What it means
A share purchase agreement, or SPA, is the contract governing a sale of shares from a seller to a buyer, and it identifies the shares, price, payment and completion steps, along with conditions, promises and allocation of risks. The buyer acquires ownership of the company through its shares rather than selecting individual assets for transfer, and the company generally continues to hold its own assets and obligations, subject to any contractual consent or change-of-control effects.
Buying the shares does not mean every liability transfers directly from the company to the buyer as a personal debt, because the target company remains the legal party to its contracts and liabilities unless the transaction structure changes them, although the buyer economically bears the effect of undisclosed debts through its ownership. Due diligence and negotiated protection in the SPA matter because the company may have tax, employment, environmental or customer claims that are not obvious from a single balance sheet.
The agreement can include conditions before completion, such as regulatory clearance, lender consent or required shareholder approval, and signing and completion may occur on different dates. The parties should spell out who runs the business between them, what actions require consent (including any restriction on interim dividends) and what happens if a condition is not met by a deadline.
Price mechanics deserve separate attention, as a headline enterprise value is not necessarily the cheque to the shareholders. A simple bridge takes enterprise value and subtracts net debt to estimate equity value, with adjustments for cash, working capital or other deal-specific items, so if enterprise value is $15,000,000 and net debt is $3,000,000, a simplified equity figure is $12,000,000.
The SPA's precise definitions and timing decide the final price. ICAEW guidance describes two common completion mechanisms.
Completion accounts use the target's balance sheet at completion and can produce a later adjustment to an estimated payment, while a locked box uses an earlier balance sheet and seeks to prevent unauthorised value leaving the business between that date and completion. Neither is automatically best for every sale, since the chosen mechanism affects who bears changes in cash, debt and working capital during the intervening period.
Warranties are statements about the company or transaction, such as ownership of shares, accounts and material contracts, and disclosure against a warranty can qualify the seller's exposure where permitted by the documents. An indemnity can allocate a specific identified risk, such as a known tax dispute, under agreed terms.
Do not treat these as interchangeable promises or assume the buyer can recover every loss automatically, since claim procedures, caps, thresholds and time limits may apply, and the disclosure letter should be prepared with the same care as the agreement because vague disclosure creates disputes. An asset purchase is different, as the buyer selects assets and may take on specified liabilities, subject to laws that can still impose obligations or require consents.
A share sale can preserve the company as the contracting entity, but change-of-control provisions may still trigger approvals or termination rights. Choosing between the structures involves tax, employment, permits, property and creditor issues, and the SPA's title alone does not solve these.
In practice
Real-world examples.
Example
A buyer checks change-of-control clauses before agreeing to acquire all shares in a target. It finds that a key supplier contract can be terminated on a change of ownership, so it makes the supplier's written consent a condition of completion.
Example
A seller discloses a known customer claim against the accounts warranty. The buyer accepts the disclosure but asks for a specific indemnity for the claim, so the risk is allocated openly instead of being argued about after completion.
Example
The parties define net debt and working-capital adjustments before completion. They agree which loans, leases and accrued bonuses count as debt, so the final price calculation follows written definitions rather than each side's assumptions.
Formula
Calculation
Simplified equity value = enterprise value - net debt, subject to the SPA's cash, working-capital and other definitions. If enterprise value is $15,000,000 and net debt $3,000,000, the illustrative figure is $15,000,000 - $3,000,000 = $12,000,000, not necessarily the final amount payable.
Under a completion-accounts mechanism, suppose the price at signing assumed net debt of $3,000,000, but the completion accounts show $3,400,000. The price falls by the $400,000 difference, so the final payment is $12,000,000 - $400,000 = $11,600,000. Under a locked box, the buyer instead relies on the earlier balance sheet and protections against value leaving the business, so no such adjustment is made after completion.Case study
Seen in the real world.
This illustrative and entirely fictional case follows Horizon Travel, an invented agency sold to a larger group. Due diligence finds a customer dispute, which the seller discloses. The SPA allocates that risk and sets completion-account adjustment rules. The parties complete the fictional sale. Disclosure does not guarantee immunity from every warranty claim.
Watch out
Common mistakes.
- Assuming a share buyer personally takes every company liability.
- Focusing on the headline price without checking adjustment definitions.
- Treating warranties, disclosures and specific indemnities as interchangeable.
Questions
People also ask.
What is an SPA?
The legal agreement for a sale and purchase of company shares.
What does it include?
Usually the shares, price mechanics, conditions, completion actions, warranties and risk limits.
How is it different from an asset purchase?
A share deal transfers ownership of the company; an asset deal identifies the assets and assumed liabilities to be transferred, subject to law.
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