Anatomy of a share purchase agreement

Specific meanings should be attributed to specific words in any contract to be precise or alter the meaning of words as commonly used in particular industries or contexts. While certain words or phrases can be defined in the body of a contract, any words or phrases with meanings that are critical, ambiguous or require lengthy definitions or explanations should be included in the definitions section. This is particularly useful in the case of recurring words, phrases or concepts. Each defined term should initially be in quotation marks so it is clear it is a defined term, bold (so it is easily found) and the first letter of each defined word capitalised so it is clear throughout the agreement that when the word is in such capitalised form it is in fact a defined term and is less easily misconstrued (as has been done in this article). If for example “Party,” is a defined term referring to a Party to the agreement it will avoid confusion when the word “party,” all in lower case, is used to refer to any party other than a Party to the agreement.

As a key component of any SPA, this section of the agreement typically specifies the number of shares to be acquired and states the rights, title and interest acquired in the shares by the purchaser. This section should also specify the purchase price for the shares and how it is to be paid (cash, securities of the purchaser, assumption of debt/liabilities, exchange of assets (real property, personal property, IP, etc), or a combination of the foregoing), as well as the time and place of the transaction closing. In this respect, it should also be specified if the execution of the SPA and closing will be simultaneous or if there will be a gap between execution and closing (a deferred closing). Deferred closings are common and may be necessary for various reasons, including because the parties will need to obtain various regulatory approvals and third-party consents and in certain instances the purchaser may need time to arrange third party financing (as may be the case in a private equity scenario). In some cases, regardless of whether simultaneous or deferred, the full purchase price is not paid at closing, with a certain portion of it payable upon the occurrence of certain future events.

In most M&A transactions, the purchase price is typically determined in relation to a target’s most recent financial statements. 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. In this respect, the purchaser and seller must agree on a valuation method and have adopted accounting policies that are similar or that can be reconciled.

Earn-outs typically consist of contingent, additional payment(s) that can be made after closing upon the satisfaction of certain milestones related to future performance, and expire at a specified date. Earn-outs mitigate acquisition risk for a purchaser and offer the seller a better price if it achieves the earn-out objectives. Earn-outs can be financial (e.g. hitting future sales targets) or non-financial (e.g. key customers of the target are maintained after the transaction) and can help manage disagreements about the value of the target if, among others: uncertainty exists about its future prospects, it is a start-up with limited financial results but has growth potential, or where the seller will continue to manage the company and the purchaser wants to motivate the seller’s future performance. There are risks related to the misrepresentation of achievements or simply unaligned accounting policies; therefore, earn-out provisions must be carefully drafted and should include very specific milestones, a clear earn-out period, a clear formula or method for determining the earn-out, a method of securing the earn-out payment (such as escrow or a guarantee) and earn-out-specific post-closing covenants. Thus, an earn-out can be viewed as an additional payment for achieving agreed post-closing goals.

A holdback is a tool used by purchasers to withhold payment of a portion of the purchase price until some post-closing condition has been satisfied. A holdback is a covenant by the purchaser to pay the withheld amount(s) (usually held in escrow) upon satisfaction of the conditions and provides certainty about uncertain matters at closing. Holdbacks can relate to achieving a specific working capital threshold or if litigation is outstanding at closing. If, for example, the target has a large number of accounts receivable, that amount could be held back from the purchase price. The holdback (or a portion of it) would be paid by a specified future date depending on the amount of receivables actually collected after closing. Thus, a holdback can be viewed as a reduction in the purchase price if certain post-closing conditions are not achieved.

Holdbacks can be very useful to bridge the gap between divergent valuations of the target and allow such valuations to prove themselves for a specified period of time after closing (the holdback period) and even protect a purchaser’s access to indemnification payments for post-closing risks so they are secured (usually by escrow) and do not depend on later recovery from the seller. However, it should be noted that where indemnification is the exclusive remedy, this method could operate as an indemnification cap by limiting the purchaser’s recovery options to what is available in that pool of secured funds.

