Share Purchase Agreements Drafting Issues.
1. Meaning and Importance of a Share Purchase Agreement (SPA)
A Share Purchase Agreement (SPA) is the principal contract governing the sale and purchase of shares of a company, resulting in:
Transfer of ownership, and often
Change in control or management
The SPA allocates commercial, legal and regulatory risks between buyer and seller.
Poor drafting often leads to post-closing disputes, regulatory violations and litigation.
2. Legal Framework Governing SPAs in India
Indian Contract Act, 1872
Companies Act, 2013
SEBI (SAST) Regulations, 2011 (for listed companies)
SEBI (ICDR) Regulations (if issue involved)
FEMA & RBI regulations (cross-border SPAs)
Stamp Acts (state-specific)
Competition Act, 2002
3. Core Drafting Issues in Share Purchase Agreements
4. Identification of Parties and Capacity
Drafting Issues:
Incorrect description of sellers (promoters vs shareholders)
Failure to identify Persons Acting in Concert (PAC)
Authority and capacity of parties
📌 Risk: Invalid transfer or regulatory breach.
5. Subject Matter and Shares Being Transferred
Drafting Issues:
Ambiguous share class
Mismatch between issued, paid-up and diluted capital
Non-disclosure of encumbrances
📌 Best Practice: Detailed capitalization table as schedule.
6. Purchase Consideration and Pricing Mechanism
Drafting Issues:
Fixed price vs completion accounts ambiguity
Earn-out misalignment
Adjustment mechanisms poorly defined
📌 Regulatory Aspect: Must comply with SEBI/FEMA pricing norms.
7. Conditions Precedent (CPs)
Drafting Issues:
Vague CPs
No long-stop date
Regulatory approvals not clearly allocated
📌 Examples of CPs:
Open offer completion
CCI approval
Shareholder approvals
8. Representations and Warranties (R&Ws)
Drafting Issues:
Overbroad or generic warranties
No materiality qualifiers
No knowledge qualifiers
📌 Key Risk Areas:
Title to shares
Litigation
Compliance
Financial statements
9. Indemnity Clauses
Drafting Issues:
No survival period
No caps, baskets or thresholds
Poor linkage with R&Ws
📌 Indemnity = Risk allocation tool, not mere boilerplate.
10. Covenants (Pre-Closing & Post-Closing)
Drafting Issues:
Over-restrictive interim covenants
No clarity on conduct of business
Inadequate post-closing restraints
📌 Includes:
Non-compete
Non-solicitation
Confidentiality
11. Closing Mechanics
Drafting Issues:
Unclear closing deliverables
Timing mismatch
Escrow arrangements not aligned
12. Termination Clauses
Drafting Issues:
No clear termination events
Break fees unenforceable
Survival of clauses unclear
13. Dispute Resolution Clause
Drafting Issues:
Arbitration seat not specified
Governing law ambiguity
Multi-tier clauses poorly structured
14. Regulatory Drafting Issues (Listed Companies)
Open offer obligations
Disclosure timing
Non-compete fees treatment
Escrow and public announcement alignment
15. Important Case Laws on SPA Drafting and Interpretation
1. Vodafone International Holdings BV v. Union of India
Principle:
Commercial substance and contractual intent are crucial
Share purchase agreements can result in indirect transfer of control
Relevance:
Landmark on SPA structuring and tax/regulatory impact
2. Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc.
Principle:
Share purchase and shareholders’ agreements must be read harmoniously
Intention of parties governs interpretation
Relevance:
SPA–SHA interplay
3. Enercon (India) Ltd. v. Enercon GmbH
Principle:
Poorly drafted dispute resolution clauses lead to jurisdictional chaos
Courts may step in to preserve commercial intent
Relevance:
Arbitration clause drafting
4. IDBI Trusteeship Services Ltd. v. Hubtown Ltd.
Principle:
Conditions precedent must be satisfied strictly
Commercial contracts cannot be rewritten by courts
Relevance:
CP drafting discipline
5. Cox & Kings Ltd. v. SAP India Pvt. Ltd.
Principle:
Indemnity clauses must be interpreted strictly
Parties bound by express risk allocation
Relevance:
Indemnity drafting clarity
6. BSNL v. Motorola India Pvt. Ltd.
Principle:
Commercial contracts must be interpreted as a whole
Isolated clauses cannot override overall intent
Relevance:
Holistic SPA interpretation
7. Nabha Power Ltd. v. Punjab State Power Corporation Ltd.
Principle:
Business efficacy test applies to complex commercial agreements
Implied terms limited
Relevance:
Avoid reliance on implied protections—draft expressly
16. Common Drafting Pitfalls in SPAs
Boilerplate clauses copied without customization
Ignoring regulatory overlays
Lack of schedules and disclosure letters
Ambiguous timelines
No integration clause
17. Best Practices for SPA Drafting
Align SPA with SHA and term sheet
Use clear definitions and schedules
Address regulatory compliance upfront
Build robust indemnity framework
Draft dispute resolution precisely
18. Conclusion
A Share Purchase Agreement is not merely a sale contract but a comprehensive risk-allocation instrument.
Indian courts consistently hold that clarity, intent and commercial logic govern SPA interpretation.
“In M&A, what is not drafted is often what is litigated.”
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