Learn to draft a share purchase (or subscription) agreement for a private equity transaction

PrivateEquityLawyer_AngiraSinghviOnce due diligence has been conducted on the target of a private equity investment and the investor, satisfied with the outcome of due diligence, is ready to invest, the stage is set for drafting the documents needed to complete the transaction. Drafts of these documents are usually prepared while the due diligence proceeds simultaneously.

The key documents

The documents that are fundamental to a private equity investment are (1) the share purchase agreement (“SPA”) or the share subscription agreement (“SSA”) depending on how the investor acquires shares in the target; (2) the shareholders’ agreement (“SHA”); and (3) the disclosure schedule. Since a private equity investor invests in the company for a fixed amount of time rather than in the assets owned by the company, asset transfers are quite rare.

An SPA provides for the transfer of shares to the investor. It is executed when the shareholders of the target company agree to transfer their shares to the investor. Under such an agreement, the investor purchases shares that are already in existence. An SSA on the other hand, provides for a new issue of shares. Such an agreement is preferred when parties decide that instead of the current shareholders transferring their shares to the new investor, the company would issue new shares to the investor. The investor subscribes to these new shares and hence the name, “share subscription agreement”.

An SHA provides for the rights and obligations of the parties inter se, that is, in relation to each other. It includes provisions for the manner in which the target company will be governed and run after the closing. Common items covered in an SHA are the appointment of directors, the conduct of board and shareholders’ meetings, shareholding, the raising of finance, and the transfer of shares.

A disclosure schedule sets out the documents and information that the target has provided or given access to the investor during the due diligence process or at any time before the execution of documents.

Let us now discuss these documents in greater detail. I will cover SPAs and SSAs in this article and SHAs and disclosure schedules in the next one.

As we have seen, an SPA or an SSA (as the case may be) provides the framework for the investor to become a shareholder in the target company. Let us now see some of the major issues that this document will cover.

Transfer or issue of shares

The agreement will state whether the shares are being issued or transferred to the investor. It will also set out the price at which the shares are being issued or transferred, the mode of transfer or issue, and the manner in which the consideration is transferred. While the transfer is stipulated in the agreement, it actually takes place during the board meeting that is conducted at the time of closing the deal. I will discuss the details of how this should be conducted in a later article on closing.

While drafting this clause, it is also useful to keep in mind certain specific aspects that may affect a transfer.

Documents in escrow: The parties may, for example, only want the transfer to take effect from a later date. Until that date, they may want the executed documents to be deposited in an escrow account. While drafting such conditions, you should be able to identify any procedural and secretarial issues such as those in relation to the validity of resolutions for a particular period or the validity of share transfer certificates. An escrow arrangement for instance, will not work unless those documents are valid for the entire period of escrow.

Sale to a foreign party: Similarly, a sale to a foreign party must adhere to the pricing norms contained in the FDI Policy.

Encumbrances: In the case of a transfer of securities, lawyers advising on the transaction should ensure that the transfer is free from all encumbrances. For example, the shares may be pledged to third parties against loans and advances or there may be a charge on the assets of the company. Due diligence should be thorough so that any such possibilities can be crossed out. Further, documentation should mention that all transfers are without any encumbrance. Charges can be searched on the Ministry of Corporate Affairs’ website and a lawyer can draft the ‘transfer’ clause accordingly.

– Authorised share capital: In case of a new issue of shares, a lawyer should also ensure that the company will continue to comply with the ceiling of authorised share capital after such issue. Under law, a company cannot raise more capital than the authorised share capital provided in its memorandum of association. In case the capital after the raise is likely to exceed this amount, the memorandum should be amended to reflect that.

– Nature of security: In case the issue involves a party resident outside India and the automatic route is intended for the investment, a lawyer advising on the transaction should also ensure that the nature of security is such that it is a plain vanilla equity or that is compulsorily convertible into equity and advise the client accordingly.

Conditions precedent to closing the transaction

On completing the due diligence, lawyers advising the investor will be able to identify some key items that the target entity should fulfil before closing the transaction. For instance, the target company may not have complied with some laws.

Some common conditions precedent include:

(1) that target entity should obtain some prescribed licenses;

(2) that it should issue appointment letters to its employees in a prescribed format;

(3) that it should complete the statutory books and pending filings;

(4) that it should obtain necessary corporate approvals and resolutions for entry into the transaction; and

(5) that it should obtain a valuation of shares.

The SPA or the SSA will contain these conditions. A condition precedent has to be fulfilled by the seller after the agreement is executed but prior to closing the transaction. The buyer usually has the option to provide an extension of this period or even to cancel any such compliance as a condition precedent if it is not fundamental to the investment. Common examples of such conditions are the obtaining or renewal of ancillary licenses, such as, the license to operate a lift. However, fundamental conditions such as the license to operate the business or any corporate approvals necessary to undertake the transaction, cannot be dispensed with.

