Sales and Purchase Agreement (SPA)
What is a Sales and Purchase Agreement (SPA)?
A Sales and Purchase Agreement (SPA) is a legal contract between the buyer and seller of a property. This agreement is legally binding and outlines the terms and conditions of the transaction. The purpose of a SPA is to define the legal obligations and protect the rights of the parties to the transaction. Common transactions using SPAs include the sales of property, goods, stock, or other assets. SPAs are not used for the sale of services.
In mergers and acquisitions, an SPA is typically entered into by the buyer and seller(s) of a target company’s stock, with the seller(s) agreeing to sell a specific number of shares to the buyer for a specified price. The value of the provisions and mechanics of a SPA can be greater than the headline price itself. Whether selling a business to achieve a clean exit at a predictable price or acquiring a business with appropriate remedies in place should the target company’s financial position not be as represented, a SPA with clear financial terms is key in achieving these goals. In the M&A process, the SPA is negotiated throughout the transaction. Once the buyer has completed the due diligence to determine the true state of the company for sale, the final phase of the transaction is to craft the SPA and determine the sale price of the company.
Key Learning Points
- The SPA is the principal document that lays out the terms of a transaction and is negotiated by the buyer and seller.
- Clear and solid financial terms in the SPA are essential to closing a successful transaction.
- Prior to drafting the SPA, the parties usually negotiate and execute a term sheet, which addresses all the principal terms of the transaction, which can then be incorporated into the SPA.
- An M&A transaction is typically accompanied by extensive due diligence before the SPA is finalized.
- SPAs may also be affected by existing shareholders’ agreements between the shareholders of a target company
Key components of a SPA
Definition- any words or phrases with meanings critical to the agreement and require lengthy definitions or explanations should be included in the definitions section.
Description of the transaction – describe the background of the transaction and underlying intent.
Sales and Purchase of Shares – specifies the number of shares to be acquired and states the rights, title, and interest acquired in the shares by the purchaser. This section also specifies the purchase price for the shares and how it is to be paid, as well as the time and place of the transaction closing.
Purchase price adjustments and earn-outs – the purchase price is determined in relation to recent financial statements and the due diligence report. Purchase price adjustments generally shield a purchaser from changes in the value of the target between the date the target was valued and the transaction closing. Earn-outs by the seller typically consist of contingent, additional payment(s) that can be made after closing upon the satisfaction of certain milestones.
Escrow – In M&A, all or a portion of the purchase price may be placed in escrow to secure the interests of the parties.
Conditions precedent – Conditions precedent, or closing conditions, are stipulations agreed upon by the parties that must be satisfied, or waived, before the acquisition may close.
Representations and warranties – In M&A transactions, representations and warranties are given by both parties to disclose material information to each other. The seller’s representations and warranties tend to be more extensive and include information about the target company, its business, assets, and liabilities. Representations and warranties allocate risk between the parties and form the basis for a legal claim in case of misrepresentation or breach.
Indemnification – addresses liability for losses incurred due to misrepresentations and breaches of warranties, covenants, and other agreements.
Termination rights – permit a party to terminate the SPA prior to closing.
Ancillary documents and agreements – Ancillary documents and agreements typically consist of documents enumerated in a schedule appended to a SPA that the parties must deliver to each other at, or prior to, closing.
Confidentiality and non-disclosure – An SPA typically contains language specifying that the terms are deemed confidential information and are not to be disclosed to any third party with reference to any prior non-disclosure agreement (NDA) that was entered into during a prior phase of the transaction.
Governing Law – the parties specify the jurisdiction whose laws will govern the SPA.
Example of SPA
Renova Investment Holding Limited (the buyer) entered into a SPA with 3DOM Inc (the seller), in relation to the acquisition of the entire issued and paid-up share capital of 3DOM (Singapore) Pte. Ltd (the target). Under the SPA, the buyer shall acquire the entire issued and paid-up capital of the target from the seller.
Key Terms of the Sales and Purchase Agreement (SPA):
Valuation: The buyer appointed an independent qualified appraiser to complete a valuation report on the target. The independent valuation expert, the buyer, and the seller concluded the target should be valued at S$1,700,000,000.
Consideration: The consideration was agreed upon on a willing-buyer and willing-seller basis, after substantive negotiations with the seller, and is based on an agreed 20% discount to the actual valuation of the target conducted by an independent qualified valuation expert.
Payment method: The parties agreed that the consideration is paid in shares. The buyer shall allot and issue 1,813,333,333 new fully paid-up common shares (the shares) in its capital (the consideration shares) at a pre-consolidation issue price of S$0.75 each to the seller.
Structure: Following the acquisition, the target will become a subsidiary of the buyer.
Transaction fees: the parties agreed that the transaction cost shall be paid by the buyer.
Conditions Precedent: The proposed acquisition is conditional upon the fulfillment or waiver of customary conditions precedent for a transaction of this nature, including but not limited to the following:
- the consideration derived from the actual valuation being not less than S$1.36 billion;
- the completion of financial, legal, operational, and any other due diligence exercise on the target by the buyer, and the results of such due diligence being reasonably satisfactory to the buyer;
- the findings and methodology presented in the valuation report to be issued by the independent qualified valuer being satisfactory to the buyer;
- the entry into service agreements by the key management of the target, on terms mutually agreeable to the parties;
- the seller procuring the target shall obtain such approval(s) required from the respective target‘s board of directors and its shareholder(s) in connection with the SPA;
- the buyer obtaining such approval(s) as may be required from its directors and shareholders
- the proposed share issuance;
- the allotment and issuance of the consideration shares at completion;
- the appointment of individuals nominated by the seller to serve as directors of the buyer post-completion;
- in respect of the buyer, all consents and approvals are required under any and all applicable laws and regulations.
A Sales and Purchase Agreement (SPA) serves to manifest a mutual written agreement on the terms and conditions of the sale of some or all of the shares of a target company. In M&A, taking advice from a comprehensive SPA service expert can lead to a significant advantage in the deal process.
MCQ on Sales and Purchase Agreement (SPA)
Download the accompanying Excel file for the answer.