Key terms in a share purchase agreement

Warranties

Warranties are assurances from the seller about the company: that it owns what it says it owns, that its accounts are accurate, that it has paid its taxes, that it is not being sued, and so on. If a warranty proves untrue, the buyer can claim damages for the loss it causes.

Singapore firms suggest the warranties should at least cover the seller's capacity and title to the shares, corporate information, financial information, employees, tax, compliance with laws and litigation, with Singapore-specific points such as GST, stamp duty, CPF contributions and work passes.

Indemnities

An indemnity is a promise to reimburse the buyer for a particular loss, typically a specific risk found during due diligence, such as a tax exposure or a pending claim. It is generally easier to recover under an indemnity than for breach of warranty, because the buyer does not have to show the loss was foreseeable and does not have the same duty to reduce it.

Limits on the seller's liability

Sellers almost always negotiate limits on what they can be made to pay. Common ones include:

• An overall cap, at or below the purchase price.
• A minimum size for each claim, and a threshold the claims must reach together before any can be made.
• Time limits for bringing claims, often longer for tax and for title to the shares than for general business warranties.
• Knowledge and materiality qualifiers on particular warranties.
• No recovering twice for the same loss.

Conditions and completion

If no approvals are needed, signing and completion can happen on the same day. Otherwise, the agreement is signed first and completed once its conditions are met, such as regulatory approval, a lender's or landlord's consent, or the shareholder approval needed when a company sells substantially all of its business. A long-stop date sets how long the parties will wait before the deal falls away.

Between signing and completion, the seller agrees to run the business normally and not to do anything significant, such as issuing shares, paying dividends, taking on new debt or signing major contracts, without the buyer's consent.

The price

There are two common ways to fix the price. With completion accounts, the price is adjusted after completion for the company's actual debt and working capital on the day. With a locked box, the price is fixed by reference to an earlier balance sheet, and the seller promises that no value has leaked out of the company since. Singapore firms report a move towards locked box, especially in private equity and auction sales. Earn-outs, where part of the price depends on future performance, are common when the founder stays on to run the business.

Other terms to look out for

• Restrictions on the seller competing or poaching staff after the sale. These are enforceable only if they protect a legitimate interest and are reasonable in scope and length.
• Warranty and indemnity insurance, increasingly used in Singapore, which covers the buyer for breaches of warranty and gives the seller a cleaner exit.
• Governing law and disputes: deals involving Singapore companies usually choose Singapore law, often with arbitration.