What is Shares Purchase Agreement?
Shares purchase agreement means the legal agreement/contract between the shareholders and the company at the time of purchasing the shares of the company and consists of details like an investment, allotment, lock-in period, terms of investment, etc.
How Does it Work?
- In this agreement in which all the relevant details regarding the purchase of shares are mentioned, such as a number of shares, the amount agreed per share, the total amount of consideration, etc.;
- Then the indemnification is filed by both buyer and seller of the shares.
- Then the executed purchase transaction will be submitted to the company for the transfer of the name of the shareholder in the books of the company.
Why do we need a Shares Purchase Agreement?
As the purchaser has invested their hard-earned money in the shares of the entity they must need to secure themselves from any sort of fraud or misconduct against them so to give a legalized effect to the same the share purchaser and the share allottee or seller must enter into a shares purchase agreement to avoid any disputable situation in future.
- Decide the company of which the shares we want to purchase.
- Search for the prospective shareholder who wants to sell the same.
- General details of the company and of the purchaser and seller such as name, address, date of the agreement, number of stocks to be purchased, rate of purchase, etc.;
- Defining the terms mentioned in the shares purchase agreement, such as the reference to the company, will be named as a company; the purchaser will be the share purchaser who had agreed to purchase the shares of the company.
- About the conditions pre and post-execution of the transaction of purchase such as undertaking, seller warranties, purchaser warranties, etc.
- The indemnification by both the parties about the trueness of the facts;
- After some other due formalities at the end of a company, the purchased shares got transferred in the name of the purchaser.
Shares Purchase vs. Shares Transfer Agreement
- The term shareholder agreementShareholder AgreementA shareholders agreement is a type of agreement that is initiated between a company and its equity holders. The purpose of this agreement is to safeguard the interests of minority shareholders. is with regards to the agreement between the shares purchaser and the shares seller regarding the terms and execution of such terms and in which manner, on the other hand, the share transfer is between the shares seller and the company to transfer such shares for which the shares purchase agreement was entered into.
- The shares transfer contract is the succeeding step taken after the execution of the shares purchase contract to transfer such shares in the name of the purchaser.
- Share transfer agreement includes shares purchase, but shares purchase agreement does not include a share transfer.
- Shares purchase contract could be canceled, but, on the other hand, the shares transfer contract could not be canceled once executed or made then binding upon the parties to execute.
- The terms and conditions in the shares transfer agreement are binding and have legal obligations, but on the other hand, the shares purchase agreement is considered as less obligatory.
- After execution of shares transfer contract, the obligations upon seller come to an end, but on the execution of shares purchase contract, the seller still has liabilities as in the books of a company, the seller is still the shareholder of the company.
- Share transfer also acts as an intimation to the company regarding the sale of shares by the existing shareholder.
- It is there is no involvement of any third party.
- The seller of the shares will have no liability pursuant upon the sale of shares to the purchaser, which now becomes due to the new buyer.
- Sometimes it is seen that there are no shares purchase contracts between the shares seller and the purchaser of the share of the company. In that situation, the shares remain in the name of the seller, which creates unauthentic rights.
- The major disadvantage of this agreement from the perspective of a buyer is that the last outstanding dues may sometimes also transfer in the name of the buyer results in unnecessary charges.
It is a very important document from the perspective of the purchaser or seller of the shares of the company who had invested in the shares of the company and provide funds to the company to manage the operations of the company and expand their business for the sake of capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets. as when the company earns more the value of the share in the market also rises. Every company enters into this agreement; it is the documented proof available with the purchaser of the shares of the company, a copy is also available with the seller. In case of any dispute, it can be easily resolved by giving preference to the agreement executed. It is advisable for every person who has invested their hard-earned money in the shares of the company to execute a proper shares agreement at the time of buying the shares of the company.
This has been a guide to the Shares Purchase Agreement. Here we discuss how does shares purchase agreement work along with its advantages, disadvantages, and differences with Share Transfer. You can learn more about from the following articles –