IN THIS ARTICLE

Sale and purchase agreements are crucial documents when it comes to selling a company or company stock, or any other high value business assets. Ensuring that the agreement reflects and protects your business interests, as either a buyer or seller, is paramount to a smooth and successful outcome. Below we look at what these types of agreement are designed for and when they are needed, as well as how these operate as a matter of law. We also look at some of the main types of contractual provisions that sale purchase agreements should contain.

What is a sale and purchase agreement (SPA)?

A sale and purchase agreement (SPA) is a written contract between a buyer and a seller, obligating a sale and purchase transaction to take place. In broad terms, this means that the SPA will obligate a buyer to buy, and the seller to sell, the asset or assets in question.

The SPA is the main legal document in any high value sales transaction, providing the legal framework to complete the sale, while putting in place a number of important protections for those involved. Essentially, the sale and purchase agreement sets out in writing all of the elements of the deal, with full details of the transaction and the respective obligations of the parties, so that they have a shared understanding and an agreed basis upon which to proceed.

Given the critical importance of sale purchase agreements to both sellers and buyers, these types of agreement tend to be complex and lengthy, comprehensively setting out the agreed terms and conditions of the sale, with various provisions designed to protect the parties’ respective interests. These provisions will include the identity of the asset(s) to be sold, together with the purchase price and payment terms, as well as warranties and indemnities as to the condition of the asset(s) in question, and any conditions and interim controls that must be satisfied prior to completion, to name but a few.

When is a sale and purchase agreement needed?

A sale and purchase agreement can be used as the principal transaction document in a variety of different sales scenarios, although these types of comprehensive and detailed agreements are used primarily for complex sales transactions, such as where one business is acquiring another, or when selling off company stock, land or other high value assets.

These types of agreement are also commonly used when transacting for large items or large numbers of items, such as in the supply chain for a big company. For example, when obtaining high volumes of materials from a supplier or in the case of a large-scale single purchase. In all cases, the SPA serves to incorporate and finalise the agreed terms and conditions of the sale. This is essential in any complex sales transaction, as it regulates in writing the relationship between the parties in the event of any disagreements or misunderstandings, and provides clear guidance regarding party responsibility.

In the context of the sale of goods, a sale and purchase agreement is not technically required. However, as the agreed terms and conditions of a sale are designed to protect both the buyer and the seller, these should be set out in writing prior to the transaction taking place. Absent a written contract, the parties will often have no legal recourse in a failed transaction. Equally, if a sale and purchase agreement has not been adequately drafted, for example, where it contains ambiguous provisions which either don’t reflect the intentions of the parties or cannot be clearly interpreted, this can often lead to time-consuming and costly disputes.

The importance of seeking expert advice and assistance in negotiating and drafting suitable provisions and protections within a sale purchase agreement cannot be underestimated.

Are sale and purchase agreements legally binding?

Before any complex sales transaction can take place, the parties must first negotiate the price of the asset(s) to be sold, together with the terms and conditions under which the transaction will complete. The sale and purchase agreement provides a legal framework within which the negotiation process can constructively evolve and develop. Once signed, the SPA then becomes a legally-binding document, representing the culmination of these negotiations.

At the point the SPA is signed by both the buyer and seller, contracts will be treated as exchanged. This means that the parties are essentially committed to completing the transaction, although there may still be certain circumstances in which the parties can terminate the contract. This is known as a right to rescind, where this right can arise where any agreed conditions and/or interim controls have not been met. These conditions and controls typically surround risk mitigation and protection of the asset(s) in question, for example, where there is refusal of any third party consent, or there is a material adverse change that impacts the business prior to completion, such as the cancellation of a key client.

However, provided all conditions and controls are satisfied, this will then usually trigger an automatic obligation on both parties to proceed to completion within a defined period.

Is an SPA the same as an asset purchase agreement (APA)?

An ‘asset purchase agreement’ (APA) is a type of SPA or ‘sale purchase agreement’, that outlines the terms and conditions relating to the sale and purchase of specific company assets. An APA is also often referred to as a ‘business purchase agreement’ (BPA).

