Inside the SPA: The Contract at the Heart of the Transaction

By the time an M&A transaction reaches the definitive agreement, much of the commercial story has already been written.

The parties may have signed an NDA, agreed the principal terms in an LOI, completed substantial due diligence and settled the basic structure of the transaction.

But none of this, by itself, transfers ownership.

In a private share acquisition, that task is ultimately governed by the Share Purchase Agreement, or SPA: the contract that turns the commercial understanding between buyer and seller into a detailed and legally enforceable transaction.

The SPA determines not only what is being sold and for how much, but also what must happen before the deal closes, what each party is promising about the business, how risk is divided between them and what happens if something goes wrong.

That is why the SPA is often described as the central document of a private M&A transaction.

But it is better understood as something more precise: the legal operating system of the deal.

From the LOI to the definitive agreement

The LOI establishes the negotiating perimeter. The SPA converts that perimeter into detailed legal obligations.

A term sheet might state that the parties have agreed a EUR 100 million enterprise value on a cash-free, debt-free basis.

The SPA must explain what "cash" means, what counts as "debt", how working capital is calculated, when the calculation is made, who prepares it, what happens if the parties disagree and when any resulting adjustment is paid.

The same principle applies throughout the agreement.

A few lines in an LOI can become dozens of pages in the SPA because the definitive contract must answer a question that preliminary documents generally do not:

what happens if reality differs from what the parties currently expect?

The precise organisation varies from deal to deal and between jurisdictions, but the underlying architecture is relatively consistent: transaction mechanics, purchase price, representations and warranties, covenants, closing conditions, indemnification, termination rights and general contractual provisions.

First: what exactly is being bought?

An SPA begins with what may appear to be the simplest part of the transaction: the sale and purchase itself.

The agreement identifies the shares being transferred, the seller or sellers, the buyer and the consideration payable in return.

But even this apparently straightforward section can contain important questions.

Is the buyer acquiring 100% of the company or only a controlling interest?

Are there different classes of shares?

Are options, warrants or other rights outstanding?

Will management retain or roll over part of its equity?

Is part of the consideration being paid in shares of the buyer?

The SPA must make the legal perimeter of the acquisition unambiguous.

This follows directly from the structural choice discussed earlier in this series. In a share acquisition, the buyer acquires ownership of the target entity; the assets and liabilities themselves generally remain with that company.

The purchase price is a mechanism, not just a number

The consideration provisions answer the obvious question — how much is the buyer paying? — but also several less obvious ones.

The headline valuation rarely tells the whole story.

The agreement may need to address cash and debt, normalized working capital, locked-box mechanics, completion accounts, leakage, deferred consideration, earn-outs, escrows or other adjustments.

This is where legal drafting and financial analysis become inseparable.

A formula can be legally precise and still fail to reflect the economics the parties actually intended.

For that reason, lawyers, financial advisers and the transaction principals need to ensure that the purchase price provisions translate the agreed valuation into the same economic result everyone believes has been negotiated.

The mechanics of purchase price will be examined separately in the next part of this series.

Representations and warranties: defining the business being acquired

The buyer has performed due diligence, but diligence rarely provides complete information about every aspect of a business.

The SPA therefore contains representations and warranties through which the parties make contractual statements about specified facts.

For the seller, these may cover areas such as corporate authority, ownership of shares, financial statements, material contracts, litigation, tax, employees, intellectual property and regulatory compliance.

For the buyer, the representations may address matters such as authority, capacity and, depending on the structure, financing.

These provisions do more than describe the target.

They allocate information risk.

If a particular statement proves inaccurate, the agreement determines whether the buyer has a remedy and under what conditions.

This is why representations and warranties are among the most heavily negotiated parts of an acquisition agreement.

But warranties cannot be read in isolation.

They interact with the seller’s disclosures, the indemnification regime and the contractual limitations on liability — subjects that will each deserve their own article later in the series.

Covenants: what happens between signing and closing?

Not every M&A transaction signs and closes on the same day.

Regulatory clearances may be required. Third-party consents may still be outstanding. Financing or corporate approvals may need to be completed.

During this gap period, the seller still owns the company, while the buyer has already agreed to acquire it.

