The short answer
A share purchase agreement, or SPA, is the contract under which a buyer acquires shares in a company from its existing shareholders. Its core clauses cover the price and how it adjusts, the conditions that must be met before closing, the seller's warranties about the business, indemnities for specific risks, limits on the seller's liability, and restrictions such as a non-compete. Understanding these clauses in plain terms helps owners spend negotiation time where the money is.
The situation
A Gujarat packaging maker has signed a term sheet to buy a competitor in Maharashtra. The seller is a family that founded the business thirty years ago. The buyer's lawyer has sent the first draft of the SPA, which runs to sixty pages, and the family wants to understand which clauses matter before their own lawyer replies. The sections below follow the order in which most drafts are written.
Price and how it is paid
Headline price and adjustments
The SPA states a headline price, then explains how it moves. The two common approaches are:
- Completion accounts: the price is adjusted after closing, once accounts are drawn up as at the closing date, usually for net debt and working capital. See working capital adjustments explained.
- Locked box: the price is fixed by reference to a balance sheet at an earlier date, and the seller promises that no value has left the business since then, apart from items both sides agree.
Deferred and contingent payments
Part of the price may be paid later, held in escrow, or depend on future performance through an earn out. Each needs clear definitions and a dispute route. Our guide on earn outs in Indian deals covers the common traps. Where the buyer or seller is outside India, foreign exchange rules limit how deferred payments can be structured, which foreign investment in an Indian company explains in general terms.
Conditions precedent
These are the things that must happen between signing and closing. Typical examples:
- approvals from lenders whose loan terms restrict a change of ownership
- consents from customers or landlords under change of control clauses
- regulatory approvals, such as merger control clearance where the deal needs it (see merger control in India)
- board and shareholder approvals required by the Companies Act, 2013 or the articles of association
- completion of specific fixes found in diligence
The SPA usually sets a long stop date. If conditions are not met by then, either side may walk away.
Warranties
Warranties are statements of fact about the business made by the seller, for example that the accounts are accurate, that taxes have been paid, that there is no undisclosed litigation, and that the company owns its key assets. If a warranty proves untrue and the buyer suffers a loss, the buyer may claim.
The seller protects itself through a disclosure letter, which lists exceptions to the warranties. A fact fairly disclosed generally cannot later be the basis of a warranty claim, subject to how the SPA defines fair disclosure. Warranties and indemnities in Indian deals goes into this in more depth.
Indemnities
An indemnity is a promise to reimburse a specific loss, often for a known risk found in diligence, such as an open tax demand or a pending labour claim. Indemnities are usually easier to claim under than warranties, because the buyer does not need to prove the warranty was breached, only that the loss arose. For that reason, sellers push to keep the list of specific indemnities short and clearly worded.
Limits on the seller's liability
Sellers negotiate limits to keep their exposure predictable. Common limits include:
- a cap on total liability, often expressed as a portion of the price, with higher caps for title and tax
- a de minimis level, below which individual claims are ignored
- a basket, so claims are paid only once they add up to an agreed amount
- time limits for bringing claims, usually longer for tax
- exclusion of losses the buyer already knew about, depending on the drafting
Buyers sometimes ask for part of the price to be held in escrow to back these claims. Warranty and indemnity insurance is also available in some deals, though it is less common in Indian mid market transactions.
Material adverse change
A material adverse change clause, or MAC, lets the buyer refuse to close if something seriously damaging happens to the business between signing and closing. Courts in many places set a high bar for relying on such clauses, and the drafting matters greatly. Sellers often seek to exclude general market or industry changes, so that only events specific to the target count. Synerger's templates include sample MAC wording to discuss with your lawyer.
Non-compete and non-solicit
The buyer will usually want the selling family to agree not to start or join a competing business for a period, and not to hire away staff or approach key customers. Under the Indian Contract Act, 1872, agreements in restraint of trade are generally void, with an exception for a seller of goodwill who agrees to a restraint that is reasonable in area and time. Keep the period, the territory and the activities covered specific and proportionate.
Other clauses worth reading closely
Conduct between signing and closing
The seller agrees to run the business normally and not to take listed actions, such as new borrowing or large contracts, without the buyer's consent.
Governing law and disputes
Most Indian SPAs choose Indian law and arbitration, with a seat named in the agreement. Cross border deals sometimes choose a foreign seat.
Stamp duty and transfer mechanics
Share transfers attract stamp duty, and the rate and process depend on the state and on whether shares are held in physical or demat form. Many private companies are now required by rules notified under the Companies Act, 2013 to hold securities in demat form. Your CA or company secretary will confirm what applies.
How the packaging buyer and seller use this
In this sample case, the family's lawyer focuses on three points: replacing completion accounts with a locked box so the price is known on signing, narrowing the specific indemnities to the two tax matters found in diligence, and limiting the non-compete to packaging for the food sector in western India for a defined period. Each change is traceable to a clause and a reason.
Where Synerger fits
Synerger keeps the term sheet, each SPA draft, the disclosure letter and the diligence findings behind them in one due diligence record, with comments on each document and a decision log. The templates library has a sample SPA and MAC clause for discussion. For negotiation support, see our mergers and acquisitions advisory.
General information; an SPA should always be drafted and reviewed by your lawyer.