Chat with us, powered by LiveChat

Live Chat

Phone Icon
Online free quote
Phone Icon
enquiries@fosters-solicitors.co.uk
Phone Icon
01603 620508

Fosters Solicitors

Share purchase agreements – Key terms to understand

Share purchase agreements are fundamental legal documents used when buying or selling shares in a business. They clearly define the terms of the transaction, protect the interests of both parties, and ensure a smooth and enforceable equity transfer. Whether you’re navigating a full acquisition or purchasing part of the equity, understanding how share purchase agreements work is crucial. For professional support, consult our Corporate Solicitors.

What is a share purchase agreement?

share purchase agreement is a legally binding contract between a seller and a buyer that formalises the sale and purchase of shares in a company. It outlines each party’s obligations, details the transaction mechanics, and provides legal protection for both sides.

Key terms in share purchase agreements

1. Parties and definitions

This section identifies all parties involved and provides definitions of key terms used frequently in the agreement to ensure clarity throughout the share purchase agreement.

2. Sale and purchase of shares

This clause details the specific shares being sold, including the number, class, and ownership status. In most share purchase agreements, it’s vital to confirm the seller’s legal authority to transfer the shares.

3. Consideration (purchase price)

The agreement must state the total purchase price and how it’s paid. Depending on the deal terms, payment structures may include:

  • Cash at completion;
  • Deferred payments;
  • Earn-outs tied to future performance; and/or
  • Completion accounts adjustment mechanism (to adjust the purchase price to reflect the company’s actual financial position at completion).

Well-drafted share purchase agreements should also clarify, where applicable: payment schedules and any conditions attached to any payments, accelerated payment provisions (allowing the seller to demand earlier payment if certain events occur, e.g. default), and anti-embarrassment clauses (protecting the seller if the buyer quickly resells the company at a higher value).

4. Conditions precedent

These are the conditions that must be satisfied before completion of the transaction can take place. Common examples include obtaining necessary regulatory or third-party consents, securing any required tax clearances from HMRC, obtaining board or shareholder approval where needed, and putting in place key ancillary agreements such as service contracts or transitional arrangements.

5. Warranties

The seller provides warranties, which are essentially legally binding statements of fact about the company and its business. These are assurances given to the buyer so they can proceed with the deal on the basis that the company is in the state described.

Warranties typically cover a broad range of areas, such as:

  • Ownership and title to the shares being sold;
  • The company’s incorporation, authority, and compliance with constitutional documents;
  • Accuracy of the accounts and financial statements;
  • Compliance with tax laws;
  • Validity and enforceability of key business contracts;
  • Employment matters;
  • Intellectual property ownership and licensing;
  • Regulatory compliance; and
  • Litigation and disputes.

If a warranty turns out to be untrue, the buyer may bring a breach of warranty claim. To succeed, the buyer generally has to prove the warranty was false, that they suffered a loss, and that the loss flowed from the breach. Sellers can often protect themselves by disclosing known issues in a “disclosure letter”, so that the buyer cannot later claim for them.

6. Indemnities

An indemnity is another form of buyer protection found in a share purchase agreement. Indemnities differ from warranties in that, rather than being a statement of fact, an indemnity is a promise to reimburse the buyer for specific losses if they arise.

Indemnities are usually negotiated to cover particular risks identified in due diligence, for example, ongoing litigation. If the indemnified risk materialises, the buyer is entitled to be compensated on a pound-for-pound basis, without needing to prove that the value of the shares has fallen or that the seller was “at fault”. This makes indemnities more direct and often more valuable to the buyer, and for this reason they are often resisted by the seller.

7. Completion mechanics

The share purchase agreement will describe all actions required to complete the deal. This might include delivering share certificates, board resolutions, and updating the company’s statutory books. Most share purchase agreements include provisions that are akin to a completion checklist to guide the process.

8. Post-completion covenants

Common post-completion obligations include non-compete clauses, the obligation to pay any deferred consideration, providing transitional support, releasing escrow funds, performing earn-out obligations, and undertaking the completion accounts process to finalise any completion accounts adjustment mechanism. These obligations help ensure that the deal terms are properly carried through and that the transition of the business is as smooth as possible.

