Before we get started, I would like to personally thank Francesca Yardley for all of her support, insights and contributions to this section. Francesca is a senior legal consultant at Ignition Law, having previously worked as a Managing Associate in Linklaters' Corporate team and as General Counsel for both R&R Ice Cream (now Froneri) and Hambro Perks. I would also like to thank James Richardson from Law Answered for his helpful suggestions and input, based on the countless SPAs he has worked on both as a lawyer and an underwriter.

Sale and purchase agreement (SPA): sale and purchase agreements (or “asset agreements”) are legal contracts that describe the outcome of key commercial and pricing negotiations and when signed, obligate a buyer to buy and a seller to sell. An SPA can be used to purchase either the assets of a company as part of an asset/business sale, or the shares of a company. In the latter case, you might hear the document being referred to as a “share purchase agreement”. 

It’s worth noting that an SPA is not a legal requirement for the transfer of shares under UK law. A stock transfer form is sufficient, but SPAs are drafted in order to set out the rights, obligations and contractual protections that have been agreed between the parties. A trainee’s role when working on an SPA can involve: collating comments from specialist teams on various provisions; helping to prepare “issues lists”; proofreading drafts of the contract, and coordinating the signing process. If you’re lucky, you may also have the opportunity to get involved in the drafting. 

Issues list: this sets out a list of issues that need to be agreed before the parties will sign off on a particular document (e.g. an SPA). Issues lists provide useful points of reference during negotiations and may need to be frequently updated as negotiations progress.

Consideration

The type of consideration that will flow between the parties to an SPA will vary depending on the nature of the deal. For example, it could include cash, shares, loan notes or a combination of the three. This section discusses some of the ways in which the amount of consideration payable by the buyer will be determined. 

Completion accounts vs. locked box accounts

In the context of one company acquiring another, the final price of the target will typically be based – in part – on an agreed set of financial accounts, for example “completion” accounts or “locked box” accounts.

Completion accounts: this pricing mechanism involves the parties agreeing in advance that the final consideration to be paid will be based upon the target’s accounts on or shortly after the date of completion. This adds a layer of uncertainty, as the parties cannot be sure of the final price until completion, although it’s arguably a commercially pragmatic mechanism as the final price will be adjusted to reflect the commercial reality on the date that ownership of the target changes hands. In certain contexts, completion accounts are seen as more buyer-friendly, as if the value of the seller decreases between signing and completion, the price will reduce. However, if a buyer is looking to buy a rapidly growing business, completion accounts might be less beneficial, as the target’s value might have risen significantly by the time the deal completes.  

Locked box accounts: this pricing mechanism involves the parties agreeing that the price for the target will be based on its accounts as they stand on a pre-agreed date. This date might fall on or after the signing date, but prior to completion (although it’s often the date of the target company’s last financial year-end, as accounts will need to be prepared for this date anyway). These accounts are known as “locked box” accounts, because the SPA will contain provisions that restrict the seller’s ability to take certain actions – without the buyer’s permission – that could affect the target’s finances (and thus its accounts) from the date on which the accounts are “locked”. We cover this in more detail below.

Although locked box accounts can give the buyer more certainty as to the final purchase price, this pricing mechanism can also result in greater financial risk for the buyer during the period between the date on which those accounts are “locked” and the completion date. For example, if the value of the target decreases during this period (e.g. if there is a global downturn), the buyer would still be obliged to purchase at the agreed price. Consequently, if a buyer accepts a locked box accounts arrangement, it will usually want to complete as quickly as possible. Note that to compensate the seller for the fact that it will not receive the sale proceeds on the date on which the accounts are “locked”, the parties will usually agree that interest will accrue on the purchase price from the locked box date up until the date of completion.

The value of the target could also decrease during this period if the seller allows value (e.g. cash and other assets) to “leak” out of the target after the “locked box accounts” date, meaning the buyer could end up paying more than the company is actually worth by the time completion comes around. There will therefore typically be provisions in the SPA to prevent the seller from carrying out certain transactions or committing to certain expenditure that will diminish the value of the business (e.g. paying discretionary dividends, selling key assets or taking on a significant amount of debt). 

