The Share Purchase Agreement (SPA) is the definitive instrument of risk allocation in an M&A transaction. While Due Diligence uncovers the risks, the SPA determines who pays for them. For professional advisors, the SPA is a complex interplay of legal protections, financial pricing mechanisms, and tax indemnities. A well-drafted SPA is practical, clearly prioritizes deal-breakers, and translates due-diligence findings into measurable contractual protections rather than long lists of aspirational statements.
In this document, we present a checkpoint-style, practitioner-focused SPA guideline that explains the common SPA articles, their practical effects, and the drafting / negotiation issues to watch for.
The items listed in this guide are general in nature and not exhaustive. Additional considerations and critical items may apply depending on the transaction structure, the target company, and its sector of activity. Sell-side and buy-side parties are advised to engage relevant stakeholders, including financial, tax, technical, and legal advisors, throughout the process.
This guide is intended as a practical reference and does not constitute legal, financial, or investment advice.
Definitions & Interpretation
Purpose and Meaning
- Sets the scope for terms used throughout the SPA; poor definitions cause circularity and disputes.
Key Effects
- Control how price adjustments, deadlines, knowledge qualifiers and thresholds operate.
Practical Checks
- ✓ Define key terms that will shape the deal and the purchase price mechanism such as “Business”, “Completion Date”, “Long-Stop Date”, “Accounts”, “Material Adverse Effect (MAE)”, “Knowledge” (and how knowledge is imputed, e.g. Seller’s Knowledge), “Permitted Exceptions”, “Excluded Assets/Liabilities”, “Law”, “Target”, “Shares/Sale Shares”, “Affiliate”, “Disclosure/Disclosure Letter”, “Purchase Price,” “Closing/Completion”, “Completion Accounts” (completion accounts deal), leakage/permitted leakage (locked-box deals) “Tax/Taxation”, “Losses”, “Fraud”.
- ✓ Add all target’s business specific definitions including specific licenses and important customers or strategic assets of the targets.
- ✓ Avoid undefined cross-references. Use singular/plural consistency and explicit time zones/currency.
- ✓ Include an entire-agreement clause and priority rules (schedules vs clauses).
Sale & Purchase Clause
Purpose and Meaning
- Precisely describes what is transferred: shares, number, classes, and any ancillary assets.
Key Effects
- Determines title transfer, tax consequences, and whether post-signing steps (consents, novation) are needed.
Practical Checks
- ✓ State share classes, issued vs allotted, and whether share capital adjustments are required pre-closing.
- ✓ Confirm transfer of related rights (dividends, intercompany claims) and whether any assets are excluded or carved out.
- ✓ Clarify rights to declared but unpaid dividends.
- ✓ Ensure share transfer is “free and clear of all encumbrances” (liens, pledges, usufructs).
Purchase Price & Payment Mechanics
Purpose and Meaning
- Sets headline price, allocation between shares, and payment breakdown (cash, deferred, earn-out).
Key Effects
- Impacts tax allocation, seller proceeds, escrow needs and potential future disputes.
Practical Checks
- ✓ Define base price, locked-box vs completion accounts, mechanism for adjustments, and exact calculation methodology (templates/formulas).
- ✓ Currency, bank details, payment timings, and conditions precedent to payment.
- ✓ Treatment of working capital: target, calculation mechanics, cut-off times, and any post-completion true-up formulas.
- ✓ Escrow: amount, purpose, release schedule, release conditions, claims process and escrow agent duties (Practical Note: To define escrow mechanism, an escrow agreement should separately be signed by and between buyer, seller and escrow agent. So, a reference to the escrow agreement to be signed, in the SPA, can also be sufficient.)
- ✓ Earn-outs: precise KPIs, measurement periods, audit/verification rights, capping, mitigation for intervening matters, anti-manipulation covenants, and dispute process (Practical Note: earn out mechanism can be defined in a separate agreement between buyer and seller).
Price Adjustments: Locked-Box vs. Completion (Closing) Accounts
Meaning and Trade-off
- In locked-box mechanism, purchase price is fixed based on a historical balance sheet with leakage protections.