An escrow is an arrangement where a third party (such as a law firm or bank) temporarily holds, and is responsible for, the assets related to a transaction until it closes to provide security for the parties. In the case of M&A, all or a portion of the purchase price may be placed in escrow to secure the interests of the parties. Escrow is particularly useful in the case of holdbacks, earn-outs and purchase price adjustments as well as a repository for indemnification funds (if necessary). Escrow is the subject of a separate agreement and specifies the terms and conditions by which the escrowee may distribute the escrowed funds or property it holds on behalf of the parties. An escrow agreement must be drafted carefully, and with specificity, to capture the key elements that determine whether funds are to be paid or withheld in relation to its subject matter.

Material adverse effect (“MAE”) is used to determine a threshold to measure the negative effect of an event on the target business. A buyer will desire protection from acquiring a business that has materially changed since it executed the SPA (typically where there is a deferred closing). MAEs are typically used to qualify representations, warranties and covenants. Consequently, an SPA can contain a condition precedent that permits a party to refuse to close a deal if the counterparty has suffered any MAE between the time the SPA was executed and the closing (a bring-down). A bring-down provision causes the representations and warranties made at the time the SPA was executed to be restated at the closing. MAE is negotiated by the parties and should be clearly articulated in the definitions of the SPA. The breadth of the definition of MAE depends on the type of transaction, industry and negotiating power of the parties.

Materiality and MAE qualifications are generally used to determine:

• Whether the conditions precedent have been satisfied;
• The scope of the seller’s disclosures;
• If a misrepresentation or breach of warranty has occurred; and
• The losses resulting from such a misrepresentation or breach.

Conditions precedent, or closing conditions, are stipulations agreed by the parties that must be satisfied, or waived, before the acquisition may close. Conditions precedent are typically attributed to a specific party but some can be mutually applicable. Failure to satisfy a closing condition typically gives the counterparty the right to abandon the transaction without liability. This protects the parties from not receiving that for which they have bargained. In the case of a deferred closing, events may transpire after the SPA is executed requiring a party to terminate the SPA prior to closing (by mutual agreement or due to the occurrence  -or lack of occurrence - of specified events).

Conditions precedent must be drafted with care. They are typically specific to a transaction and the needs and circumstances of the parties.  Conditions precedent typically found in SPAs, among others, are:

• Bring-downs of representations and warranties - in the case of a deferred closing, the representations and warranties made when the SPA was executed shall remain true at the time of closing - the parties typically must each deliver closing certificates to verify the accuracy and satisfaction of each party’s representations and warranties (and compliance with pre-closing covenants) on the closing date, certified by an officer of each party as well as certification by the company secretary of each party that its resolutions authorising the consummation of the transaction are correct and properly resolved;
• Approvals - both parties shall have received all relevant regulatory and other governmental approvals in relation to the transaction from any place with jurisdiction over the subject matter of the SPA;
• No legal impediments - no government or authority with any jurisdiction over the subject matter of the SPA shall have enacted any law or rule that would make consummation of the transaction illegal or act to restrain or prohibit closing or deprive the purchaser of that for which it has bargained;
• Delivery of documents - each party shall have delivered executed copies of all ancillary documents;
• Payment - the purchaser shall have delivered the purchase price to the seller (or escrowee);
• Disencumbrance - the seller shall have proven the release of any security interests or liens on the assets of the target (unless the purchaser has agreed to accept and assume the encumbrances);
• Consents - the seller shall have obtained and provided all third-party consents (usually required by contracts to which the seller is a party, such as customer contracts, supply contracts, and/or leases) agreed by the parties (note that because sellers tend to desire certainty that a deal will close, some may be disinclined to agree to conditions outside their control, whereas buyers want protection from acquiring a business the operations of which are impaired or impracticable after closing due to a failure to obtain third-party consents);
• Compliance - the parties shall have complied with all pre-closing covenants (parties to an SPA typically negotiate whether these conditions are qualified by materiality or an MAE);
• MAE - no MAE shall have occurred since the execution of the SPA;
• Litigation - each party certifies no litigation shall have been commenced, or is expected, that would impede its participation in the transaction; and
• Legal opinions - all necessary legal opinions in connection with the transaction shall have been delivered.

