The share purchase agreement
The share purchase agreement turns the offer into enforceable obligations. Beyond the price, it decides what is sold, how the price adjusts, which risks each side keeps and how payment is secured.
What it contains
The share purchase agreement, or SPA, is the main contract in a company sale. Most UK deals for owner-managed businesses are share sales; an asset sale uses an asset purchase agreement with a different structure. The usual sections of an SPA are:
- Sale and purchase: which shares are sold and with what rights.
- Price and payment, including deferred consideration, any earn-out and the completion mechanism.
- Conditions to completion, if signing and completion are separate.
- Warranties given by the seller, and any specific indemnities.
- A tax covenant (sometimes a separate tax deed).
- Limitations on the seller's liability: caps, thresholds and time limits.
- Payment security: retention, escrow or W&I insurance.
- Restrictive covenants: non-compete, non-solicit, confidentiality.
- Governing law and dispute resolution.
It is negotiated alongside the disclosure letter and, where relevant, your new service agreement and any rollover documents.
Completion accounts or locked box
There are two ways to get from the headline price to the amount actually paid for the shares.
Completion accounts. A balance sheet is drawn up as at completion, after the event. The price is adjusted pound for pound for the actual net debt and for working capital above or below an agreed normal level. It is accurate, but it takes weeks or months after completion and can lead to disputes over accounting policies.
Locked box. The price is fixed by reference to a recent balance sheet, the locked box date. From that date the economic risk passes to the buyer, and the seller promises that no value has leaked out to the seller's side (dividends, bonuses, management charges) apart from agreed "permitted leakage". It gives you price certainty at signing but needs reliable recent accounts.
Both have their place. Private equity buyers often prefer a locked box; trade buyers and smaller deals still frequently use completion accounts. The choice belongs in the heads of terms. Our guide to net debt and equity value explains the adjustments.
Warranties, indemnities and the disclosure letter
The warranties are usually the longest and most negotiated part. They are statements about the company that you confirm are true: that the accounts are accurate, that tax has been paid, that there are no disputes beyond those listed, that key contracts are in force, that the company owns its intellectual property, that there are no hidden liabilities.
If a warranty turns out to be untrue and the buyer suffers a loss, it may have a claim for damages. The buyer must generally show that the breach reduced the value of the shares, which is why buyers also ask for indemnities: a promise to repay pound for pound if a specific, known risk materialises, such as an identified tax exposure or a pending claim.
"Save as disclosed, and so far as the seller is aware, there are no disputes"
The second version limits the statement to the seller's awareness as defined in the SPA, but it will not always be acceptable to the buyer or appropriate for every topic. The SPA should define whose awareness counts and what enquiries they are deemed to have made.
The disclosure letter is your main protection. In it you set out exceptions to the warranties. A matter fairly disclosed, with enough detail for the buyer to understand its nature and scope, generally cannot be the basis of a warranty claim. Disclosure must meet the standard agreed in the SPA: buyers will resist "general disclosure" of everything in the data room. Indemnities are normally not qualified by disclosure, because they cover risks both sides already know about.
Limits on your liability
The SPA limits the seller's exposure. Four parameters are negotiated on almost every deal:
| Limit | What it is | Common UK position |
|---|---|---|
| Cap | The maximum total you can be liable for | For general warranties often a share of the price; on smaller deals it is often close to the full price |
| Threshold (basket) | Total claims must exceed this before any can be made | Often around 1% of the price; usually once exceeded the whole amount is claimable |
| De minimis | Individual claims below this are ignored | Often 0.1% to 0.5% of the price |
| Time limits | How long the buyer has to bring a claim | General warranties often 18 to 24 months; tax often 7 years |
These are common reference points, not rules; every deal is negotiated. Fundamental warranties (title to the shares, capacity, no encumbrances) are usually capped at the full price and run for longer. The caps and time limits do not normally protect a seller from fraud or deliberate concealment.
Securing payment and claims
The parties can use several tools, some to protect the buyer's claims and some to protect payments still owed to you.
- Retention. The buyer holds back part of the price and releases it when the warranty period ends if there are no claims. You become a creditor of the buyer, so check its financial strength.
- Escrow. The amount is paid into an account held by an independent third party, often a solicitor or bank, and released under agreed rules. It reduces exposure to either side's solvency, at some cost and administration.
- Warranty and indemnity (W&I) insurance. A policy, usually taken out by the buyer, that pays for loss from a breach of warranty. Premiums on UK deals are commonly around 1% to 1.5% of the amount insured, plus insurance premium tax and fees; limits are often 10% to 30% of enterprise value. Policies exclude matters the buyer already knows about, forward-looking statements, price adjustments and some specific risks. Fixed costs mean it is harder to justify on smaller deals, and some practitioners put the lower limit somewhere around £10m to £15m of enterprise value. Where it is in place, the seller's cap is sometimes reduced to a nominal amount, which can mean a much cleaner exit for you.
If part of the price is deferred, assess the credit risk and negotiate proportionate security: a parent company or bank guarantee, escrow, a charge or restrictions on what the buyer can do with the company until you are paid. A personal guarantee is only worth something if the guarantor has the means and it is properly documented.
Obligations after completion
Non-compete
A promise not to set up or join a competing business. Under English law it must go no further than is reasonably necessary to protect the goodwill the buyer has paid for, by activity, territory and duration. Courts allow more scope in a business sale than in an employment contract, but covenants in UK SPAs rarely exceed three years.
Watch for wide wording. A clause preventing you from being "involved in any related activity" could stop you investing in the sector you know, which is often exactly what you want to do next.
Non-solicitation
Restrictions on approaching employees or customers should also be precise and proportionate, and should not catch relationships that have nothing to do with the business sold.
Your ongoing role
If you stay on, set out your duties, time, pay, duration and termination in a separate service agreement or a clearly separate part of the documents. The SPA should say what happens to deferred or earn-out payments if that role ends, including good leaver and bad leaver definitions.
Signing and completion on different days
On simple deals, signing and completion happen together. When conditions must be met first, such as regulatory approval, a mandatory notification under the National Security and Investment Act, customer consent under a change of control clause or the buyer's funding, they are split.
The period in between then needs careful drafting: what you may and may not do with the company, what happens if trading deteriorates, a long-stop date and who carries the risk if something changes.
During that time you still own the company, but you have accepted restrictions on how you run it. There should be a long-stop date, termination rights and rules for adverse events, consents and day-to-day management.
Legal references
Shares in a private company are usually transferred on a stock transfer form, and the company may only register the transfer once a proper instrument of transfer has been delivered, under section 770 of the Companies Act 2006. The buyer normally pays stamp duty of 0.5% on the price, rounded up to the nearest £5, for transactions over £1,000. Restrictive covenants are tested against the common law restraint of trade doctrine. Every SPA needs advice from a corporate lawyer and a tax adviser and, where relevant, employment, pensions and competition specialists.
Frequently asked questions
How long am I liable after completion?
The SPA sets different periods by topic. General warranties commonly run for 18 to 24 months, tax claims often for around seven years, and fundamental warranties for longer still. There is no fixed number. Check the notice requirements and how third-party claims are handled too.
Can I limit my liability to the price I received?
You can negotiate an overall cap and lower caps for specific topics. How the cap relates to the price, fundamental warranties, fraud and specific indemnities must be spelled out. Do not assume every risk shares the same cap.
What if there are several sellers?
The SPA will say whether liability is several (each seller for their own share) or joint and several (each for the whole amount). A minority seller will usually want liability limited to their percentage and the amount they receive, with any exceptions spelled out.