- In completion (closing) accounts mechanism, purchase price is adjusted on actual net debt and working capital at the closing date.
Key Effects
- Locked-box reduces post-closing accounting fights but requires robust leakage definition and warranty on accounts. Completion accounts shift accounting risk to post-close true-up (With completion accounts, purchase price is adjusted on actual accounts at the closing date. So, accounting risk is calculated after the closing based on actual figures.).
Practical Checklist
- ✓ For locked-box: define “permitted leakage”, leakage examples, interest on leakage, and effective locked-box date. The buyer needs a strong indemnity for any leakage between and the locked box date and closing.
- ✓ For completion (closing) accounts: define timelines for preparation, review, dispute resolution (expert, accountants), and interest on overdue amounts. The definition of “Net Debt” and “Working Capital” must be exhaustive. Watch for “trapped cash” (any cash or cash equivalents of the target that, as at the completion date (or the locked-box date, as applicable), are not freely distributable or transferable to the Buyer without restriction) or “deferred revenue (any amounts received or invoiced by the target prior to the completion date (or the locked-box date, as applicable) in respect of goods or services that have not yet been fully delivered or performed).” The specific accounting policies (GAAP/IFRS vs. Management Accounts) must be agreed upon.
Conditions Precedent (CPs)
Purpose and Meaning
- Conditions that must be satisfied or waived before completion (e.g., regulatory approvals, third-party consents, financing).
Key Effects
- Provides buyer exit routes or trigger obligations to close the deal.
Practical Checks
- ✓ List each CP clearly, include materiality thresholds, and define who bears responsibility for obtaining approvals such as competition board clearances, industry-specific licenses and third party consents required for change of control clauses.
- ✓ Define a long-stop date for CPs.
- ✓ Include a clear process for waiver, extension, and long-stop consequences (termination rights).
- ✓ Consider a clause allowing the Buyer to walk away if a catastrophic event occurs between signing and closing (Material Adverse Change).
- ✓ Address filing fees, timing, confidentiality in filings, and interim operation covenants while CPs pending.
Representations & Warranties (R&W) and Disclosures
Purpose and Meaning
- Factual statements by seller and buyer about the target and the transaction, forming the backbone of risk allocation.
Key Effects
- Breaches can trigger indemnities, penalties, price adjustments, or termination in some cases.
Practical Checks
- ✓ Categorize reps: (a) fundamental (title, capacity, authority to sell, non-insolvency), (b) usual/standard (accounts, contracts), (c) tax, (d) IP and (e) tailored reps (regulatory, AML, competition).
- ✓ Materiality/time qualifiers: decide whether reps are qualified by “materiality” and how that impacts claims.
- ✓ Knowledge qualifiers: define whose knowledge counts and how it is imputed (seller’s knowledge, board, senior management).
- ✓ Disclosure letter: expressly carve out disclosed matters from reps, ensure a robust cross-reference system and that the disclosure schedule is searchable and dated. Decide whether it will be a specific disclosure or fair disclosure. Ensure disclosure letter expressly states the extent to which it qualifies specific reps and include materiality thresholds where relevant.
- ✓ Reps survival: set survival periods and exceptions.
- ✓ Bring-Down Clause: Ensure that R&Ws confirmed are still true at closing.
Indemnifications & Limitations on Liability
Purpose and Meaning
- Seller’s and/or buyer’s contractual promise to compensate for losses from breaches, claims or agreed liabilities.
Key Effects
- Primary risk reallocation tool; interacts with caps, baskets, and survival periods.
Practical Checks
- ✓ Cap: set an overall indemnity cap (often negotiated as a % of purchase price) and carve-outs (fraud, fundamental reps, tax often excepted or subject to higher caps).
- ✓ Baskets/deductibles: threshold model (tipping vs. non-tipping) — choose what suits negotiation dynamics. Define de minimis (minimum size of a single claim to count) and basket (the aggregate threshold before claims are paid) amounts.
- ✓ Survival & limitation: survival periods per category.
- ✓ Time-bar and claim notice procedures: strict timelines for notification and proof requirements.
- ✓ Mitigation and set-off: obligation for claimant to mitigate, and whether parties can set-off claims.
