Share purchase agreement

What it means

An SPA, or share purchase agreement, is the main contract when a company is sold through a purchase of shares. It covers the price and its adjustments, the conditions for closing, the seller's representations and warranties, indemnities, a non-compete and other arrangements between buyer and seller.

In Slovakia it is formally a contract for the transfer of a business share in an s.r.o. or a share purchase contract in a joint-stock company. In larger deals, however, a fuller document modelled on international practice is usually signed, and a short transfer contract serves only for the commercial register.

An SPA differs from a sale of a business in that the buyer acquires the whole company with all its assets, contracts and liabilities. That is why much of the agreement deals with allocating risks that may have arisen before the sale and only show up later.

How it works in practice

The content of an SPA builds on the findings of due diligence. Risks the buyer uncovered are handled by a price reduction, a specific indemnity or a condition the seller must meet before closing. Statements that could not be verified are covered by warranties and indemnities.

The price is often set by a mechanism rather than a fixed amount. It may be adjusted for actual net debt and working capital at the closing date, fixed at an earlier date under a locked-box approach, or partly deferred as an earn-out tied to future results.

Several weeks or months may pass between signing and closing, for example while awaiting competition clearance or bank consent. The agreement therefore sets out how the company must be run in the meantime and often contains a MAC clause for a material adverse change.

What to watch out for

The target's articles should be checked, since they may restrict share transfers, require shareholder approval or give other shareholders a pre-emption right. A transfer of a share in an s.r.o. becomes effective towards the company only once the contract is delivered to it, and registration has its own deadlines.

The tax result differs from a sale of a business. The seller is taxed on the gain from selling the share, the buyer cannot amortise goodwill and all historical tax risks stay in the company. It is therefore sensible to review the tax consequences before signing.