In the case of share acquisitions, binding legal opinions are often provided by the seller’s lawyers and their delivery to the purchaser is a common condition precedent to closing. Such legal opinions are meant to be relied upon by a purchaser and provide security. If inaccurate or incorrect, the purchaser can seek recourse against the law firm, as well as the seller as they relate to any breaches of the SPA or ancillary documents. In such legal opinions, the seller’s counsel will typically opine on matters such as, among other things:

• Good standing and valid existence of the target;
• Correct authorisation, execution, and delivery of transaction documents;
• Absence of conflict between the transaction documents and the target’s charter document and other contracts (including shareholders’ agreements) or applicable laws;
• Absence of governmental filings, consents or constraints as to the target entering into and performing the SPA (and other documents) and consummating the transaction;
• Absence of litigation against the target;
• Authorised and outstanding shares; and
• Effect of the transfer of shares and a statement of the rights or status obtained by the purchaser as to the shares under applicable law.

A purchaser may inadvisably choose to forego such a legal opinion and rely solely upon the representations and warranties of the seller, but this choice depends on the risk tolerance of the purchaser.

In M&A transactions, representations and warranties are given by both parties to disclose material information to each other. While a seller’s representations and warranties tend to be more extensive because they include information about the target company, its business, assets and liabilities, they can be in favour of the seller depending on the respective negotiating power of the parties, the nature of the transaction and the industry. Representations and warranties allocate risk between the parties and form the basis for a legal claim in case of a misrepresentation or breach. They can be as complex or rudimentary as the parties negotiate but are integral to an M&A transaction.

Representations are assertions of fact (past or existing) on the date made and given to persuade another party to enter into a contract or take (or forbear from) some other action. A representation precedes and induces agreement and is typically information used by a party to decide whether to enter into a contract. A warranty is a guarantee, given to assure something is as promised, will remain so and is typically accompanied by a promise of indemnification if the assertion proves to be false.

Traditionally, remedies for representations and warranties are different. Generally, if representations are untrue or inaccurate (i.e. misrepresentations) a contract may be able to be rescinded. However, in the case of breach of a warranty, a cause of action for breach of contract would typically arise with a claim for damages to cover the losses of the aggrieved party.

In the context of an SPA, a seller’s representations and warranties generally cover, among others, that the:

• Target legally exists, has the power to carry on its business and is legally authorised to do business in any jurisdiction where it does business (organisation, power and standing);
• Target’s records are complete and accurate (charter documents and any amendments);
• Target has no undisclosed liabilities; 
• Confirmation of target’s capital structure (number of authorised shares, par value (if any) and if unencumbered);
• Seller has authority to enter into the SPA and its execution does not contravene any limitations attached to the shares being purchased (board minutes and resolutions should be provided);
• Target is legally compliant and possesses all government approvals to conduct its business, and there are no violations or claimed violations of any such approvals or any applicable laws or regulations;
• No conflict will be caused by the execution of the SPA with the target’s charter documents or any law or regulation;
• Target is not involved in any litigation (as a defendant or plaintiff);
• Target’s liabilities (usually financial and capped as at the closing date);
• Target’s accounting records are true and accurate and comply with accepted accounting guidelines;
• Target has properly filed tax returns, all taxes due on, or prior to, closing will be paid, there are no ongoing or pending tax audits and tax authorities will have no grounds for reassessment for additional taxes up to the closing date;
• Target has disclosed all bank and financial accounts together with names of signatories and signature or company chop/stamp specimens for withdrawals;
• From the execution of the SPA to closing, the target will conduct itself in the ordinary course of business and there will be no material changes to the business;
• Target has adequate insurance (legally required and as otherwise needed);
• Target’s real property is intact (assurances of ownership, encumbrance, leases properly entered and maintained and all fees and taxes paid);
• Target has unencumbered title to assets;
• Condition of target’s assets (including inventory);
• Target’s IP (ownership, knowledge of infringement and steps to protect trade secrets);
• Target’s material contracts (validity and enforceability and none with improper affiliates);
• Target’s labour status (full legal compliance, no labour claims or disputes);
• Target’s environmental compliance;
• Target’s anti-corruption compliance;
• Full disclosure (seller has made full, complete and accurate disclosures); and
• Reliance (seller understands purchaser is relying upon seller’s representations and warranties in entering the SPA).

