Share Purchase Transactions: The Most Heavily Negotiated Clauses

Share Purchase Transactions: The Most Heavily Negotiated Clauses

A share purchase transaction requires the parties to regulate much more than the transfer of shares and payment of the purchase price. The share purchase agreement must allocate risks between the buyer and the seller, establish the consequences of any inaccurate information, and provide mechanisms for resolving disputes that may arise after completion. As a result, certain clauses tend to account for a substantial part of the negotiations.

Representations and Warranties

Representations and warranties set out the seller’s statements regarding the legal, financial and operational position of the target company. They commonly cover matters such as title to the shares, annual accounts, material contracts, litigation, tax and employment compliance, intellectual property, data protection and the absence of undisclosed liabilities.

If any representation or warranty proves to be false, inaccurate or misleading, the seller may be required to indemnify the buyer. Negotiations usually focus on the scope of the warranties, the matters disclosed during the due diligence process, the level of knowledge attributed to the seller and the duration of the seller’s liability.

The parties also normally agree on financial limitations, including de minimis thresholds, baskets and an overall liability cap. In practice, representations and warranties given at signing are often repeated at completion.

Earn-Outs and Post-Completion Purchase Price Adjustments

An earn-out allows part of the purchase price to be deferred and made conditional on the target company achieving certain future objectives, such as revenue, EBITDA, profit or customer acquisition targets.

This mechanism can be particularly useful where the buyer and seller disagree on the valuation of the company. However, it requires careful drafting of the relevant performance indicators, accounting principles, measurement period and the buyer’s powers to manage the business during the earn-out period.

The agreement may also provide for post-completion purchase price adjustments based on matters such as net debt, working capital or specific accounting discrepancies. A lack of clarity in the calculation method, accounting standards or dispute resolution procedure is a frequent source of disagreement between the parties.

Non-Compete and Non-Solicitation Clauses

Non-compete clauses prevent the seller from carrying on, for a specified period and within a defined geographical area, a business that competes with the target company.

To remain proportionate and enforceable, these restrictions should be limited to the business actually acquired and to what is reasonably necessary to protect the value of the transaction.

Non-solicitation clauses prevent the seller from approaching key customers or recruiting key employees of the target company. They usually establish a specific duration, exceptions for general recruitment campaigns and financial penalties in the event of breach.

Careful drafting of these provisions reduces uncertainty, protects the value of the transaction and limits the risk of post-completion claims.