- ✓ Conduct of claims & defense: who controls defense of third-party claims and settlement authority; buyer should seek seller consent for settlements prejudicial to seller.
- ✓ Anti-Double Recovery: prevents buyer from recovering the same loss twice (e.g., once via Price Adjustment and again via Warranty Claim).
- ✓ Duty to Mitigate: obligates the buyer to take steps to minimize losses after a breach.
Warranty & Indemnity (W&I) Insurance
Purpose and Meaning
- Insurance that shifts R&W risk to insurer; impacts how indemnities and caps are negotiated.
Key Effects
- Can reduce escrow, change seller risk appetite and speed up negotiations.
Practical Checks
- ✓ Decide buyer- or seller-side placement, timing, scope and exclusions. Factor in policy retentions, running costs and disclosure obligations.
- ✓ Define who pays for “Known Issues” excluded by the insurer.
Deal Security & Payment Protections
Purpose and Meaning
- Protections that reduce risk for buyer or seller in compensation of potential claims.
Key Effects
- Can change buyer or seller risk appetite and speed up negotiations
Practical Checks
- ✓ Escrow/Retention: consider holding back a portion of the share price in a bank account to secure potential claims.
- ✓ Set-Off Rights: define buyer’s right to withhold future payments (Earn-outs) against outstanding indemnity claims.
- ✓ Parent Company Guarantee: demand parent company guarantee especially if the counterparty is an SPV or a HoldCo with no assets.
Covenants (Undertakings)
Purpose and Meaning
- Promises regarding conduct of business, and post-closing period.
Key Effects
- Reduces the risk for a material adverse change, and unnecessary competition. Protects buyer’s expectation of the target’s condition at completion.
Practical Checks
- ✓ Ordinary Course of Business: ensure that seller runs the business in the ordinary course. Define permitted actions carve-outs for board-approved matters, and notification/consent processes for restricted actions.
- ✓ Non-Compete: consider if seller should not start a competing business after the closing.
- ✓ Non-Solicit: ensure that seller cannot poach employees or customers after the closing.
Termination & Break Fees
Purpose and Meaning
- Defines when either party may exit and cost allocation on termination.
Key Effects
- Break fees deter opportunistic exits and compensate parties for wasted costs.
Practical Checks
- ✓ List termination events (failure of CPs, material breach, insolvency), notice requirements, cure periods and entitlements to break fees or expense reimbursement.
Transition & Post-Closing Integration
Purpose and Meaning
- Defines seller’s post-closing obligations for a smooth transition.
Key Effects
- Ensures operational continuity of the target.
Practical Checks
- ✓ Transitional Services Agreement (TSA): Seller provides services such as IT/HR/Accounting for a fee for a set period post-closing.
- ✓ Wrong Pockets Clause: Mandates the transfer of assets (IP, contracts) that were accidentally left behind with the Seller (or vice versa).
- ✓ Consider Target’s contracts or ongoing business relations with Seller affiliated companies.
Confidentiality, Public Announcements & PR
Purpose and Meaning
- Controls external communication about the transaction and handling of leaks.
Key Effects
- Prevents market disruption and reputational damage; some filings may require pre-notification to authorities.
Practical Checks
- ✓ Agree on announcement timing, content sign-off, and embargoes.
- ✓ Address mandatory disclosures, insider lists and communication protocols.
Governing Law, Jurisdiction & Dispute Resolution
Purpose and Meaning
- Determines forum and law that govern SPA interpretation and remedies
Key Effects
- Affects enforceability, remedies available (specific performance, injunctive relief) and litigation risk/cost.
Practical Checks
- ✓ Choose governing law favorable to enforceability of specific remedies (e.g., injunctive relief).
- ✓ Consider arbitration vs courts, seat and language. Include interim relief carve-outs permitting local courts to grant urgent relief.
Schedules & Ancillary Schedules
Purpose and Meaning
- The schedules constitute the factual backbone.
Key Effects
- Poorly structured schedules lead to disputes over facts.
Practical Checks
- ✓ Use clearly indexed, hyperlinked schedules with dates and cross-references.
