Sales and Purchase Agreement (SPA)

What is sales and purchase agreement (SPA)?

A sales and purchase agreement (SPA) is a legally enforceable contract between two parties that binds a seller and a buyer to a transaction. The agreement is the result of negotiations between the seller and the buyer, and it sets the terms and conditions of the sale. SPAs are commonly utilised in real estate deals, though they can be used in any sector.

Highlights

• A sales and purchase agreement (SPA) is a legally binding contract that a buyer is obligated to buy, and a seller is obligated to sell a good or service.
• SPAs are frequently utilised in real estate transactions or when two parties deal with a significant number of assets.
• Negotiations between the seller and the buyer are based on the necessity for a SPA.

Frequently Asked Questions (FAQs)       

What are the components and provisions of SPA in a business?

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Parties to the accord

In the simplest version of a sale, where the firm being sold is completely owned by a parent company or single person and is being bought by a single buyer, there are only two parties to the transaction. Besides, there may be more parties engaged in this procedure. For example, multiple shareholders may need to enter into a sale and purchase agreement to sell their shares.

Restrictive covenants

Under the contract, the buyer has the power to prohibit the seller from starting a new competitive business that would depreciate the value of the firm being sold. As a result, the sale and purchase agreement will include restrictive covenants prohibiting the seller from courting existing customers, employees, or suppliers and competing with the company being sold in general, for a given period and within specific geographic locations.

Legal ownership of the shares

The contract guarantees that the entire legitimate ownership of the shares, also known as title, is transferred correctly, along with any fundamental rights attached to the shares, such as dividend rights. This clause usually includes specifies that the shares are free of hindrances, assuring the buyer that the seller has not committed any of the shares to a lender or bank.

Warranties and compensation

Warranties are assertions of truth made by a seller in the SPA about the state of the organisation being sold. Material contracts, property, assets, intellectual property, workers, accounts, insolvency, litigation, and debt are all covered by warranties. If a warranty turns out to be false and the company's value plummets, the buyer may be able to sue for breach of warranty.

Suppose more specific risks are uncovered during due diligence. In that case, they are likely to be covered by an adequate indemnity in the SPA, under which the seller undertakes to compensate the buyer for the indemnified responsibility on a pound-for-pound basis.

Consideration

Buyers pay a seller consideration in debt, cash, shares in the buyer, or a mix of these things for an acquiring firm.

Conditions precedent

The best and easiest way of closing a contract is simultaneous signing and completion, which means both parties sign the SPA and make the sale on the same day.

To fulfil some remaining outstanding requirements, a time gap between signing and completion is often necessary. These are called "conditions precedent," and they typically involve third-party consent, merger approval from authorities, and tax authority clearances.

In addition, the sale and purchase agreement will be terminated if all the specified requirements are not met by a stated deadline. As a result, the SPA must spell out how to assess whether the prior requirements have been met and when they can no longer be met. It should also state which party is responsible for ensuring that each condition precedent is met. The relevant party must undertake reasonable efforts to fulfil the relevant conditions precedent within the deadline.

Completion

Once legal ownership of the share transfers to the buyer, the purchaser becomes the owner of the target firm. A completion timeline in the SPA will typically detail all the documents that must be signed and any steps that must be taken for the deal to be completed.

Post completion of the deal

Post completion, the SPA remains an important reference document since it explains how any earn-out will function and contains restrictive covenants, guarantees, indemnities, and confidentiality obligations, all of which may be extremely important in the future.

How does SPA work when buying a property?

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A SPA is a legal contract that ties the two parties under legal parameters set forth by the country's property laws, and it must be signed in the presence of a lawyer. The purpose of signing the legal document is to guarantee that both the buyer and the seller thoroughly comprehend the contract's key clauses.

Furthermore, this contract frequently serves as the foundational legal framework that educates the parties involved on their legal responsibilities and rights. The contract allows buyers to obtain precise information about their purchasing property, such as the purchase price or the needed deposit. On the other hand, the seller will be notified about various essential things through the contract, including the potential penalties of a breach of contract.

In all the paperwork required to buy a property, the SPA needs the most care, particularly from the buyer. It is recommended that the buyers retain the services of a legal adviser when processing this contract. Any miscommunication or error will determine whether the agreement between the buyer and the seller succeeds or fails.

The agreement protects both the buyer and the seller, but the buyer is covered by most of the protection privileges in most circumstances. The purpose of this is to avoid situations where the seller alters the stipulated terms and conditions to take advantage of the buyer during a property acquisition. If there is a misunderstanding after a contract is made, it can always be used as proof by both the buyer and the seller.