SALES PURCHASE AGREEMENT SERVICE
An agreement to sell is an important document in the process of sale and purchase of property. This agreement contains the terms and conditions agreed upon between the parties, and binds them. An agreement to sell is the basic document on which a conveyance deed is drafted. It is always advisable to have an agreement to sell in writing.
What is a Sales and Purchase Agreement – SPA
A sales and purchase agreement (SPA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. SPAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal.
An SPA serves as a basis for a transaction to take place, providing a framework for how the transaction will proceed, what is included in the transaction and, if necessary, what is excluded from the sale. It allows the buyer and seller of a particular asset to negotiate, and ultimately agree upon, a proper price. While not required for every transaction, SPAs are often used for large single purchases or frequent purchases across a specified amount of time.
Not only do SPAs dictate the terms of the sale, but they also contain detailed information about the buyer and the seller. They serve as a record of any deposits made as negotiations move forward, any portions of the agreement that have already been met or transactions that have already been completed, as well as an official record of when the final sale is to take place.
Sales and purchase agreements are also found in the upper supply chains of many large, publicly traded companies. An SPA may be used when obtaining a large quantity of materials from a supplier.
Sales and purchase agreements are also found in the upper supply chains of many large, publicly traded companies. An SPA may be used when obtaining a large quantity of materials from a supplier.
The Sale and Purchase Agreement (SPA) is a legally binding contract outlining the agreed conditions of the buyer and seller of a property (e.g., a corporation). It is the main legal document in any sale process. In essence, it sets out the agreed elements of the deal, includes a number of important protections to all the parties involved and provides the legal framework to complete the sale of a property. The SPA is therefore of critical importance to both sellers and buyers.
Common features and provisions of a Sale and Purchase Agreement (SPA)
Parties to the agreement
In the simplest form of a sale where a company being sold is wholly owned by a single person or parent company and is being bought by a single buyer, there are only two parties to the agreement. However, additional parties may be involved when, for example, there are multiple shareholders in the company being sold. In these cases, each of the shareholders will need to enter into the sale and purchase agreement to sell their shares.
Agreement to sell and purchase
This is often the shortest and simplest provision in the SPA. However, it is one of the most important, as it ensures that full legal ownership to the shares (also known as “title”) is properly transferred, together with all the relevant rights that attach to the shares (e.g., rights to dividends). The provision also normally states that the shares are free from any encumbrances, giving the buyer comfort that the seller has not pledged any of the shares to a bank or other lender.
Consideration
Consideration for an acquired company is paid by buyers to a seller in the form of cash, debt (such as a loan note issued by the buyer), shares in the buyer, or a combination of these.
Restrictive covenants
The buyer will want to prevent the seller from establishing any new competitive business that will impair the value of the company being sold. The sale and purchase agreement will, therefore, contain restrictive covenants that prevent the seller (for a specified period and within specified geographic regions) from soliciting existing customers, suppliers or employees, and from competing generally with the company being sold. These restrictive covenants must be reasonable in geography, scope, and duration, as otherwise, they may contravene competition law.
Warranties and indemnities
Warranties are statements of facts made by a seller in the SPA relating to the condition of the company being sold. If a warranty subsequently proves to be untrue and the value of the company is reduced, the buyer may have a claim for breach of warranty. Warranties cover all areas of the company including its assets, accounts, material contracts, litigation, employees, property, insolvency, intellectual property, and debt.
If more specific risks are identified during due diligence, it is likely that these will be covered by an appropriate indemnity in the sale and purchase agreement, under which the seller promises to reimburse the buyer on a pound for pound basis for the indemnified liability.
Conditions precedent
Simultaneous signing and completion of a deal (where the parties sign the SPA and complete the sale on the same day) is the preferred and simplest way of concluding a deal. Sometimes, however, there is a need for a time gap between signing and completion in order to satisfy certain final outstanding conditions. These are known as “conditions precedent” and commonly include tax authority clearances, merger approval by authorities, and consent from third parties (for example, where a change of control provision exists in a material contract of the company being sold).
Unless the parties agree otherwise, the sale and purchase agreement falls away if all of the conditions present are not satisfied by an agreed upon date (the “longstop date”). It is therefore critical that the SPA sets out how to determine when the conditions precedent have been satisfied, and when they are no longer capable of being satisfied. It should also specify which of the parties is responsible for satisfying each particular condition precedent. The relevant party is obliged to use its reasonable endeavors to satisfy the relevant conditions precedent by the longstop date.
Completion
Completion is when legal ownership of the shares transfers to the buyer, resulting in the buyer owning the target company. A completion schedule in the SPA will normally list all of the documents to be signed and other actions necessary for completion to affect the deal.
Post Completion
Following completion, the sale and purchase agreement continues to be an important document for reference, as it covers how any earn-out is to work and contains restrictive covenants, confidentially obligations, warranties, and indemnities, all of which may remain very relevant.