multiple counterparts, each of which is deemed an original

Stamp Duty on Share Purchase Agreements

Stamp duty is payable on SPAs under the applicable State Stamp Act. Rates may vary but are generally in the range of 0.25% to 1% of the transaction value. If shares are in demat form, stamp duty is now levied electronically through the Stock Holding Corporation of India Ltd. (SHCIL) under the revised Indian Stamp Act (post-2020 amendment).

Common Mistakes to Avoid in a Share Purchase Agreement (SPA)

• Failure to Clearly Define Key Terms
• Omitting Specific Conditions Precedent
• Ignoring the Articles of Association (AoA)
• Inadequate Due Diligence Before Signing
• Weak Representations and Warranties
• Ignoring Post-Closing Obligations
• Inadequate Termination Provisions
• No Non-Compete or Non-Solicitation Clauses
• Missing or Defective Closing Checklist
• Unclear Dispute Resolution Mechanism
• No Provision for Confidentiality or Data Protection

Why Choose Kanakkupillai for Share Purchase Agreement (SPA)?

Looking to execute a risk-free and legally sound Share Purchase Agreement? Kanakkupillai’s team of experienced legal and financial experts can assist you at every stage of the deal, from term sheet negotiation to SPA drafting and regulatory compliance. We provide:

• Customised Drafting Services: Every transaction is unique. At Kanakkupillai, we do not use standard templates. Instead, our legal team drafts each SPA to reflect the specific commercial terms, legal considerations, and jurisdictional requirements relevant to your deal.
• Due Diligence and Compliance: Our due diligence team conducts exhaustive legal, financial, and compliance checks to identify potential risks before they escalate. We assist both buyers and sellers to ensure there are no undisclosed liabilities, ongoing litigation, regulatory defaults, or non-compliant contracts.
• Cross-Border Expertise: For clients involved in international transactions, we provide specialized advice on cross-border legal frameworks, including:
• FEMA and FDI compliance
• Transfer pricing regulations
• Foreign exchange laws
• International tax structuring
• End-to-End Transaction Management: From initial term sheet drafting to final closing, we remain actively involved at each stage of the transaction lifecycle. Our team facilitates:
• Preparation and execution of all legal documents
• Coordination of regulatory filings with ROC, RBI, SEBI, etc.
• Liaison with Chartered Accountants, Company Secretaries, and Depository Participants