Share Purchase Agreement (SPA): Key Terms Explained

The Share Purchase Agreement (SPA) is the definitive legal document in any M&A transaction involving the acquisition of shares (as opposed to assets). It is the contract that actually transfers ownership, allocates risk between buyer and seller, and establishes the post-closing rights and obligations that can persist for years after the deal closes. A typical mid-market SPA runs 60 to 120 pages before schedules and exhibits, and its negotiation often consumes 40-60% of total legal fees in the transaction. According to CMS European M&A Study 2024, the average time from LOI to SPA execution in European mid-market deals was 12.4 weeks, with purchase price adjustment mechanisms being the most heavily negotiated provision. This guide walks through every major section, explains the economic and legal implications of key terms, and provides practical negotiation guidance for both buyers and sellers.

What Is a Share Purchase Agreement?

A Share Purchase Agreement is a contract under which the seller(s) agree to sell, and the buyer agrees to purchase, all (or a specified portion) of the issued share capital of a target company. Unlike an asset purchase, where the buyer selects specific assets and liabilities to acquire, a share purchase transfers the entire legal entity -- with all of its assets, liabilities, contracts, employees, permits, and obligations -- to the new owner. The target company itself is not a party to the SPA; it is the object of the transaction.

Share purchases are the dominant structure in mid-market and large-cap M&A for several reasons: they are operationally simpler (no need to individually transfer contracts, licenses, or employees), they preserve the target's legal identity and contractual relationships, and in many jurisdictions they offer tax advantages to the seller (capital gains treatment on share disposal rather than ordinary income on asset sales). However, the buyer assumes all of the target's liabilities -- known and unknown -- which makes the representations, warranties, and indemnification provisions critically important.

SPA vs. APA: Key Differences

The choice between a share purchase and an asset purchase has fundamental implications for deal structuring, tax treatment, liability allocation, and the complexity of the definitive agreement. Understanding these differences is essential for evaluating which deal structure is appropriate for a given transaction.

Key Sections of the SPA

A well-drafted SPA follows a logical structure that mirrors the transaction lifecycle from signing through closing and into the post-closing period. While the specific provisions vary by jurisdiction, deal size, and transaction complexity, the core architecture is remarkably consistent across markets.

Purchase Price Adjustment Mechanisms

The purchase price mechanism is arguably the most commercially significant provision in the SPA. It determines not just how much the buyer pays, but when and how the price is finalized. The two dominant approaches -- completion accounts and locked box -- represent fundamentally different philosophies about risk allocation and economic timing.

Completion Accounts

Under a completion accounts mechanism, the buyer pays an estimated purchase price at closing based on projected net debt, working capital, and cash. Within 60 to 90 days after closing, the buyer prepares "completion accounts" -- a set of financial statements as of the closing date -- that determine the actual values of these components. The purchase price is then adjusted upward or downward based on the difference between the estimated and actual figures. If the parties cannot agree on the completion accounts, the dispute is typically referred to an independent accounting firm for binding determination.

The completion accounts approach gives the buyer significant control over the post-closing price adjustment process, which is why sellers often resist it. The buyer prepares the accounts, chooses the accounting policies (within agreed parameters), and effectively controls the narrative. Sellers should insist on detailed accounting policies being agreed in the SPA, the right to review and challenge the buyer's draft accounts, and a tight timeline for the determination process.

Locked Box

The locked box mechanism fixes the purchase price at signing based on a set of audited or agreed-upon financial statements as of a specific date (the "locked box date"). The economic interest in the target effectively transfers to the buyer on the locked box date, even though legal ownership does not transfer until closing. To protect the buyer during the interim period, the seller provides a comprehensive warranty that no value has "leaked" from the target since the locked box date -- no dividends, management fees, related party payments, or other distributions beyond "permitted leakage" (typically ordinary course salary payments and pre-agreed items).

Locked box mechanisms have become increasingly popular in European M&A because they provide price certainty, eliminate post-closing disputes, and allow the seller to make a clean exit without a 60-120 day tail of accounting uncertainty. However, they require the buyer to be comfortable with the locked box accounts, which means robust diligence on the target's financial position as of the locked box date.

Earn-Out Provisions

When the parties cannot agree on a purchase price -- often because the seller's valuation is based on projected future performance that the buyer considers uncertain -- an earn-out bridges the gap. A portion of the purchase price is contingent on the target achieving specified financial or operational milestones during a defined period (typically 1-3 years) after closing. Earn-outs are among the most litigated provisions in M&A, and their drafting requires extreme precision. Common metrics include revenue, EBITDA, gross profit, customer retention, and product development milestones.

Representations & Warranties

Representations and warranties are the seller's statements about the condition of the target company. They serve three critical functions: (1) they flush out information during negotiation (the seller must review each warranty and disclose exceptions), (2) they allocate risk between buyer and seller (if a warranty is breached, the seller may be liable for resulting losses), and (3) they provide the basis for the buyer's indemnification claims.

Seller warranties in a typical SPA cover: authority and capacity to enter the transaction, title to shares, financial statements, material contracts, employees and benefits, intellectual property, tax compliance, litigation, environmental matters, regulatory compliance, and real property. Each warranty is qualified by a disclosure schedule (also called a disclosure letter) in which the seller identifies specific exceptions. The negotiation of disclosure schedules is often as time-consuming as the negotiation of the warranties themselves. For a deeper examination of these provisions, see our dedicated guide on representations and warranties in M&A.

Indemnification and Limitation of Liability

The indemnification provisions determine the financial consequences of warranty breaches and other specified losses. They are the enforcement mechanism for the entire warranty package and are among the most heavily negotiated sections of the SPA.

