- in European Union
Concluding a Share Purchase Agreement (SPA) can occur either as a single-stage or a two-stage process, depending on whether execution and closing (sometimes referred to as completion) are simultaneous or distinct events. When a SPA involves a two-stage process the SPA is executed first, (i.e. the parties make a legal commitment to proceed with the transfer of the shares by delivering their signed SPA to the other party) but the actual transfer of the shares (and often the payment of the consideration) take place at a later date, often referred to as the closing date. At such subsequent date (i.e. the closing date), the closing occurs during which all necessary actions are undertaken to effectuate the transfer of the shares. Where there is an interval between execution and closing, several matters should be considered when drafting the SPA.
Non-simultaneous execution and closing is typically utilized when the transfer of the shares is conditional upon the satisfaction of certain conditions precedents (i.e. conditions precedents to closing), such as obtaining merger clearance, regulatory consent, tax clearance, consent from a third party such as the target's lender or other creditor, and any such other actions that have to be performed before the Buyer acquires the shares in the share capital of the target company. Closely related is the question of the so-called "long-stop date" which sets the outer deadline by which all the conditions precedent must be satisfied (or, if applicable, waived) (the "Long-Stop Date"), and the consequences if they are not. Should the SPA terminate automatically in the event conditions precedent are not met by the Long-Stop Date and if not, what are the parties' rights and remedies? If it does terminate, the SPA shall provide for those certain terms such as confidentiality, costs, governing law and accrued liabilities which survive the termination of the SPA and how accrued costs are to be allocated between the parties.
The period between execution and closing also requires careful attention. As the seller continues to control and manage the target company during this time, buyers usually expect contractual assurances that the status quo will be maintained. Accordingly, the SPA should expressly impose obligations on the seller during this "interim period" including, for example, to operate the target company in the ordinary course, maintaining trade and customer connections, and not effecting any change in the company's financial position or assets. It may also be appropriate for the SPA to prohibit the target company from taking certain actions without the buyer's consent, such as disposing of or acquiring a material asset, issuing shares, making changes to officers or key employees, incurring significant capital expenditure, or committing to new borrowings or loans. On a related note, the SPA should specify the buyer's remedies in case the seller breaches any such pre-completion undertakings, including whether the Buyer has the right to withhold completion or require the breach to be remedied (if possible) before proceeding.
Finally, the SPA should make clear when the closing date (the date on which the closing will take place which may be either: (i) a fixed calendar date, assuming that all conditions precedent have been satisfied or waived by that date, or (ii) a date falling within a specified number of days after all conditions precedent have been satisfied or waived. On the closing date, the closing shall take place, at which point the buyer acquires legal title to the shares. In practice, this involves the coordinated performance of several steps. The buyer shall ensure that the transfer is properly registered in the target company's register of members and shall receive the share certificates representing the shares being purchased. In addition, the parties typically exchange any ancillary documents necessary to give effect to the transfer, such as board resolutions approving the transfer, resignations or appointments of officers etc.
Conclusion
The interval between execution and closing is a critical phase of a share sale. It raises issues of conditionality, risk allocation, and management of the target company. Careful drafting of the SPA not only protects both parties but also ensures that the transaction proceeds smoothly—or, where necessary, that there is a clear and fair route to disengagement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
