In M&A transactions, one must carefully choose the agreements to fit the unique circumstances of each case. Hereafter, we examine the most frequently used contracts in the context of M&A deals in Spain.
The contract is usually drafted following a comprehensive examination of the legal, economic, financial, and commercial aspects of the company or business to be acquired, a process known as Due Diligence (click here for more information regarding Due Diligence).
The contract choice depends on the specific object of the transaction, usually the purchase of shares or assets. The transfer of a company can take place through the purchase of shares or the company’s assets.
Based on the above dichotomy, we can distinguish the following main types of agreements:
- Share Purchase Agreements (SPA)
- Asset Purchase Agreements (APA)
- Investment Agreements (IA)
The Share Purchase Agreement (SPA)
The purpose of this agreement is the direct acquisition of shares in the target company and involves a change in the composition of its shareholding.
In other words, when a company is acquired through a Share Purchase Agreement (SPA), only the shares of that company are transferred directly. Indirectly, this transfer grants control over the assets and business of the company.
For this reason, the parties involved in this contract are the shareholders and the person(s) interested in acquiring the company. Thus, the new partners or shareholders will have the political and economic rights of the target company.
A Share Purchase Agreement (SPA) is an agreement used to acquire all or a portion of the shares of a company, allowing the acquiring party to gain a minority or majority stake in the target company. Signing a shareholders’ agreement (SHA) for a partial acquisition is also necessary to regulate the relationship between the shareholders, amongst themselves and with the company. It will protect all parties’ interests and address potential disputes clearly and effectively.
The most usual clauses in this type of contract are those involving to the object, the price and payment method, the representations and warranties of the parties or the liability regime, among others.
In a SPA, the purchase price is paid directly to the target company shareholders. It is an essential aspect of the agreement as it means transferring ownership and control of the company.
Through the SPA, the seller transfers all rights and obligations of the target company, including its debts. As a result, it is crucial to include a comprehensive system of guarantees in favour of the buyer to protect him against any potential future liabilities.
The Asset Purchase Agreement (APA)
The main objective of an Asset Purchase Agreement (APA) is the direct transfer of specifically identified assets from the owning company to the acquiring party.
The parties to this contract are the company owner of the assets and the acquiring party.
An Asset Purchase Agreement (APA) enables to purchase the company’s assets, a specific branch of activity, or certain assets (such as machinery, stock, contracts, premises, know-how or others).
The APA requires a clear and precise identification of the transferred assets and may exclude those of no interest to the buyer in a process commonly referred to as cherry-picking.
An APA is like the SPA in terms of its content and clauses. However, it has one particularity: it includes a detailed specification of the transferred assets and their legal nature. Additionally, it explicitly states the need to obtain consent from third parties and specifies the conditions for the effective transfer of each asset. These specificities are crucial to ensure the smooth completion of the transaction and avoid any potential issues or liabilities.
The purchase price to be paid to the owning company will be defined by the market value of those assets.
The investment agreement (IA or Investment Agreement)
Its purpose is the realisation of investments through the investor’s entry into the share capital. In other words, the investor becomes a partner or shareholder.
The investor, the targeted company, and the remaining shareholders collectively establish the investment agreement. The investment usually involves a capital increase in the target company; it can also be a financial loan.
The standard clauses of such agreements regulate:
- The amount of the investment and the specific percentage of the share capital to be subscribed
- The form and timing of the payment of the capital
- The conditions to which the investment is subject, if any
- The special rights of the investor, including the right to information on specific aspects of the company
- The distribution of the share capital among the shareholders.
As in any other transaction, an agreement in M&A operations provides legal certainty to the parties to complete the transaction. The choice of the type of agreement will depend on its purpose.
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This article is not considered legal advice