Caps

The indemnification cap limits the seller's maximum liability for warranty breaches. For non-fundamental warranties, the cap typically ranges from 10% to 30% of the purchase price in mid-market transactions, with 15-20% being the most common range (SRS Acquiom 2024). Fundamental warranties (authority, title, tax) are often subject to a higher cap -- up to 100% of the purchase price -- or excluded from the cap entirely.

Baskets

A basket establishes a minimum threshold of losses before the seller's indemnification obligation is triggered. There are two types: a "deductible" basket (the seller is only liable for losses exceeding the basket amount) and a "tipping" or "first dollar" basket (once losses exceed the threshold, the seller is liable from the first dollar). Basket amounts typically range from 0.5% to 1.5% of the purchase price. Individual claim thresholds (or "mini-baskets") prevent the buyer from aggregating trivial claims to reach the basket.

Survival Periods

Survival periods define how long the seller's warranties remain enforceable after closing. Standard business warranties survive for 12 to 24 months. Fundamental warranties (title, authority, capitalization) often survive for 3 to 6 years or indefinitely. Tax warranties survive until the expiration of the applicable statute of limitations plus a buffer period. The seller's interest is in shorter survival periods; the buyer wants longer periods to allow time for issues to surface.

Material Adverse Change Clause

The Material Adverse Change (MAC) or Material Adverse Effect (MAE) clause is a condition precedent that allows the buyer to walk away from the transaction if the target experiences a significant deterioration in its business, operations, financial condition, or prospects between signing and closing. The definition of what constitutes a "material adverse change" is one of the most fiercely negotiated provisions in the SPA.

Sellers push for a narrow MAC definition with extensive carve-outs -- changes in general economic conditions, industry-wide trends, changes in law, natural disasters, pandemics, and market fluctuations should not constitute a MAC. Buyers want a broad definition that captures any significant negative development. Delaware courts have historically set a high bar for invoking MAC clauses (Akorn v. Fresenius, 2018, was the first Delaware decision to sustain a MAC termination), which gives sellers leverage in negotiation. However, the COVID-19 pandemic reignited debate about the scope of MAC carve-outs for pandemics, epidemics, and government-mandated shutdowns.

Non-Compete and Non-Solicitation

Post-closing restrictive covenants prevent the seller (and often key management) from competing with the target's business or soliciting its employees and customers for a defined period after closing. Standard non-compete periods range from 2 to 5 years, with 3 years being the most common in mid-market transactions. The geographic and industry scope must be reasonable and specifically defined -- overly broad non-competes risk being unenforceable in many jurisdictions. Non-solicitation provisions are typically less controversial but should define "solicitation" clearly and include exceptions for general advertisements and unsolicited approaches.

Governing Law & Dispute Resolution

The choice of governing law has substantive implications for the interpretation of key SPA provisions. In cross-border transactions, the governing law may differ from the jurisdiction where the target operates, where the parties are domiciled, or where disputes will be resolved. Common choices in international M&A include English law (favored for its well-developed case law on warranty claims), Delaware law (standard for US transactions), and the laws of the target's home jurisdiction.

Dispute resolution mechanisms include: litigation in designated courts (faster for interim relief, but public proceedings and potentially unfavorable jury dynamics), arbitration (private, expert arbitrators, easier cross-border enforcement under the New York Convention, but slower and more expensive), and expert determination (used specifically for accounting disputes such as completion accounts). Most mid-market SPAs use a combination: expert determination for purchase price disputes and arbitration for all other disputes.

Negotiation Tips

For Buyers

• Draft first. The party that drafts the SPA sets the starting point for every negotiation. Buyers should insist on producing the first draft wherever possible -- it establishes the framework and forces the seller to react rather than propose.
• Focus on the disclosure schedules. The warranties are only as valuable as the disclosures are narrow. A broadly drafted warranty becomes worthless if the disclosure schedule carves out every material risk. Review each disclosure critically and push back on disclosures that are overly broad or vague.
• Ensure the indemnification survives long enough. Many issues -- particularly tax, environmental, and IP matters -- do not surface until well after closing. Push for survival periods that match the realistic timeline for discovering breaches.
• Negotiate the MAC clause carefully. Post-pandemic, the MAC definition and its carve-outs are more consequential than ever. Ensure the carve-outs are reasonable and do not effectively eliminate the MAC as a termination right.

For Sellers

• Push for a locked box. Price certainty eliminates the single largest source of post-closing disputes. If you have clean, audited financials, a locked box mechanism is almost always in your interest.
• Qualify warranties with "knowledge" and "materiality." Every warranty should be qualified to the extent appropriate -- "to the knowledge of the seller" limits exposure to matters the seller actually knows about, while materiality qualifiers exclude trivial breaches. Be careful with "double-materiality" -- some indemnification clauses ignore materiality qualifiers when calculating losses.
• Use W&I insurance to clean up the exit. If the buyer is willing to obtain W&I insurance, the seller can negotiate significantly lower indemnification caps (sometimes as low as $1) and avoid escrow holdbacks entirely.
• Limit post-closing covenants. Non-compete provisions should be time-limited, geographically bounded, and narrowly defined. Resist open-ended cooperation covenants that create indefinite obligations.

Conclusion

The Share Purchase Agreement is the most consequential document in any share acquisition -- the contract that actually transfers ownership and allocates risk for years after closing. Its negotiation requires not just legal precision but commercial judgment: understanding which provisions create real economic exposure and which are largely theoretical. Buyers should focus on warranty scope, disclosure schedule quality, indemnification mechanics, and purchase price adjustment provisions. Sellers should prioritize price certainty, liability limitation, and a clean exit structure.

For a deeper understanding of the deal structures that determine whether an SPA or APA is appropriate, see our guide on M&A deal structures. Once the Letter of Intent is signed, the SPA negotiation begins in earnest -- and the preparation you do during diligence directly determines your leverage at the drafting table.