Share Purchase Agreement in Venture Financing: Ultimate Review Guide

Venture financing deals usually involve the signing of the following documents:

  1. Term Sheet: The term sheet is a non-binding document outlining the basic terms and conditions under which an investment will be made.
  2. Share Purchase Agreement (SPA): The SPA is a central document in any VC deal. It sets out the specific terms of the transaction, including the number of shares being sold, the price per share, and the total investment amount. This agreement also covers representations and warranties, conditions to closing, and indemnification provisions
  3. Disclosure Schedule for SPA: This schedule accompanies the SPA and provides specific disclosures related to the representations and warranties in the SPA. It often includes exceptions or additional details that qualify or explain these representations and warranties, which are vital for assessing risks and obligations.
  4. Voting Agreement: The voting agreement details how certain shareholders must vote their shares, particularly in the context of board composition, sale of the company, and other major corporate decisions. It's essential for maintaining investor rights and balancing interests among different shareholder classes.
  5. Investor Rights Agreement (IRA): This document outlines various rights and privileges granted to investors, including rights to information, registration rights, and other governance-related matters.
  6. Right of First Refusal / Co-sale Agreement: This agreement provides the company, and sometimes other shareholders, the right to buy shares before the selling shareholder can transfer them to a third party (Right of First Refusal). It may also allow shareholders to join in on a sale (Co-sale).
  7. Certificate of Incorporation: Outlining the rights and privileges associated with preferred stock, which is commonly issued to venture investors.

In this guide, we will focus on the Share Purchase Agreement (”SPA”). Our goal is to provide comprehensive guidance for effectively reviewing, negotiating, and advising on the SPA in a VC deal.

Jump to the Section:

1. The SPA is Legally Binding, you MUST ensure terms in the Term Sheet are accurately translated into the SPA

Once the Term Sheet is agreed upon and signed, the SPA is drafted. This document is legally binding and elaborates on the terms agreed upon in the Term Sheet. Your role is to ensure that every clause, condition, and term in the Term Sheet is accurately translated into the SPA. You need to pay close attention to key elements such as valuation, amount of investment, share price, board composition, voting rights, protective provisions, and any rights of first refusal. These terms must be consistent between the Term Sheet and the SPA.

👉 **For detail review guide of the Term Sheet, see: Term Sheet in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/term-sheet-in-venture-financing)**

2. Reviewing the Company’s Representation Section

The Company’s Representation section are factual statements about the company's business, assets, liabilities, and overall condition. For the company, making these representations and warranties increases legal liability, necessitating careful drafting and review.

  • Categories of Representations and Warranties:
    • Fundamental:
      • The basic, essential facts needed for the transaction, such as capitalization, the company’s legal organization, authority to enter into the agreement, conflict of interests, validity of obligations, litigation status, and solvency.
    • General:
      • Concern broader aspects of the company like financial statements, corporate structure, material contracts, and maintenance of books and records.
    • Special:
      • Address specific areas that require additional assurance, often tailored to the company or industry. This can include environmental claims, employee benefits, or compliance with securities laws.
    • Tax:
      • Cover tax-related issues, including the accuracy of tax returns, payment of all due taxes, and any ongoing tax audits or legal proceedings.
👉 **Review Tips:

For the Company**: Ensure that all representations and warranties are accurate and complete. Overstating or omitting significant facts can lead to legal liabilities. It's important to provide a true picture of the company's status, including any potential risks or liabilities.

For Investors: Carefully verify each representation and warranty. This might involve conducting independent due diligence to confirm the information provided by the company.

3. Reviewing the Purchaser’s Representations and Warranties

  • Authority and Enforceability:
    • Confirm that the purchaser has the authority to enter into the agreement and that the agreement is legally enforceable against the purchaser. This protects the company by ensuring that the purchaser is legally bound by the terms of the SPA.
  • Investment Intent:
    • Ensure the purchaser clearly states their intention to invest for investment purposes and not with the intent to resell quickly. This is important for regulatory compliance, particularly with securities laws.
  • Accredited Investor Status:
    • Verify that the purchaser qualifies as an accredited investor, as defined by relevant securities regulations. This status impacts the types of offerings available to them and their eligibility to participate in the investment.
  • Exculpation Among Investors:
    • Review any clauses that provide for the exculpation of the purchaser among other investors. This typically involves limiting the purchaser's liability towards other investors in the deal.
  • Acknowledgement of Restricted Nature of Securities:
    • Ensure the purchaser acknowledges the restricted nature of the securities being purchased. This usually means that the securities cannot be sold or transferred without registration or an applicable exemption.
  • Foreign Investor Status:
    • If the purchaser is a foreign investor, confirm compliance with the laws and regulations applicable to foreign investment. This may include adhering to specific disclosure requirements or limitations on foreign ownership.

4. For Miscellaneous Provisions

While the Miscellaneous Provisions might seem less central than other clauses, they play a critical role in defining how the SPA is executed and managed. Here are key points to consider for each provision:

  • Governing Law:
  • Identifies the legal jurisdiction that governs the SPA. It's crucial to choose a jurisdiction whose laws are favorable or at least neutral to both parties. Familiarize yourself with the specific legal implications of the chosen jurisdiction.
  • Notice:

Outlines the procedures for communication between parties related to the SPA. Ensure that the methods of notice (e.g., email, postal mail) and requirements for effective delivery are practical and clear.

  • Dispute Resolution:

Arbitration is widely used in VC deals due to its efficiency and confidentiality. Unlike court proceedings, arbitration can be less time-consuming and more private, which is crucial in the business world where protecting reputation and sensitive information is key. You need to clearly specify that arbitration is the chosen method for dispute resolution. Include details such as the number of arbitrators, the process for their selection, and the governing rules (e.g., ICC, AAA). Determine the seat of arbitration, which establishes the legal jurisdiction governing the arbitration proceedings and any court involvement required for enforcing the arbitration award.

  • Severability:
    • Ensures that if one part of the agreement is found to be invalid or unenforceable, the rest of the agreement remains in effect. This clause helps preserve the SPA even if minor aspects face legal challenges.
  • Counterparts:
    • Allows the SPA to be executed in multiple copies, each considered an original. This is particularly useful when parties are in different locations and facilitates the execution process.
  • Assignment:
    • Dictates the conditions under which parties can transfer their rights and obligations under the SPA to others. Clarify any restrictions or requirements for assignment to ensure that rights and responsibilities are properly managed.
  • Amendment:
    • Governs how the SPA can be modified. Typically, amendments require the written consent of all parties. Ensure this clause allows for necessary flexibility while maintaining the integrity of the original agreement.

Related Articles:

  1. Term Sheet in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/term-sheet-in-venture-financing)

  2. Voting Agreements and Right of First Refusal / Co-sale Agreements: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/voting-and-right-of-first-refusal-agreement-review-guide)

  3. Investor Rights Agreement (IRA) in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/investor-rights-agreement-review-guide)

  4. Certificate of Incorporation in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/certificate-of-incorporation-agreement-review-guide)