Permitted leakage: in this context, there will usually be a carve out for “permitted leakage” (i.e. permitted expenditure), to allow the seller to continue trading in the ordinary course of business. Examples of permitted expenditure might include making loan repayments, paying fixed rate (i.e. compulsory) dividends, paying trading expenses and salaries, and covering other usual day-to-day expenses. 

Now, the accounts mentioned above are all well and good if the buyer is buying one or more distinct companies from within the seller’s group. But what if the buyer is acquiring various parts of different entities from within the seller’s corporate group? The seller’s latest accounts will likely relate to the seller’s entire group or to each distinct company within that group, not the respective “parts” of the various group companies that will need to be carved out to create the final “package” being sold. To solve this issue, the parties might agree to base the consideration on a set of “pro forma” accounts.

Pro forma accounts: where a transaction depends on the seller reorganising a group of companies in order to create (and sell) a new entity that is comprised of various parts of its group, it could create a “fictional” set of accounts that reflect the combined financial performances of the relevant “parts” of the seller’s group (i.e. as if those parts were already functioning together as a separate, consolidated company). These accounts are known as “pro forma” accounts.

Earn-out

As well as basing a target’s valuation on its accounts, the final consideration may also be contingent on the target’s performance post-acquisition. This could be achieved by including an “earn-out” provision in the SPA. 

Earn-out: this is a pricing mechanism that can entitle a seller to further consideration following a sale, depending on the target’s future performance during what is termed the “earn-out” period.

Under an earn-out provision, the company’s “success” – for the purposes of calculating the extent of any further consideration that might be payable to the seller post-acquisition – will be based on a figure that is sometimes referred to as the “relevant profits” (although this figure could also be tied to other financial metrics, such as turnover). If the buyer is part of a wider group of companies, determining what will constitute the "relevant” profits/turnover can be a point of contention during negotiations. This is because it can be difficult to identify which future profits/turnover will be attributable solely to the target company’s performance, and which will be attributable – at least in part – to the performance and resources of other companies within the buyer’s wider group. 

This is especially the case if the target has been properly integrated into the buyer’s group during the earn-out period. Moreover, sellers are unlikely to accept earn-outs unless they can continue to exert some level of influence over the target’s performance during the earn-out period (e.g. by retaining a seat on the target’s board post-acquisition until the earn-out period ends).

Revenue / turnover / sales: the total income generated from a business’ operations within a period of time. This does not take into account costs, instead purely reflecting the money that has been received from sales. For example, if a business sells 10 handbooks for £10 each, its revenue would be £100.

Net profit: this refers to the amount of money remaining from the revenue after all related expenses (including tax) have been subtracted.

Conditions precedent

An SPA will usually include a series of “conditions precedent” that must be fulfilled (or waived) before completion. These will cover a broad range of actions, requirements and obligations, upon which completion will be contingent.

Conditions precedent (CPs): in an M&A context, these are conditions that must be fulfilled before the parties will be bound to perform their obligations under a contract, usually between signing and completion of a deal. Notable examples of conditions precedent in the context of a transaction include the receipt of consent from a target’s existing lenders and clearance from the relevant competition authorities.

Examples of common conditions precedent in an SPA include:

• Regulatory clearances: for example, securing approval of the deal from any relevant competition authorities. This will be mandatory in certain jurisdictions, whereas other jurisdictions may simply recommend that the parties do so in advance. In a deal context, you should seek advice from your firm’s competition team on how to deal with regulatory clearances, and how any required clearances could impact on the deal time frame (waiting for clearance can really slow down a deal!).
• Deal-specific conditions: for example, the receipt of waivers to change of control clauses in commercial contracts or loan agreements, the seller’s completion of an internal corporate reorganisation to ensure that the “target” entity includes all the assets that the parties have agreed will be included in the transaction, the delivery of accurate completion accounts, and the receipt of confirmation that key employees will remain with the target post-acquisition. Bear in mind that fulfilling these types of conditions might require additional documentation – not to mention input from other specialist teams and the client’s other advisers – so be sure to allow sufficient time to get everything in place before the relevant deadline. 
• No material adverse change: depending on the parties’ bargaining power, a buyer will usually want to make the deal conditional on there being no “material adverse change” in the target’s circumstances between signing and completion.