Purchasers typically desire broad, absolute and unqualified representations and warranties from sellers to provide stronger grounds for termination and indemnification. Sellers can mitigate the risk of representations and warranties by confining them only to ‘material’ matters and use ‘knowledge’ standards to limit statements of fact to those things about which the seller has, or should have, actual knowledge. Qualifying representations and warranties can reduce the potential for future claims of misrepresentation and breach of warranty based on non-disclosure of material information. Sellers can also reduce risk by confining representations and warranties to specific time periods.

Purchasers also make representations and warranties in an SPA. Typically, a seller wants to ensure the purchaser can legally acquire the target, can close and has the funds to pay the purchase price. Typical purchaser representations and warranties address, among other things:

• Organisation, power and standing of the purchaser;
• Authorisation to enter into the SPA with provision of appropriate board resolutions to that effect;
• Power and authority of the purchaser to make the representations and warranties and any other covenants in the SPA and to execute and perform the SPA;
• Purchaser’s compliance with any applicable laws for the lawful conduct of its business and that it is in good standing in this respect;
• The execution of the SPA will not conflict with its charter documents or contravene any law;
• Solvency of the purchaser as of the closing date;
• Legality of funds – consideration used by the purchaser to pay for the shares of the target are from legal sources; and
• No litigation is ongoing or expected that would impede the purchaser’s obligations under the SPA.

A subject of heavy negotiation and nuance, an SPA will typically contain an indemnification clause that addresses liability for losses incurred due to misrepresentations and breach of warranties, covenants and other agreements. The indemnification clause can be drafted as an exclusive remedy or a non-exclusive remedy to assert such claims. As an exclusive remedy, the indemnification provisions should specify when and how claims must be made, processed and paid, as well as any limitations or qualifications with respect to payment and liability. Agreement to an exclusive remedy would normally constitute a waiver by the parties of any remedies that would otherwise be available under applicable law(s). However, there are exceptions to this exclusivity in the case of fraud, intentional breaches, wilful misconduct and equitable remedies.

In some cases, a purchaser may desire the flexibility of indemnification as a non-exclusive remedy, allowing it to pursue other causes of action or remedies to ensure it can be made whole. This is desirable where there is a risk the indemnification provisions may not adequately protect the purchaser in the event of unforeseeable damage and would allow it to benefit from all protections and remedies provided by applicable laws without being confined to just those remedies provided in the SPA. Sellers may prefer exclusive remedy provisions because of the perception that without them a purchaser might circumvent the negotiated terms and impair the core purpose of the indemnification provisions. Exclusive remedies can also act as a cap on indemnification liability.

Typical indemnification obligations of a seller are, among others, to indemnify the purchaser from:

• Breaches of representations and warranties made by the seller;
• Breaches of covenants or other obligations of the seller;
• Any liabilities stemming from seller’s ownership or operation of the target before closing;
• Any product manufactured or shipped, or any services provided, by the seller before closing;
• Those specific matters disclosed in the disclosure schedules; and
• Any liabilities specifically retained by the seller.

Typical methods of mitigating a seller’s indemnification risk are, among others:

• Materiality and knowledge qualifiers that constrain the breadth and scope of representations, warranties and covenants;
• Imposing time limits on when and for how long a purchaser can make a claim;
• Caps on the seller’s liability;
• An indemnity basket (or deductible) requiring a purchaser’s damages to exceed a threshold amount before triggering indemnification liability (to avoid petty claims);
• Requiring any insurable loss to be insured and the purchaser to first claim from insurance before seeking indemnification from the seller; and
• Prohibiting the purchaser from making a claim for indemnification in relation to anything disclosed in the DD investigation or about which it had knowledge.

A ‘materiality scrape’ is a provision commonly included in an SPA indemnification clause to favour a purchaser. It typically provides that when determining if a representation is inaccurate or a warranty breached or when calculating the quantum of damages or loss due to an inaccuracy or breach (or both), any materiality or knowledge qualifiers in the seller’s representations and warranties will be disregarded (scraped) for indemnification purposes.

A ‘single materiality scrape’ retains materiality and knowledge qualifiers when determining if a seller has made a misrepresentation or breached a warranty but, where a misrepresentation or breach has been found to occur, the materiality qualifier will be disregarded in determining damages. Thus, subject to any deductible and other indemnity limitations in the SPA, the purchaser can recover the full amount of its damages due to the breach. A ‘double materiality scrape’ negates materiality and knowledge qualifiers from both determining whether a misrepresentation has been made and a warranty breached, as well as in the calculation of damages due to such a breach.