The SSA or SPA will also provide a date by when each of the conditions precedent should be complied with. This is usually called the “long stop” date. The agreement will stipulate that unless the conditions are complied with by that date, the agreement, despite execution, will terminate and there will not be any closing of the agreement.


The “closing” is the point at which the transaction is completed. Shares are transferred, money is paid, the board undergoes changes, and the necessary corporate actions are undertaken to formally make the investor a part of the target entity. Closing is usually undertaken 30 to 60 days after the execution of transaction documents. During this time, the target entity fulfils the stipulated conditions precedent or seeks from the investor, a waiver from fulfilling them.

On the closing date, a board meeting is organised. The main actions undertaken at such meetings include the issue or transfer of shares (as the case may be); the appointment of directors nominated by the investor; and the approval of the amended form of the target’s articles of association and then placing them before the shareholders for final approval. We will discuss the need for such appointments and amendments in a later post on SHAs. The process of closing will also be discussed in detail in subsequent posts.

Following the board meeting, a shareholders’ meeting is also organised. Some matters that are passed by the board, such as an amendment to the company’s articles of association, require shareholders’ meeting for final approval.

Once the closing has been successfully completed, an investor formally becomes a part of the target company. All these aspects are stipulated in the SPA or the SSA usually after the clause on conditions precedent. This clause provides the time and date of closing and also lists out the actions that will be undertaken on the closing date. Since there are numerous actions to be completed, usually, it is provided that upon one last action being completed, all closing items will be deemed to have been completed. This clause also provides the manner in which consideration will flow from the buyer to the seller unless a separate clause on consideration is provided for. There are several ways in which a transfer of shares may take place. For example, it may be in dematerialised form or through the endorsement of share certificates. Consideration may be paid through cash, cheque, or wire transfer. All these aspects are provided for in the clause providing for transfer or issue of shares. Where the investor is a foreign entity, Form FC-GPR in the case of an issue of shares or Form FC-TRS in case of a transfer of shares, need to be filed with the Reserve Bank of India. After all these actions are completed, share certificates are finally issued to the buyer and then the closing is deemed to have been undertaken.

This clause has a large bearing on the completeness of a transaction from a procedural point of view. All items should be carefully listed and completed in accordance with company law and the applicable secretarial standards.

Representations and warranties backed by indemnity

You will remember from studying the law of contracts and sale of goods that representations and warranties are usually made by a seller to a buyer regarding the product that is up for sale. To understand this clause in the SSA or the SPA, you can consider the target company as a ‘product’ that is being sold by its current shareholders. Extensive representations and warranties are made to ensure there will not be any liabilities or adverse consequences for the investor.

They include representations and warranties about the authority and capacity of the parties in entering into the transaction; corporate matters, filings, resolutions and approvals; licenses and approvals for the transaction and business; business of the company; taxation, accounts and records; borrowings; intellectual property; related party transactions; assets; and litigation.

As lawyer advising the investor, you should ensure that your list of representations and warranties should be extensive and cover every aspect in relation to the target company. A lawyer advising the target company will attempt to narrow down the list. For example, if the target company has already provided the investor with some information during the due diligence, you may refrain from providing any representation or warranty on that very aspect as the investor is expected to know the correct state of affairs. Also, if the investor has clearly come to know of any shortfall in the company’s affairs, you may not want to provide a representation or warranty to that item.

These representations and warranties are backed by indemnity. While agreeing to indemnify the investor, the company and its current shareholders promise to save the investor from any loss caused to the investor for any breach, falsity, or shortfall of the representations and warranties. It is important to draft the clause on indemnity carefully to ensure that liability is predictable. A company will want to cap its liability as much as possible while an investor will want to do the opposite.

This brings our discussion on drafting SPAs and SSAs to a close. I will discuss SHAs and disclosure letters in my next post.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.


Best efforts clauses: Reluctance of US courts to define a “best effort” shows it is important to define it in the contract

SamarJha“Best efforts” clauses are among the most contentious and heavily negotiated clauses in asset purchase and share purchase agreements. They require one (or both) of the parties to use their highest efforts to perform some obligation. While the clause may (or may not) require a party to achieve a specific goal, the use of the term “best efforts” creates a strict standard of compliance. Effort clauses therefore require a party to commit to a particular standard of effort to comply with the provisions of the contract. For instance, in the clause, “Supplier agrees to use commercially reasonable best efforts to satisfy the requirements of…”, the best efforts clause is qualified with the term “commercially reasonable”. Common variations of “best efforts” include “reasonable efforts” and “commercially reasonable efforts”.

