In simple language a transaction document is one which set-outs details of a proposed transaction, in our context an investment transaction such as purchase of equity or preference shares or subscribing to debentures of a company, whether convertible or not. All investment transactions are not identical. More often than not, each investment transaction begins with a term-sheet, which is nothing but a bullet point (non-binding) document outlining the terms of a proposed deal. Parties exchange the term sheet in an attempt to negotiate and resolve major outstanding issues. Once the terms of a deal are finalized, parties begin to exchange definative agreements such as shareholders agreement and share purchase agreement, as the case may be. Let us now discuss the above agreements in detail as, one will find these agreements in most investment transactions. Remember that since such transactions are of various types, this is not an exhaustive list but an informative one.
SHARE PURCHASE AGREEMENT
A share purchase agreement, as the name suggests is a binding contract between sellers of shares (can be the company or its sareholders or both) and purchaser of shares, the incoming investor. Such an agreement essentially outlines the market price of shares, premium amount if any, duty and responsibility of parties towards the company, manner in which the shares can be used and sold and provisions with respect to powers of the board. Let’s understand this with the help of an example. Let’s assume Evaluer Private Limited (“Evaluer”) has two shareholders, Raghav and Rahul. Raghav intends to sell its shares in Evaluer to Zinc Limited for a specified monetary consideration. This understanding between the parties will be recorded in a share purchase agreement (“SPA”), a legally binding contract. This agreement is important as it contains all the terms and conditions relevant to the sale of shares such as: (a) the exact description of shares (including the number of shares, price per share and premium amount, if any); (b) the conditions that must be satisfied before the sale takes place; (c) the date on which the sale will be completed; (d) the manner in which the transfer will be made; (e) any indemnities or protections available to the parties; (f) the representations and warranties made by either party; and (g) the conditions upon which the agreement will terminate. The parties to a SPA, as also mentioned above are typically the seller, the purchaser, and the company whose shares are being sold.
SHARE HOLDER AGREEMENT
Second document that is executed when an investment happens is an agreement between shareholders, inter-se. Typically, this agreement supplements a SPA . However, a shareholders agreement is not necessary in all cases. A shareholders agreement is usually entered into when a company has more than one shareholder. The parties to a shareholders agreement are typically the shareholders of the company and the company itself. This agreement contains the rights and obligations of each shareholder on various matters such as: (a) the manner in which shareholders can exit the company; (b) the procedure for transfer of shares; (c) the manner in which to wind up the company (in case of insolvency); (d) the manner in which to resolve a disagreement between the shareholders; (e) the manner in which the company will operate on a day-to-day basis and the rights of each shareholder regarding such operations; and (f) the composition of the board of directors.
The share purchase agreement and shareholders agreement, together are often combined into one document that contains details of a proposed investment transaction and the manner of operation of the company after a transaction has been completed. This, in essence is the meaning and difference between a share holders agreement and share purchase agreement.
Where can I find sample SHA and SPA ?
Sample formats of a shareholder agreement and share purchase agreement are available at our ‘business document template’ section. You could also place a request for drafting the said agreements at Evaluer.