The materiality and MAE qualifiers most commonly covered by a materiality scrape relate to the determination of:

• Whether there has been a misrepresentation or breach of a warranty;
• The quantum of damages or losses suffered by the purchaser due to the misrepresentation or breach;
• The scope of disclosure required in the seller’s SPA disclosure schedules; and
• Whether the closing conditions have been fulfilled.

Pre-closing covenants generally limit what a seller can do before the closing. Typically, covenants given by the seller are heavier than those given by the purchaser because the seller typically retains control of the target until the transaction closes. As promises to do or not do certain things, pre-closing covenants are common in transactions with deferred closings to protect and preserve the value of the business being acquired between the execution of the SPA and the closing of the acquisition.

Pre-closing covenants ensure the parties to the SPA make efforts (the parties must negotiate to determine the legal standard of effort – ‘best efforts’ (the highest standard of obligation) vs ‘commercially reasonable efforts’ (a lower standard of obligation)) to close the transaction and commonly include, among others:

• The purchaser’s right to access the target’s premises, books and records (including its designees such as lawyers, accountants and business advisors);
• Requirements that the seller conducts business as usual and does not enter into any extraordinary transactions;
• Requirements the seller makes necessary regulatory filings and gets any required approvals;
• Requirements to use [best or commercially reasonable] efforts to close the transaction;
• No-shop provisions preventing the seller from using the signed SPA to seek better offers;
• Requirements for the seller to restructure the target company to effect the transaction; and
• Requirements for the target company to terminate related-party transactions or transactions with entities owned or controlled by the target company’s management, founders or affiliates.

In order to prevent the seller and target company management from impairing the company, a purchaser will typically use pre-closing covenants to prohibit the target company, its shareholders, directors and management from:

• Issuing new shares (or repurchasing any equity in the target company or its subsidiaries);
• Transferring any shares in the target company to any person other than the purchaser or its designee;
• Paying any dividends or repaying any shareholder loans;
• Incurring any new debts;
• Granting any security interest on any assets of the target company;
• Entering into any merger, acquisition or consolidation with any entity other than a restructuring agreed by the parties to the SPA;
• Entering into any joint venture, strategic partnership or other relationship with a third party other than as specifically agreed by the purchaser and seller;
• Acquiring or disposing of any target company assets other than in the ordinary course of business;
• Amending any target company constitutional documents other than as needed to fulfil the obligations of the SPA;
• Increasing the compensation of any current or former director, officer, employee or consultant or pay any bonuses to any of those individuals;
• Making any material changes to the target’s business;
• Incurring capital expenditures above a specified threshold and that would not be in the ordinary course of business; and
• Entering into, amending or terminating any material contract.

Connected with closing conditions are termination rights, which would permit a party to terminate the SPA prior to closing. Typically negotiated termination rights found in an SPA, among others, are termination:

• By mutual written consent of the parties;
• Due to a party’s breach of a warranty, material misrepresentation or failure to perform a covenant;
• If a party has failed to satisfy its closing conditions by the agreed date (a drop dead date); and
• By either party if any government or authority with jurisdiction over the subject matter of the SPA has enacted any law or rule that would make consummation of the transaction(s) illegal or in some way act to restrain or frustrate consummation of the transaction (legal impediment).

Ancillary documents and agreements typically consist of a number of documents enumerated in a schedule appended to an SPA that the parties must deliver to each other at or prior to closing in order for an M&A transaction to close and include, among others:

• Non-disclosure, non-compete, and non-solicitation agreements with the selling shareholders;
• Board minutes and resolutions from both parties to approve the terms of the transaction and the transaction documents as well as authorise them to be executed and to approve matters that must be handled at the close, following satisfaction of the conditions;
• A guarantee, in the event the purchaser requires a guarantor for any of the seller’s obligations under the SPA, (which can be added to the terms of the SPA rather than a separate document in which case the guarantor would also be a party to the SPA (the guarantor is often be the seller’s parent company));
• Loan notes, if the consideration includes the issue of loan notes by the purchaser to the seller (an instrument must be negotiated and drafted that articulates the terms and conditions of the issue of loan notes);
• An escrow deed, when it is agreed escrow will be used to facilitate transaction-related payments such as earn-outs or indemnification claims, in which case an escrow account must be established and an escrow deed negotiated, drafted and executed appointing an escrowee to administer the escrow account;
• A deed of contribution, where the target company has multiple individual shareholders as the sellers in order to apportion liabilities among them in the event of warranty claims and other potential actions against the sellers by the purchaser; 
• A shareholder’s agreement (typically prepared by the purchaser) signed and executed by the selling shareholders where the acquisition is not for 100% of the shares of the target or where any of the target’s shareholders will remain as shareholders in the acquired target; and
• Employment or consulting agreements signed by the selling shareholders (if individuals) where it is desirable to retain them or lock them in as employees or consultants at the new newly acquired company.

SPAs may also include post-closing covenants that apply after a transaction closes. Post-closing covenants are tailored to the needs of the parties and are contextual. They may, among other things:

• Ensure the purchaser co-operates with the seller to maintain certain tax and business records (in case of tax or other regulatory audits);
• Ensure the purchaser maintains directors’ and  officers’ insurance for outgoing directors and officers of the target company;
• Prevent the seller from competing with the target company;
• Prevent the seller from soliciting employees of the target company; and
• Ensure IP transferred to the purchaser or retained by the seller in relation to the transaction is not used by the counterparty.

An SPA typically contains language specifying that the terms of the SPA itself, including its existence, are deemed confidential information and not to be disclosed to any third party. However, this language should incorporate and specifically reference any prior non-disclosure agreement (“NDA”) that was (and should have been) entered into between the purchaser and seller during a prior phase of the transaction, such as the term sheet or DD phase and emphasise that any such agreement remains in full force and effect until that agreement terminates or is superseded. Any NDA language in the SPA can reflect additions to prior NDAs and incorporate the language of the prior NDA by reference into the SPA, supersede such prior NDAs in their entirety or maintain that only that language in the prior NDA that is inconsistent with the SPA is superseded.

Additionally, this clause of the SPA should contain restrictive language with respect to press communications. Any press releases, public announcements, conferences or advertisements relating to the transaction, the SPA and its existence should be prohibited unless the consent of the parties to the SPA is obtained.

An NDA establishes the parameters of the disclosures of sensitive, proprietary and confidential information by the parties. An NDA should contain, at a minimum, among others:

• A definition of what constitutes confidential information;
• Exceptions to confidential information;
• Covenants to maintain confidentiality;
• Non-compete and non-solicitation provisions; and
• Well considered miscellaneous provisions (see below).

Typically, sellers want definitions of confidential information to be drafted as broadly as possible to protect proprietary information. Conversely, purchasers tend to prefer less inclusive definitions to mitigate potential liability.

Non-compete and non-solicitation provisions are often included as a component of an NDA. They are covenants that restrict a seller from competing with the target company and from soliciting employees and customers of the target company or the buyer for a specified period of time after the closing.

Miscellaneous provisions are an essential component of any well-drafted agreement. Many gloss over these terms and consider them standard boilerplate when in fact they are important. It is a place where lawyers may cache terms that could be overlooked.

Miscellaneous provisions are common to most contracts, including SPAs.  They typically consist of provisions on, among others: 

• Notices to the parties and how they are to be sent;
• Severability as to illegal or unenforceable terms and rectification;
• Survival of certain provisions beyond the expiration or termination of the SPA;
• Merger and integration that makes the SPA the final written manifestation of the parties’ intentions and agreements and disregards or supersedes any prior agreements or understandings unless specifically included or referenced in the SPA;
• If and how the SPA may be amended;
• Governing law and jurisdiction;
• Dispute resolution method;
• Further assurances to do anything necessary to carry out the provisions of the SPA or ancillary agreements;
• Allocation of costs in case of disputes; and
• Prevailing language of the SPA if it is bi- or multi-lingual (necessary in a cross-border context, where the parties do not all natively use the same language). 

This article will not deviate from its core subject matter and explore in any detail the panoply of important miscellaneous provisions. However, survival clauses deserve special attention in this context. Parties often include a survival clause to limit or extend the effectiveness of certain provisions beyond a contract’s term.