Material adverse change (“MAC”) clause: material adverse change clauses – also referred to as “MAC” clauses – include provisions that entitle a buyer to walk away from or renegotiate a deal if, between signing and completion, circumstances arise that significantly reduce the value of the target company (or might have the potential to do so). Sellers might accept “business” MAC clauses, meaning clauses that entitle the buyer to walk away if something specific happens to the target business before completion that affects its value (e.g. if there is a factory explosion). They are less likely to accept “market” MAC clauses however; these entitle the buyer to walk away if the value of the target is negatively impacted by broader legal, economic or political factors that affect the market in which it operates, for example economic downturns, changes in the law, or fluctuations in commodity prices. Note that in practice, MAC clauses can be incredibly difficult to invoke.

There are certain conditions precedent that sellers will typically refuse to include in an SPA, including the buyer’s completion of due diligence (as the time frame for this is outside the seller’s control), the buyer securing appropriate financing (as arguably these arrangements should already be in place before signing), and the buyer securing the necessary corporate approvals, such as shareholder consent to go ahead with the deal (again, as these should already be in place).

Practical tip

When drafting conditions precedent, it is important to specify:

• Who is responsible for fulfilling each condition.
• The extent of each obligation. For example, must the person responsible for fulfilling each condition use their “best endeavours”, or only their “reasonable endeavours”?
• Whether each condition can be waived and if so, by whom.
• The deadline for the fulfilment of each condition. Make sure each deadline takes into account reasonable time frames for the completion of any actions that must be taken, for example the time it typically takes for competition authorities to approve a proposed transaction.

It’s important to specify that the conditions must continue to be fulfilled right up until completion. Otherwise, if (for example) competition clearance is granted right after signing but then revoked before completion, the condition precedent will have been fulfilled when clearance was first granted, meaning the buyer could be bound to go ahead with the deal even though the competition authorities subsequently revoked their approval.

Pre-closing undertakings

If a deal involves a “split” signing and completion (i.e. where signing will take place first, then completion will follow at a future point in time), SPAs will typically include a set of “pre-closing undertakings”.

Pre-closing undertakings: promises given by the seller to the buyer in respect of how the seller will run the target between signing and the point at which control and ownership transfers to the buyer (i.e. completion). These can include a mix of positive undertakings (promises to do something) and negative undertakings (promises to refrain from doing something), as well as an agreed list of actions that can only be taken with the buyer’s prior consent.

When drafting pre-closing undertakings, it’s important to consider whether breaches of each undertaking should give the buyer a right to terminate the deal, or simply the right to raise a claim against the seller for breach of contract. A buyer could also try to negotiate indemnities to cover losses arising out of any breaches of pre-closing undertakings, and could include a contractual right to adjust the purchase price to take into account any drop in value resulting from any breaches of pre-closing undertakings (e.g. if the seller wrongly allows money to “leak” out of the target between signing and completion).

A buyer will also likely want the ability to confirm that the seller has complied with any undertakings given, so might require the right to access certain information about the target before completion. However, this right needs to be balanced against competition law restrictions relating to “gun jumping”, which can prohibit the sharing of too much information between a target and a buyer before the deal has been cleared by any relevant competition authorities.

Gun jumping: where parties to a proposed merger or acquisition start to act as if the transaction has taken place (e.g. by implementing certain changes or taking certain actions) before receiving formal confirmation from the relevant competition authorities that the transaction can go ahead.

Contractual protections

Contractual protections will depend somewhat on the outcome of the buyer’s due diligence and any disclosures made by the seller about the target business. Here’s a quick refresher on the link between due diligence, disclosure and the allocation of risk through contractual protections:

Representations

Representations are typically statements made about a target company or asset, but unlike warranties, representations may be statements of opinion – not only statements of existing fact – and may not actually be included in the contract itself. Note however that many contracts contain “entire agreement” clauses that prohibit the parties from relying on any representations that are not explicitly included in the contract, so key representations are generally included as actual contractual terms.

