In the context of mergers and acquisitions, the Share Purchase Agreement (SPA) is more than merely a legal formality. Consider it the skeleton of the whole deal—it sets out the commercial terms, legal entitlements, representations, indemnities, and ongoing obligations of both parties.
But for all of its importance, many agreements collapse on account of imprecise terms or overlooked details. What may appear to be a trivial mistake can rapidly escalate into a serious legal controversy, only to emerge long after the deal has been signed.
Based on experiential knowledge from dealing with mid to big-ticket transactions, this article provides insights into the most common pitfalls encountered in SPAs and the legal protections that the parties must include to safeguard their interests.
1.Ambiguity in Purchase Price Mechanism
The Pitfall: SPAs usually fail to make it explicit whether the purchase price is fixed or if it should be varied by reference to net debt, working capital, or some other financial metrics. This lack of clarity can lead to disputes after the deal closes.
The Protection: Make sure to clearly state whether you’re using a locked box mechanism or completion accounts. Detail the adjustment formulas, set thresholds, establish timelines for review, and outline escalation procedures in case of disagreements.
Reference: The Bombay High Court emphasized the importance of clearly worded post-closing adjustment mechanisms and upheld arbitration to resolve disputes arising out of ambiguity in purchase price calculation.
2. Loopholes in Representations and Warranties
The Pitfall: Sellers tend to put in limiting phrases like “to the best of knowledge” or use imprecise language that undermines the enforceability of their representations and warranties.
The Protection: Buyers should insist on precise, objective representations supported by detailed disclosure schedules. Sellers must make their statements are accurate and sufficiently qualified so that they are not exposed to any future liabilities.
Reference: In Nash v. Paragon Finance case the UK Court reiterated that “knowledge qualifiers” weaken enforceability and have to be clearly defined. The Indian courts follows the same rationale while considering commercial contracts under the Indian Contract Act, 1872.
3. Inadequate Indemnity Clauses
The Pitfall: Indemnity provisions, which are one of the most disputed sections of an SPA, tend to be too general or written with less than adequate commercial negotiation.
The Protection: Set out the scope of indemnity, including applicable caps, deductibles (or baskets), time periods, and procedures to be followed.
Reference: The Supreme Court held that indemnity provisions should be construed on the basis of contract terms and can operate independently of common law damages.
4. Vague or Open-Ended Conditions Precedent
The Pitfall: Conditions precedent (CPs) are essential, but they often end up being too vague, which can cause delays, disputes, or even failed transactions.
The Protection: Clearly outline all CPs, specifying measurable deliverables and timelines. Steer clear of vague phrases like “subject to mutual satisfaction” unless there’s a clear benchmark to refer to.
Reference: In Union of India v. D.K. Joshi & Co. [Company Law Board, 2013], the tribunal ruled that failure to meet time-bound conditions precedent, where the agreement lacked clarity, led to a justifiable termination of the SPA.
5. Overlooking Employment & Transition Issues
The Pitfall: When it comes to employee transfers, retaining key personnel, or handling exit liabilities, these issues are frequently overlooked during the SPA phase.
The Protection: Make sure to include clauses that address employee retention, bonus payments, gratuity, and non-solicitation. In regulated sectors like NBFCs or insurance, keep in mind the necessary approvals for continuing services.
Reference: In Western India Match Co. Ltd. case, the Supreme Court observed that acquiring entities must either absorb employees or comply with statutory obligations during business takeovers.
IRDAI Circular: As per IRDAI regulations and Circulars mandate that approval must be obtained for continuation or transfer of agents and employees during acquisition or restructuring of an insurance intermediary.
6. Ignoring Regulatory and Tax Nuances
The Pitfall: In cross-border or industry-specific deals (like insurance, broking, or fintech), regulatory and tax structuring is often an afterthought.
The Protection: Get in touch with regulatory consultants and tax advisors early on. Whether it’s about IRDAI approval, FEMA compliance, or indirect transfer taxation, these factors should shape the SPA drafting process, not just be added later.
Reference: Vodafone International Holdings BV v. Union of India case is a example of how failure to anticipate indirect transfer tax liability in a cross-border M&A deal can lead to massive litigation and financial exposure.
Regulatory Circulars:
- As per SEBI Circular on schemes of arrangement – highlights disclosure and approval requirements for listed companies.
- IRDAI Guidelines – prescribes prior approval for share transfers above thresholds in insurance companies/intermediaries.
- As per FEMA Notification – applicable for share transfers involving non-residents.
7.Weak Post-Closing and Dispute Resolution Framework
The Pitfall: Post-closing obligations, such as IP transfers, earn-outs, litigation management, or escrow terms, are sometimes not negotiated thoroughly.
The Protection: Create detailed timelines and responsibilities for post-closing activities. Select a suitable dispute resolution method—whether it’s arbitration, a jurisdictional court, or a neutral forum—based on the nature of the parties and the transaction.
Reference: In K.K. Modi case the Supreme Court laid down guidelines for valid arbitration clauses, stressing the need for clarity in dispute resolution frameworks.
Conclusion: A Share Purchase Agreement goes beyond just legal drafting; it’s about aligning commercial goals with legal enforceability. Whether you’re representing a buyer, seller, or investor, your job as an advisor is to anticipate potential friction points and address them with practical, well-negotiated clauses.
With increasing regulatory scrutiny and evolving judicial interpretations, inserting the right protections from the outset is not just wise—it’s essential.
The aim isn’t just to get a deal signed—it’s to ensure a smooth, dispute-free transition after closing.
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