The disposal of any company will be structured as either an asset sale, where the company itself will be the seller of the business and the assets that it holds, or a share sale, where individual shareholders dispose of their shares in the corporate entity, either a Ltd or LLP. The principal difference between the two types of sale is that a buyer of shares in a company will purchase both assets and liabilities, while a buyer of assets will only acquire specified assets, without usually taking on any other liabilities associated with the business.

Of note, a share sale is often referred to as a share purchase agreement, or SPA, but SPA in this context relates specifically to the sale of a company or corporate entity, while a SPA in a more generalised context can relate to the sale and purchase of a whole host of other high value assets. Equally, a more generalised sale and purchase agreement (SPA) may be referred to as a ‘purchase and sale agreement’ (PSA), where these two acronyms can be used interchangeably.

What terms should be included in a sale and purchase agreement?

A sale and purchase agreement will need to include all the agreed terms and conditions of a sales transaction in detail, where the operative parts are likely to be the subject of a significant amount of negotiation time between the parties. The SPA will also include certain standard provisions that are not usually negotiated heavily, but which are designed to provide certainty on a variety of general legal matters, such as confirming the governing law applicable to the contract and the mechanism for determining any disputes which might arise under it.

There can be considerable variation in the precise terms of any sale and purchase agreement, depending on what is being sold and the extent to which the parties want to cover all eventualities. It’s important to remember that every sale and purchase agreement must be tailored to the specific needs of the parties, providing sufficient protections to mitigate any risks. Below we set out just a selection of some of the principal features of a SPA:

Parties to the agreement

This section sets out the identities of the parties where, in its simplest form, there will be two parties to the sale and purchase agreement. However, additional parties may be involved, for example, if there are multiple shareholders in a company being sold where each of the shareholders would need to enter into a share purchase agreement to sell their allocation of shares.

Definitions and Interpretation

This section provides the definitions for all major terms used in the overall body of the agreement to provide the parties with clarification, and to help avoid or minimise any misunderstandings throughout and after the sale process.

Asset Identification

This section identifies the exact nature of what is being bought and sold under the agreement. It is important to set out exactly what is being purchased, for example, when selling a company’s assets under an asset purchase agreement, the APA could include plant and machinery, stock, contracts, premises, know-how and goodwill.

Purchase Price and Payment Terms

This section specifies the purchase price and payment terms. Typically, this will set out what portion of the sale price is due as an upfront deposit and how that deposit will be made, together with how and when the remaining balance will be paid. This may be a fixed sum or a sum to be determined by reference to a formula, such as based on agreed revenues and/or profits of a business.

Warranties and Indemnities

This section includes contractual assurances, in the form of warranties, made by a seller as to the condition of the business or the asset(s) being sold. Warranties can cover all kinds of matters, including company assets, accounts, contracts, litigation, staff, property and intellectual property. If a warranty subsequently proves to be incorrect, and the value of the business or any other asset is reduced, the buyer may have a claim for breach. The agreement may also include certain critical warranties made on an indemnity basis, where specific risks are identified during the buyer’s due diligence process, under which the seller promises to reimburse the buyer for the indemnified liability.

Covenants and Conditions Prior to Close

This section outlines the conditions of the sale, and any interim controls, that must be satisfied in order for the sale to be legally binding. Many of these covenants surround risk mitigation and protection of the asset, where any inaction or failure to follow these conditions will provide the buyer with the right to rescind.

Restrictive covenants

This section will include any restrictive covenants that apply post-completion, for example, in the context of a company sale, the buyer will usually want to prevent the seller from establishing any new competitive business that may diminish the value of the company being sold. This can be achieved through a non-compete clause.

Governing Law and Jurisdiction

This section will cover the governing law applicable to the contract, for example, the law of England and Wales, as well as the preferred mechanism for determining any disputes which might arise under it, for example, arbitration.

In addition to the main terms and conditions, the sale and purchase agreement must also deal with completion. This represents the point at which legal ownership and title transfers to the buyer. A completion schedule in the agreement will normally list all of the documents to be signed and other actions necessary for completion to take place, together with a closing date.

Sale and purchase agreement FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

Author

Sale and Purchase Agreement 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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