Entire agreement clause: a clause stating that only the terms contained within the contract will apply to the agreement, meaning that the parties will not be bound by any previous negotiations, representations or oral statements that have not been recorded in the contract (unless such representations or statements were fraudulent). In the context of an SPA, the seller might want to explicitly include in the entire agreement clause that any previous agreements, pre-contractual statements, or implied warranties, conditions or undertakings will be excluded from the terms of the deal.

Representations tend to reflect the key statements about a target company that induced the buyer to enter into the SPA. The remedies available for inaccurate representations (as opposed to inaccurate warranties) differ to the extent that if a buyer was induced to enter into the SPA by an inaccurate representation on which they relied, they can bring a claim for misrepresentation, which can entitle them to terminate the contract (a breach of warranty generally only entitles the injured party to bring a claim for breach of contract). 

Warranties

Warranties are statements of existing fact on which the buyer is entitled to rely. Warranties typically involve the seller promising that certain statements about the target’s business are true and that it has complied with previous obligations.

Warranties can reduce the extent of the due diligence that a buyer must carry out, because a buyer can to some extent rely on a seller’s warranties in the knowledge that they can sue the seller if it later transpires that the warranties do not reflect the true state of the target’s business. Warranties can also encourage the seller to make full disclosures, for the reasons set out in the disclosure section below. A buyer would not want to rely solely on warranties however, as there is still a risk that an issue may be identified that wouldn’t be covered by a set of standard seller warranties. Moreover, there is always the risk that the seller will in the future become bankrupt and therefore be unable to pay out in connection with a subsequent breach of warranty claim. 

When a private equity firm is selling one of its portfolio companies, the private equity firm itself may refuse to give warranties about the target’s business, or may only agree to give a limited suite of such warranties (although it will always give “title” and “capacity” warranties, i.e. warranties that it owns the target’s shares and has the required permission to sell those shares). This is because private equity firms will want a clean break after the sale (rather than having possible warranty claims hanging over them) and tend to see “business” warranties as the responsibility of the management team of the business being sold, given that those managers will usually have the most in-depth and up-to-date knowledge of the target’s business. The warranties given by the management team in this context will typically be set out in a management warranty deed.

Key SPA warranties

The warranties given by a seller in an SPA will typically cover: the target’s ownership structure (including confirmation that the seller owns and has the right to sell the target’s shares); the target’s compliance with employment law, tax law and other laws and regulations (including confirmation that the target is not currently involved in any disputes); the status of the intellectual property on which it relies (including confirmation that it owns any relevant intellectual property); the processes it has followed when pursuing commercial courses of action (for example, confirmation that it has secured the right consents before building factories); the condition of its assets; the accuracy of its financial statements; and any other key elements of the target’s business.

Materiality thresholds

A seller may want to limit the extent of the warranties it gives, rather than giving broad, blanket warranties that could require hundreds (or even thousands) of disclosures to properly qualify. For example, if the seller was selling an airline and was asked to warrant that the target airline wasn’t involved in any litigation, to avoid being in breach of this warranty the seller would need to disclose every single claim brought against the airline, no matter how small (think coffee spills or delayed flights). To strike a more practical balance, the parties could use the word “material” in the warranties so that only material (i.e. significant) claims would need to be disclosed. Similarly, rather than warranting that no clients have ceased working with the target since the date on which the target’s last financial accounts were prepared, the seller could warrant that no “material” (i.e. major) clients have ceased working with the target during this time.

“Material” could then be allocated a specific definition, perhaps in accordance with a cash amount or a percentage of the value of the deal (e.g. “Material Litigation” means litigation that could result in the target having to pay damages worth more than £10,000; “Material Client” means any client that is responsible for 5% or more of the Target’s revenue etc.). 

Disclosure 

In the context of transactions, “disclosure” refers to the exchange of legal, commercial and financial information between one or more parties, for the purposes of enabling those parties to better understand a particular asset, business or group of businesses. Don’t confuse this with “disclosure” in the context of contentious work, which is based on a legal obligation to exchange documents relevant to a case or investigation for the purposes of enabling the parties to assess their legal positions.