These clauses are generally used in situations where a party cannot guarantee a particular outcome that has to be performed under a contract, where a situation is beyond a party’s control, where there is unpredictability about the promising party’s ability to achieve an objective, or where a promising party refuses to agree on a covenant. For example, a clause may specifically state, “The Purchaser shall make any necessary filings with respect to, and use its [best efforts/reasonable best efforts/commercially reasonable efforts] promptly to obtain, all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and will cooperate fully with the other parties in promptly seeking to obtain all such authorizations, consents, orders and approvals.

According to § 2-306 (2) of the Uniform Commercial Code (“UCC”), a lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes, unless otherwise agreed, an obligation on the seller to use “best efforts” to supply the goods, and on the buyer to use “best efforts” to promote their sale.

The UCC standards are unclear because Official Comment 5 does not distinguish between “best” and “reasonable” standards of effort. It explains that the obligation on the parties is to use “reasonable diligence as well as good faith”. On the face of it, it looks as if the standard is not that strict.

Your reasonable efforts are your best efforts, say US courts



Interpreting such terms according to the facts and circumstances of the case, courts have interpreted “best efforts” as “reasonable efforts” and in decisions such as Soroof Trading Development Company LTD. v. GE Fuel Cell Systems LLC, 842 F. Supp. 2d 502 (S.D.N.Y., 2012) by the Southern District of New York, these terms have even been used interchangeably. In Bloor v. Falstaff [601 F.2d 609 (2d Cir. 1979)], the court stated that while performing its obligations using best efforts does not necessarily “prevent the party from giving reasonable consideration to its own interest”, such action or inaction has to be in “good faith and to the extent of its own total capabilities” and like an “average prudent” performer. In US Airways Group, Inc. v. British Airways PLC [989 F. Supp. 482 (S.D.N.Y. 1997)], British Airways delayed investments totaling USD 750 million into the US Airways Group by not obtaining the necessary approvals without telling the latter about their intentions to not continue with the deal. The duty of good faith and fair dealing, the court said, is implied in every contract and the actions of British Airways were construed as not being their “reasonable best efforts” and a transaction done in ba

In Hexion Speciality Chem. Inc. v. Huntsman Corp. [965 A.2d 715 (Del. Ch. 2008)], the court held that the buyer breached its covenant to use “reasonable best efforts” to close the merger (Huntsman was the target, and Hexion the buyer) when Hexion took steps to subvert the financing it was seeking to acquire Huntsman. Hexion filed a suit seeking to terminate the merger without paying the contractually mandated reverse break-up fee. It argued that the surviving entity after the merger would be insolvent and Huntsman’s poor financial results triggered the material adverse effect clause in the agreement. It was held however, that one poor financial result does not trigger it and that ultimately, since Hexion did not perform the obligation in good faith, its actions constituted a willful and intentional breach.

Recently, in Apollo Tires v. Cooper Tires, Civil Action No. 8980-VCG, the moot point was whether Apollo Tires (the buyer) had failed to use “reasonable best efforts” to reach the negotiated agreement with the United Steelworkers Union (“USW”) as required by the merger agreement. The court said that a provision that specifically mandated an obligation to obtain antitrust and other regulatory approvals couldn’t be interpreted to include within it, an obligation to obtain third-party contractual consents. The language of the efforts clause asked for obtaining antitrust and other regulatory approvals and did not talk about third-party consents. In the end, Cooper Tires could not prove that Apollo Tires did not use “reasonable best efforts” to obtain the consent from USW.

Courts clearly are reluctant to provide a definition for “best efforts”. They rightly treat this issue according to the specific facts and circumstances of the case and do not have a particular definition for the term. It is not a “hell or high water” clause as it is sometimes called because, as we have seen, the promising party does not always have to do everything in its power to conclude the obligation. The courts make sure that the promising party does not ignore their own interest, incur losses just to perform the obligation, or ignore its fiduciary duties. It is important however, that the promising party’s obligation is performed in good faith and there is no willful breach of the obligation.

Define “best efforts” to reduce uncertainty

To avoid uncertainty in terms of performing obligations and enforcement, firstly, it is important for the parties understand their rights and obligations under the “best efforts” provisions. Parties can also define the terms in the contract. As we have seen, courts have provided a subjective interpretation only when the agreement did not provide a definition for “best efforts”. The definition should clearly define the promisor’s capability, reasonable business practice, and the industry standard in relation to the obligation. Providing objective criteria would implore the courts to stick to the contractual language.

Samar Jha recently received an LLM from the University of Pennsylvania Law School.