What is a SPA?

Explanation of SPA

A SPA is a core legal document used in mergers and acquisitions when a buyer acquires shares in a company. By purchasing shares, the buyer obtains ownership of the company itself, including its assets, liabilities, and contractual obligations.

The SPA sets out the detailed terms of the transaction. This typically includes the purchase price, payment structure, completion conditions, warranties, and indemnities provided by the seller. It also outlines how the transaction will proceed from signing through to completion.

In many transactions, the SPA incorporates mechanisms to adjust the purchase price based on financial information at completion. These may include working capital adjustments, net debt adjustments, or other agreed financial measures.

In the UK, SPAs are governed by contract law and are commonly used in private company acquisitions. The document reflects the commercial negotiations between the parties and forms the legal framework for completing the share sale.

Key characteristics of a SPA

Key characteristics of a SPA include the following:

• It is a legally binding contract governing the sale and purchase of company shares.
• It sets out the purchase price and how the transaction will be structured.
• The agreement typically includes warranties, indemnities, and disclosure provisions.
• It defines conditions that must be satisfied before the transaction completes.
• Price adjustment mechanisms may be included to reflect financial changes at completion.
• SPAs are commonly used in private company mergers and acquisitions.

How a share purchase agreement works

A share purchase agreement typically operates through the following process:

1. The buyer and seller negotiate the commercial terms of the transaction.
2. The SPA is drafted to document the agreed terms and legal protections.
3. The parties sign the agreement once negotiations and due diligence are completed.
4. Completion occurs once any agreed conditions are satisfied and ownership of shares transfers.

Example of a SPA in practice

A UK investor agrees to acquire all shares in a privately owned consultancy business. The parties negotiate the purchase price and document the terms within a share purchase agreement. The SPA includes warranties from the seller and a mechanism to adjust the final price based on the company’s net debt and working capital at completion.

Related terms

• Mergers and acquisitions
• Due diligence
• Business valuation
• Purchase price adjustment
• Warranties and indemnities
• Asset purchase agreement
• Completion accounts

Common misconceptions about SPAs

A SPA does not always mean the transaction completes immediately after signing; completion may occur later once conditions are met.

A SPA does not only specify the purchase price; it also includes legal protections and risk allocation between the parties.

A share purchase agreement differs from an asset purchase agreement, which transfers specific business assets rather than company shares.

Share purchase agreement frequently asked questions

What does SPA stand for in business transactions?

SPA stands for share purchase agreement. It is the contract that governs the sale and purchase of shares in a company.

What is included in a share purchase agreement?

A SPA typically includes the purchase price, payment terms, warranties and indemnities, completion conditions, and provisions covering how ownership transfers to the buyer.

What is a purchase price adjustment in a SPA?

A purchase price adjustment is a mechanism that changes the final transaction price based on financial metrics at completion, such as net debt or working capital.

When does a SPA become legally binding?

A SPA generally becomes legally binding when it is signed by the parties involved, subject to any conditions specified in the agreement.

What is the difference between a SPA and an asset purchase agreement?

A share purchase agreement transfers ownership of shares in a company. An asset purchase agreement involves buying specific assets or parts of a business rather than the company itself.