As mentioned earlier, warranties may be “qualified by” (i.e. given subject to) any corresponding disclosures made by the seller. In this sense, disclosure is one of the principal means by which a seller will seek to limit its exposure to warranty claims, as a buyer cannot bring a claim for breach of warranty if the breach in question had already been disclosed by the seller. Sellers are therefore motivated to disclose issues in the knowledge that the buyer may otherwise be entitled to sue under the warranties given in the SPA. Such disclosure can be achieved by the seller uploading to a data room documents that relate to the issue being disclosed, then referencing these documents in a disclosure letter. 

Note that as the due diligence and disclosure processes unearth additional risks and issues, the buyer may seek more focused warranties to further protect its position, and this cycle can continue throughout negotiations.

Disclosure Letter 

All disclosures should be recorded in a formal disclosure letter, complete with an annex containing copies of key documents that relate to the disclosures made. The disclosure letter is usually prepared by the seller’s legal team and should disclose everything relevant to the warranties given, including matters of which the buyer is already aware (just so there is a formal record of the buyer’s knowledge of such matters).

Remember, as warranties are existing statements of fact, a seller will not have breached a warranty given at the time of signing just because the circumstances subsequently changed before the completion date (as long as the warranties were true at the time they were given). For this reason, buyers may require sellers to repeat their warranties on the date of completion, meaning those sellers would need to make additional disclosures (by updating the disclosure letter) to qualify those warranties if circumstances have changed between the signing of a deal and the completion of that deal. 

Note that at this late stage in a transaction, sellers will generally only be permitted to qualify existing warranties by disclosing new issues that have arisen since the disclosure letter was originally signed; they may not be permitted to rectify omissions or mistakes identified in relation to their earlier disclosures.

Buyers will try to reserve the right to terminate the agreement or renegotiate the terms, contractual protections and/or purchase price if something is disclosed at the time of completion that – had it not been disclosed – would have constituted a material breach of a warranty. This effectively means that if particularly pertinent issues come to light after signing, but before completion, the buyer can terminate without facing penalties (or can instead leverage this right to negotiate better terms). 

Indemnities 

As already mentioned, indemnities are essentially promises made by the seller to reimburse the buyer for any losses incurred in connection with specific issues that have been identified and might result in the buyer/target incurring costs at some point after the acquisition has closed. As such costs are rarely precisely quantifiable at the outset, indemnities tend to simply promise pound for pound reimbursement of the actual costs incurred post-acquisition by the buyer/target in connection with the specified issues (subject to any agreed liability caps).

Although SPAs tend to include certain indemnities as standard, further specific indemnities will usually be negotiated after the due diligence has been carried out, the warranties have been given and the seller has made disclosures to qualify those warranties. This is because such indemnities will be given by the seller to mitigate the particular risks identified by the buyer throughout these processes. Note that indemnities are typically given for the big risks, including identified risks that could potentially result in the target incurring significant costs.

To give an example, if it transpires that the target is currently involved in litigation proceedings for supplying a faulty product to a third party, the buyer could require an indemnity from the seller to cover any costs incurred by the target as a result of those litigation proceedings (including the cost of legal fees and any compensation that a court orders the target to pay). This may be a more favourable option for the buyer than simply waiting for the litigation to conclude and then reducing the purchase price to reflect any pay-out made by the target, as litigation can take years to resolve. 

With an indemnity in place, the buyer would only risk being out of pocket post-acquisition if the relevant indemnity is subject to a cap that is lower than the amount that the target has to pay out in connection with the litigation, or if the seller becomes insolvent. To mitigate the insolvency-related risk, the parties could rely on “warranty and indemnity” insurance (covered in more detail below) or agree that a portion of the purchase monies be temporarily set aside in a neutral “escrow” account to ensure the money will be available should a future pay-out need to be made.

Indemnities will often be subject to fierce negotiation; whether indemnities are given, and the scope of those that are given, will depend very much on the parties’ bargaining positions. A seller in a strong position could simply adopt a “take it or leave it” approach and refuse to give certain indemnities, in which case the buyer would be buying with full knowledge of the risks, so would likely have little recourse in the future.