The representations, warranties and covenants made in an SPA should survive the execution and delivery of the SPA and closing of the transaction, thus extending them beyond the closing of the transaction. It is possible that some misrepresentations and breaches of warranty will only be discoverable after the closing. The survival of the representations, warranties and covenants (as well as indemnification terms) beyond the closing of the transaction protects the purchaser if it receives less than that for which it bargained. However, the parties should carefully consider the governing law of the SPA to determine how that jurisdiction interprets and enforces statutes of limitations. Some jurisdictions prohibit breach of contract claims to extend beyond the jurisdiction’s statute of limitations even where the parties to an SPA specifically agree on survival language that allows a claim for a breach to extend beyond the jurisdiction’s statute of limitations.

An SPA specifies the contractual terms that will regulate the transaction. However, the interpretation and effect of those terms will vary depending upon which country’s laws are applicable. A choice-of-law clause is a selection by the parties to use the law of a specific jurisdiction to govern the SPA and determine issues regarding the parties’ rights and obligations.

It would be rare for a choice-of-law provision to be excluded from an SPA (or any other cross-border agreement). The lack of a choice-of-law clause in an SPA would subject the parties to unnecessary expense and complex rules to determine which law to apply by considering where the parties are located and where their obligations are to be performed, among other things. In the context of international M&A, failure to specify what law governs the SPA could be a disaster in relation to any dispute, particularly where the buyer is based in one jurisdiction and the seller in another, with subsidiaries and assets in multiple other jurisdictions.

Additionally, the parties must consider how and where adjudication of disputes occurs. Parties are generally free to choose the governing law and it need not have a connection with the location of the parties or the subject matter of the contract. Therefore, the parties to an SPA should also specify in what country a dispute must be adjudicated and whether such adjudication will occur in the courts or via arbitration. Some courts are willing to apply the laws of another jurisdiction. Some courts will require one of the parties or the transaction to have some connection with the jurisdiction where adjudication is to occur and apply a test to determine a connection with the jurisdiction or apply a monetary value threshold that a dispute must exceed in order for the courts of that jurisdiction to have standing to hear the case. Arbitration, which is private adjudication, can occur virtually anywhere, notwithstanding the location of the parties or the transaction. A well-crafted dispute resolution clause is very important and should specify the governing law, the seat of adjudication and select a forum (arbitration or the courts).

Arbitration offers certain advantages over courts because it gives complete flexibility to the parties. Arbitration allows the parties to select virtually any governing law, determine which arbitration body will adjudicate a dispute, choose the jurisdiction where the arbitration will occur and the arbitration rules that will govern the adjudication of the dispute. This allows the party to indirectly determine procedure, evidentiary burdens and processes and directly control the language in which the arbitration is conducted and the selection of the number of adjudicators. There are numerous arbitration organisations around the world that can draw from a diverse pool of adjudicators that will have extensive professional experience both with M&A, and specific industries, that will facilitate the adjudication of a dispute that may involve complex circumstances that court judges may not understand. Additionally, arbitration may be safer in jurisdictions where the courts are known to have corruption issues. Moreover, because of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which currently has 161 signatories, arbitration awards can be enforced in any signatory jurisdiction. Conversely, foreign court judgments are less easily enforced in other jurisdictions and sometimes unenforceable. Arbitration can be more expensive than traditional court litigation, depending on the jurisdiction, but it is generally faster and less complicated.

A quality SPA cannot make a bad business acquisition good. However, backed by a well-negotiated term sheet and effective DD, an SPA is an essential tool to mitigate risk in M&A. Experienced, competent lawyers are indispensable not only to craft a term sheet and draft an SPA (and ancillary documents) that sufficiently meet the needs and objectives of the parties to an M&A transaction but also to manage and coordinate all the moving parts of the deal. This article is meant to provide general guidance to laypeople and non-corporate lawyers to better understand the complications that can arise in M&A.

Hill Dickinson, founded in 1810, has lawyers with decades of experience in dealing with a full range of corporate matters involving M&A and due diligence, conventional and complex investments and structures, venture capital, private equity, joint ventures, business sales, corporate reorganisations and capital markets offerings.  Our combination of technical expertise, commercial acumen and excellent service, together with the quality of our team, market knowledge and commitment to achieving client success, makes us Hill Dickinson.