Share Purchase Agreement in IT venture deals: key terms and conditions

25.06.2024

• Concept of share purchase agreement
• Key terms of a share purchase agreement in venture capital transactions 
• Contact our legal team to learn more

In case a startup is going to attract venture capital investments into its business or sell the whole business at a later stage, founders will definitely come across such a document as a share purchase agreement.         

In this post, we would like to tell you about the key terms of this document, which you should pay attention to when analyzing the agreement and negotiating.

Concept of share purchase agreement

Share purchase agreement (SPA) is a contract for the purchase and sale of shares, in which both legal and commercial terms of the transaction (transfer of rights to shares from the seller to the purchaser) are fixed. SPA is concluded in case of cash-out financing - when shares are sold by the founder and the money goes directly to them.

In venture capital transactions the startup itself may also be the seller. In a situation where shares are sold by the startup (cash-in) and the money is used for business development, the parties enter into a share subscription agreement (SSA).

Key terms of a share purchase agreement in venture capital transactions 

The specific terms of a share purchase agreement vary from deal to deal. Below we review the basic structure and terms found in most of share purchase agreements.

(i) Definitions

A section listing terms that appear in the agreement, some of which may significantly affect the rights and obligations of the parties and the business terms of the transaction. By reading the main body of the agreement without looking at the definitions section, you may get the impression that the term is in your best interest. However, the definition of a term, which is located in the definitions section, may be not.

For example, sometimes SPA contain provisions prohibiting founders from engaging in competing activities (the non-compete section, which we recently discussed in detail in this post). So, having analyzed the main non-compete section, it is necessary to pay attention to the definitions: the definitions of startup business and competing activities should be formulated as clearly as possible. By making sure that all the wording is correct, you will not face excessive restrictions and the risk of being held liable in the future.

(ii) Share transfer and price

One of the key sections is the share purchase agreement section, which sets out the following provisions

• information on shares: number of shares to be sold, their class (ordinary, preferred), scope of rights to be transferred (as a rule, shares are sold with all rights free from third party claims), 
• procedure for transfer of rights to the shares: for example, at the moment of conclusion of the SPA or at the moment of receipt of payment for the shares by the purchaser,
• price: value of transferred shares, currency of payment,
• payment procedure: cashless/cash payment/other method, possibility of third party payment, as well as the moment of fulfillment of payment obligations (e.g. the moment when the money was sent by the purchaser or when it reached the seller's account).

(iii) Conditions precedent (closing conditions)

This section contains a list of actions to be taken by the parties prior to the closing of the transaction. Accordingly, until they are performed, the transaction will not be closed.

Before closing the deal, the parties must provide each other with a package of documents confirming the possibility of the transaction. Their volume depends on the specific transaction and its parties. Here are some common examples:

A purchaser will definitely ask the seller for:

• confirmation of rights to the shares
• a resolution of the general meeting or board of directors' meeting approving the transaction (if the seller is the company itself)
• necessary consents and waivers of pre-emptive rights of the other shareholders (right of first refusal)
• drafts of amendments to the startup's corporate documents;

Proof of legal capacity is also required from the purchaser. Basically: passport, power of attorney, board/board resolutions, articles of association;

In deals with IT startups, investors see the greatest value in the IP of the company, so another condition precedent is often the obligation to properly formalize all rights to the startup's IP.

(iv) Closing (closing of the transaction)

Closing is the moment when the parties fulfill all key obligations under the transaction, including conditions precedent, transfer of shares and payment for them, and the transaction is considered closed.

It is also common to see in SPAs such condition as a long-stop date - a deadline date by which the conditions precedent must be fulfilled in order to close the deal. The condition is usually added to the contract to avoid disruption of the deal through no fault of the parties (for example, if it is assumed that there may be delays because of banks). However, if obligations are not fulfilled by the end of the long-stop date, the transaction may not be closed.

(v) Post-closing covenants

A section that contains a list of post-closing covenants that the parties must perform within a certain time after closing (usually within a month). As a rule, these are some additional and less important (in comparison to closing conditions) obligations of the parties (registration of amendments to corporate documents, issuance of share certificates to the investor), which may not become an obstacle for closing the transaction, but which still need to be fulfilled.

Post-closing can also include more serious obligations, such as non-compete. This means that the parties (or one of the parties) will have to refrain from engaging in activities competing with the startup for a certain period after the deal is closed.

(vi) Governing law and jurisdiction (applicable law and court)

The section that governs the applicable law and the procedure for resolving any potential disputes.

The content of the section depends largely on the jurisdiction in which the transaction is structured. If we are talking about Cyprus, the applicable law of the parties is most often English law, and in the USA - the law of the state where the transaction is structured (e.g. Delaware).

As to the choice of the competent court, there are many factors to consider. The key thing that the parties will have to agree on is a state court or arbitration. We have talked in detail about how to choose the court in transactions in this post. We also recommend providing for a mandatory pre-trial (claim) dispute resolution procedure in order to be motivated to resolve disputes through negotiations, because court is always long and costly (both financially and morally).

(vii) Representations and warranties

Representations and warranties (R&W) are a list of the seller's representations about the most material circumstances relating to the startup, the transaction and the IP. The willingness to sign up to representations and warranties affects the ability to close the transaction because it demonstrates to the purchaser that the seller is willing to be held accountable for its actions.

To avoid adverse consequences, founders should review the list of R&W provided in detail, propose adjustments to it, or prepare a disclosure letter. We recently wrote more about representations and warranties here.

(viii) Liability

The SPA is a binding transaction document, i.e. all the terms and conditions set out therein are binding. 

The parties are often held jointly and severally liable for breach of the terms of a SPA in the form of damages. It is also common to find indemnity clause as the seller's liability - an obligation to indemnify the purchaser/startup for the property losses incurred by the purchaser/startup in connection with claims made against it by third parties.

Quite serious liability is provided for breach of representations and warranties: from indemnity to termination of the transaction. 

We will tell you more about how to limit liability under the SPA in detail in a new article soon.
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Share purchase agreement is a key document in the sale of shares in a startup. It records information directly about the shares to be transferred and the scope of rights to them, the price per share (amount of investment), as well as a list of representations and warranties of the founders. When analyzing the SPA, remember that there are no unimportant sections in it. Every term, from definitions to liability, should be clear to you. 

We hope our post was helpful! Stay in touch!

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