9. Confidentiality and public announcements

Share purchase agreements often contain confidentiality clauses preventing parties from disclosing sensitive deal information without prior consent.

10. Governing law and jurisdiction

This clause determines which country’s legal system governs the share purchase agreement and where any disputes would be resolved.

Case Study: Indemnities in share purchase agreements

In the course of negotiating a share purchase agreement for the sale of the entire issued share capital of a private company limited by shares, the buyer’s draft included an indemnity requiring the seller to cover any losses arising from historic breaches of customer contracts, despite the legal due diligence investigations revealing a well-run and legally compliant business, with no live or historic issues. The indemnity was broadly drafted, uncapped, and unlimited in duration, creating the risk of significant ongoing liability for the seller after completion.

The seller’s lawyers identified the issue and raised it during negotiations. The buyer ultimately accepted the concern and agreed to remove the indemnity, leaving liability to be dealt with under the standard warranty coverage. The change prevented the seller from assuming open-ended risk that would have been disproportionate to the transaction and relieved the seller of concern over this potential risk after completion.

Expert insights on share purchase agreements

  • Tailor warranties to the specific risks of the target business.
  • Review indemnity limits and caps to manage exposure.
  • Always conduct legal and financial due diligence before signing.

Our specialist Corporate Solicitors regularly advise on and negotiate share purchase agreements, as well as providing advice on a broad range of other corporate matters, often supporting current or prospective business owners through their transactions.

Contact us for more information.

Benefits and drawbacks of share purchase agreements

  • Benefits:
    • Ensures the agreed terms and conditions of the transaction are clearly documented and legally binding on the parties.
    • Clarifies rights and obligations.
    • Provides legal remedies for breach or misrepresentation.
    • Facilitates structured, secure transactions.
  • Drawbacks:
    • May lead to disputes if not drafted precisely.
    • Can require time-intensive due diligence to inform the drafting of the agreement.

Future outlook for share purchase agreements

Share purchase agreements are adapting to reflect modern business risks and practices. Increasingly, they address issues such as data protection, cybersecurity, and environmental, social and governance compliance.

For larger or higher-value transactions, there is also growing use of warranty and indemnity insurance to manage risk, alongside secure digital platforms for negotiating and completing deals. As technology, including AI tools, becomes more integrated into due diligence and contract processes, it is important that legal documentation remains up to date, enforceable, and proportionate to the size and nature of the transaction.

FAQs

What is the purpose of a share purchase agreement?

A share purchase agreement sets out the terms and conditions on which a buyer acquires the shares of a company from its existing shareholders. Its purpose is to transfer ownership of the company (or part of it) while allocating risks, responsibilities, and protections between buyer and seller (for example through warranties, indemnities, and completion mechanics).

What is the difference between warranties and indemnities in a share purchase agreement?

A warranty is a contractual statement made by the seller regarding the state of the target company or business. If a warranty is breached, the buyer can claim damages, but only if they can prove the breach and demonstrate that the value of the target is less than it would have been had the warranty been true.

In contrast, an indemnity is a promise by the seller to compensate the buyer for specific losses or liabilities arising from a defined event or risk. Indemnities are generally more advantageous for the buyer because they allow recovery on a pound-for-pound basis without needing to prove a reduction in the target’s value.

Do I need a solicitor for a share purchase agreement?

Yes, legal expertise is crucial to ensure fair terms and protect against future liabilities. The drafting of a share purchase agreement can be complex, so it is always important to get a lawyer to draft, negotiate and review the share purchase agreement to ensure it is legally accurate, compliant and sufficiently protects the interests of each party.

Can a share purchase agreement include performance-based payments?

Yes, many share purchase agreements include earn-out clauses linked to future company performance. If the targets are not achieved, the buyer is not obligated to make the earn-out payments or may pay a reduced amount, depending on the specific terms.

 

This article was produced on the 6th October 2025 for information purposes only and should not be construed or relied upon as specific legal advice.

Author