I’ll start this series by providing an overview of the acquisition agreement (also referred to as a purchase and sale agreement, share purchase agreement, or sale and purchase agreement). This post will cover the purpose of the acquisition agreement, often abbreviated as SPA, and the key sections within the SPA. I will not explore any section in detail in this post; rather, I want to show how all the pieces fit together before delving into any section. Before I begin, I should emphasize that is is by no means meant to be a definitive guide to private equity acquisition agreements; that would be pure arrogance. It is merely a starting point.
The Purpose of the SPA
So, without further ado, the purpose of the SPA. The SPA is a legally binding document that sets out the terms that will govern the sale of the equity of the target company by the seller(s) to the purchaser(s). It will not set out the characteristics of the equity interests sold and will not set out the relationship of the parties after the closing. The former is defined in the constituent documents of the target company, which—depending on the jurisdiction in which the target company is incorporated—will be called the certificate of incorporation, the by-laws, the memorandum of association, the articles of association, or the charter. The latter is established by the shareholders’ agreement.
The Parts of the SPA
The SPA is divided into several parts (often referred to as “articles” or ”sections”), which I have set out in the table below.
Drafting the SPA
In a negotiated sale, the purchaser(s)’ attorneys will prepare the first draft of the SPA. In an auction process, the seller(s)’ attorneys will prepare the first draft to ensure consistency across all the bids received. This is important for one reason. The party that prepares the first draft of the SPA sets the tone for the discussion. The party making changes to the draft is the party that must justify its changes.
I think of the SPA as a bundle of trade-offs. Each part of the SPA can be tailored to favor the seller(s) or the purchaser(s). Often, unless negotiating power is very significantly skewed towards one party, the parties will make trade-offs that reflect the value they place on different rights and obligations.
Because it is a bundle of trade-offs, it is important to understand each part of the SPA. Only then can one see where there is room to give and take in the negotiation of the SPA, and thus close the transaction.