General undertakings

As mentioned, undertakings are statements, given orally or in writing, promising to take or refrain from taking certain action in the future. The statements must be given in the course of business by someone held out as representing the company, to a party that reasonably places reliance on them. Note that an SPA might not distinguish between general undertakings and pre-closing undertakings; all the undertakings might simply be set out in the pre-closing undertakings section of the SPA. 

In the context of a deal, an undertaking could take the form of a promise by the seller to take certain action by a specified date, for instance to rectify an issue that has been identified during the due diligence process and over which the seller has some degree of control. Alternatively, the buyer could include a condition precedent in the contract that makes completion conditional on the seller rectifying the relevant issue before the intended completion date. 

Limitations of liability

If a seller has agreed to give contractual protections, it will likely attempt to limit its potential future liability, including by negotiating liability caps (e.g. de minimis provisions, aggregate claims baskets and de maximis provisions), restrictions on double recovery, limitations on the periods during which claims can be raised (this period is usually 1 – 3 years post-completion, except for tax-related claims), and knowledge qualifiers.

De minimis clause: these clauses restrict the ability of an injured party to bring a claim unless that claim is worth at least a minimum specified amount. This prevents parties from having to spend time administering relatively trivial claims. 

Basket / “tipping” basket: in the context of limitations of liability, a “basket” clause provides that a party who has given an indemnity will not have to pay out in respect of that indemnity until the other party’s losses exceed (in aggregate) an agreed amount. This can be structured as either: (a) a “tipping” basket, which means that once the agreed threshold is reached, the party that gave the indemnity must pay out in respect of the total value of the losses incurred to date; or (b) a “deductible”, which means that once the threshold is reached, the indemnifying party is only liable to pay for the losses that arise in excess of the agreed threshold. A basket can eliminate redress for relatively small claims, therefore helping to ensure that the indemnifying party will not have to carry out the burdensome administrative process of repeatedly paying out for proportionately small claims.

De maximis cap: these clauses place a cap on the maximum amount that can be claimed for particular breaches of contract, therefore limiting the potential liability of the parties. For example, there may be a cap on the maximum amount that can be claimed by the buyer if the seller breaches the terms of the SPA, thereby limiting the seller’s potential liability. 

No double recovery clause: a buyer’s loss may be covered by both an indemnity and a warranty, by multiple different warranties, or by an insurance policy. For instance, a seller may warrant that no environmental contamination has taken place and also indemnify the buyer for any losses that arise as a result of any contamination that occurred before the sale. The buyer may also take out an insurance policy to cover any costs that arise as a result of any contamination that is later discovered. A double recovery clause prevents the buyer from recovering the same loss multiple times, meaning the buyer could not recover its loss by suing under the warranty that was breached, enforcing the indemnity that was given and also collecting under the insurance policy. It would need to choose one of these forms of redress to pursue (and may have agreed in the sale contract or as part of the insurance policy which form of redress it will pursue in priority).

“Knowledge” or “awareness” qualifier: in the context of legal drafting, a “knowledge” (or “awareness”) qualifier is a caveat to a contractual statement which means a party will only be liable if it was actually aware of the pre-existing circumstances that led to, caused or constituted a breach of that contractual statement. This serves to limit a party’s liability to matters which are within that party’s actual knowledge. For example, a seller might want to include an awareness qualifier in a warranty covering whether there are any potential claims against the target company. This could read something to the effect of “As far as the seller is aware, there are currently no claims pending against the target”. Including this wording limits the extent to which the seller would need to investigate the circumstances. However, in order to place greater onus on the seller to check the validity of the statements it makes, the buyer could insist on amending this clause to read: “As far as the seller is aware, having made reasonable enquiries, there are currently no claims pending against the target”.

In addition, if a third party brings a claim against the target post-acquisition, and the potential loss to the buyer/target would be covered by one of the contractual protections given by the seller in the SPA (e.g. an indemnity), the seller will want some level of control over the handling of that claim. Otherwise, the buyer could potentially settle the claim for a higher amount than is necessary simply to dispense with proceedings as quickly and easily as possible, then raise a claim against the seller to recover its losses in full. The seller will therefore usually negotiate the right to settle claims on behalf of the buyer in order to retain some level of control over the amount it will have to pay to the buyer in connection with the settled claim.