The SPA must therefore establish what the parties can and cannot do before closing.

Typical covenants may require the seller to continue operating the business in the ordinary course and restrict extraordinary actions such as major acquisitions, disposals, new debt, significant contractual commitments or changes to capital structure without the buyer’s consent.

These clauses reflect a delicate balance.

The buyer wants to ensure that the business it agreed to acquire does not materially change before closing.

The seller, however, still owns and manages the company.

The SPA therefore needs to protect the value of the transaction without giving the buyer premature control of the target — particularly where competition law or other regulatory constraints apply.

Conditions precedent: when does the obligation to close arise?

Where signing and closing are separated, the SPA normally identifies the conditions that must be satisfied before completion can occur.

These may include regulatory approval, merger control clearance, foreign investment approval, shareholder consent, third-party contractual consents or completion of specified restructuring steps.

The agreement may also require representations and warranties to remain sufficiently accurate at closing and the parties to have complied with relevant pre-closing covenants.

These conditions determine whether the parties must actually proceed from a signed agreement to a completed acquisition.

They therefore sit at the intersection between contractual commitment and execution risk.

A transaction can be fully negotiated and signed yet still fail because a necessary condition cannot be satisfied.

Risk allocation does not stop at closing

One of the biggest misconceptions about an SPA is that its purpose ends when the shares change hands.

In reality, some of its most important provisions are designed precisely for what may happen after closing.

Suppose a tax liability relating to the pre-closing period emerges six months later.

Or a material litigation matter was not properly disclosed.

Or a representation concerning ownership of intellectual property proves incorrect.

The SPA must determine whether the seller remains responsible, for how long, subject to what thresholds and up to what maximum amount.

This is the territory of indemnities, liability caps, baskets, de minimis thresholds, survival periods and other negotiated limitations.

In modern transactions, warranty and indemnity insurance may also alter the traditional allocation of post-closing exposure.

The purpose is not to pretend that the acquisition eliminates uncertainty.

It is to decide who bears the financial consequences when an identified category of uncertainty becomes a real loss.

Termination: a signed deal is not always a closed deal

Where there is a gap between signing and closing, the SPA must also address the circumstances in which the transaction can be terminated.

What if regulatory approval is refused?

What if a condition remains unsatisfied by the long-stop date?

What if one party materially breaches the agreement?

What if an event occurs that falls within an agreed Material Adverse Change provision?

Termination provisions define when a party may walk away and what consequences follow.

Again, the SPA is doing more than documenting the transaction.

It is providing rules for a transaction that might not happen.

The SPA as the negotiated allocation of uncertainty

It is easy to see an SPA as an extremely long contract containing dozens of independent clauses.

That misses the broader logic.

The sections are interconnected.

Due diligence identifies a risk.

That risk may affect valuation.

It may generate a specific warranty.

The warranty may be qualified by disclosure.

A known exposure may instead require a specific indemnity.

That indemnity may be excluded from the general liability cap.

And if the issue must be resolved before completion, it may become a condition precedent rather than a post-closing remedy.

This is where the legal and advisory perspectives converge most clearly.

A good transaction adviser does not simply identify problems. A good M&A lawyer does not simply draft clauses.

The objective is to determine where each risk belongs in the transaction.

Should it change the price?

Should it be solved before closing?

Should the seller retain it?

Should the buyer accept it?

Should it be insured?

Or is the risk significant enough that the transaction should not proceed at all?

The SPA is where those decisions ultimately become contractual.

The contract at the heart of the deal

An SPA does not create the commercial rationale for an acquisition.

It does something different.

It takes the valuation, diligence findings, negotiated positions, identified risks and execution requirements of the transaction and turns them into a single enforceable framework.

Its purchase price provisions determine the economics.

Its representations and warranties establish the contractual picture of the business.

Its covenants protect the period before closing.

Its conditions determine whether closing must occur.

Its indemnification provisions allocate post-closing risk.

And its termination provisions determine when the parties may leave the transaction behind.

That is why negotiating an SPA is not simply the final legal step after the "real" deal has already been agreed.

The SPA is where the commercial deal becomes the legal deal.