Practical tips

When drafting limitations of liability, it is important that you define the scope of the recoverable loss as accurately as possible. For instance, you may want to consider:

• Whether exclusions are required for indirect and inconsequential loss.
• Whether “direct loss” should be interpreted broadly and include, for example, loss of profit, reimbursement of expenses (e.g. manufacturing expenses, as opposed to only the profit that would have been made on the products manufactured), and/or loss of revenue, contracts, business, anticipated savings, goodwill and/or reputation.
• If different caps should apply for each party or for different categories of liability (e.g. warranties and indemnities).

Remember that you cannot exclude liability for fraud (it is standard practice to expressly preserve liability for fraud), unfair or unreasonable terms, death or personal injury, or failure to give good title.

Insurance

It’s worth briefly noting that pretty much any major deal will involve warranty and indemnity insurance (often referred to as “W&I insurance”). This is an insurance product designed to reimburse a buyer if losses arise as a result of a seller breaching the warranties given during the sale process, and to cover payments that sellers would otherwise have to make in connection with indemnities. These policies can help to protect a buyer’s position if the seller later enters into insolvency, although it’s worth noting that pay-outs under these insurance policies may be subject to certain limitations, carve outs and caps.

Restrictive covenants

A buyer will want to include non-solicitation obligations in the SPA to prevent the seller from soliciting (i.e. trying to poach) the target’s employees, customers, suppliers, and other key stakeholders for a specified period of time post-acquisition. However, sellers will try to limit the period for which the non-solicitation restrictions will apply and ensure the restrictions only apply to key employees. Sellers will also usually want to retain the ability to recruit employees from the target’s business who have been attracted using usual (i.e. general, non-targeted) recruitment activity, and continue working with certain customers or suppliers that are already involved in other aspects of the seller’s business.

A buyer will also want to place some level of restriction on the seller’s ability to engage in business that competes with the target post-acquisition, although sellers will want to ensure these restrictions are suitably limited in time and – if applicable – geography (for example, the seller may want to retain the right to set up a similar business in a jurisdiction in which the target doesn’t currently operate).

Note that there’s no set rule to determine what is a reasonable period for restrictive covenants to subsist post-acquisition. However, courts will only uphold restrictive covenants if the stipulated duration is necessary to protect a company’s legitimate interests. If a court believes that the duration of a restrictive covenant is unreasonable in the sense that it is longer than necessary, the restrictive covenant might be “struck out” (i.e. treated as if it was never included in the first place). For this reason, it’s important not to include time periods that are longer than necessary.

As a final point, buyers may want to include the right to seek an injunction against the seller in respect of any breaches (or threatened breaches) of restrictive covenants, on the basis that damages might not be sufficient under the relevant circumstances.

Injunction: in this context, an injunction involves the court issuing an order that legally prohibits a party from doing (or continuing to do) a specific act. For example, if a seller – in breach of a restrictive covenant in the SPA – is in the process of setting up a business that competes with the target, the buyer could seek an injunction to stop the seller from launching that business. This can be far more powerful than the remedies available for breach of contract, as failing to adhere to an injunction constitutes contempt of court, which can lead to imprisonment and an unlimited fine.

Completion deliverables

An SPA will also usually set out key “deliverables” (i.e. actions that must be taken and documents that must be delivered) that will fall due on or before completion. For example, this section of the SPA will usually stipulate that the buyer must pay the seller, and the seller must provide to the buyer any documents needed to facilitate the transfer of ownership and control of the target. 

Such documents typically include share certificates (or indemnities in respect of any lost share certificates), executed stock transfer forms (to give effect to the transfer of the target’s shares from the seller to the buyer), the target’s company books, and anything else that might be relevant to the transfer of ownership and control (e.g. the authentication code for the target’s Companies House account, the title deeds to any real estate that is being transferred, and any relevant keys or passwords).