What is a Share Purchase Agreement?
A Share Purchase Agreement is a legal document between a buyer and a seller for the sale and purchase of the shares in a corporation (the Company) to which the seller holds shareholdings. In the Philippines, a Share Purchase Agreement can be structured to include both the sale of shares as well as the related assets and liabilities of the corporation.
Depending on the circumstances for the sale, a Share Purchase Agreement can be prepared for individual sellers (whether they are officers or shareholders of the corporation), two or more sellers where each seller holds a particular class of shares or the total for all shareholdings. In addition, either the purchaser (the purchaser may be a corporation , usually incorporated and registered in the Philippines) can be the one to undertake the preparation of the Share Purchase Agreement or the seller can initiate the sale process and upon receiving offers may only prepare a Share Purchase Agreement with a winning bidder.
There are several reasons corporations and/or shareholders enter into agreements to sell their shares in the corporation. One of these reasons is that the shareholders believe the share purchase will provide them with additional cash for other projects or investments whilst providing a good ongoing return. A share transfer could also be an exit strategy for a shareholder where the shareholder no longer has an interest in the ongoing business (meaning that the shareholder does not need to be able to participate in a future basis for distributions from the corporation).
Essential Elements of a Share Purchase Agreement in the Philippines
In a share purchase transaction, parties will agree to the selling of shares in a target company to a buyer. At the center of this kind of deal is the share purchase agreement. In this section, we will discuss some of the key elements of a Philippine share purchase agreement.
Capital Stock
Some of the items listed under the capital stock clause include the following:
-Total issued and outstanding shares.
-Certain classes of shares, if any.
-Number of directors.
-Shareholder rights and obligations, indices, restrictions on conversion, etc.
– Terms of share repurchase, buy-sell agreements, subscription agreements, etc.
Purchase Price
Some of the items listed under the purchase price clause include the following:
-Payment terms.
-Adjustment to purchase price.
-Potential earn outs and other incentives (if any).
-Payment securities (escrows, holdbacks, notes, guarantees, collateral securities, etc.).
Representations
Representations may also be made by the seller to the buyer on the following:
-Material adverse effect.
** The parties must clearly define what a material adverse effect will be under the agreement. It must be broad enough to give the buyer comfort that there will be no any critical events that will result in a drop in value of the target.
Warranties
Some of the individual items listed under warranties may include the following:
-Due organization, qualification.
-Capitalization (as mentioned above).
-Power and authority of target company (to sign and perform the agreement).
-Litigation (proceedings or complaints addressed to the target company).
-Liabilities (undisclosed and contingent).
-Material and intellectual property.
Compliance with Legal Requirements and Regulatory Approvals
Share Purchase Agreements (SPA) in the Philippines are generally governed by the civil code, company regulations, tax laws, intellectual property laws, especially when the company owns an intellectual property and related assets or is a technology-based company, the labor code, on transfer of employee related rights and obligations to give notice to the Department of Labor and Employment (DOLE) when buying companies with more than 50 employees; Regulatory compliance with respect to agencies such as Securities and Exchange Commission (SEC) or other regulatory bodies within an industry prior to the consummation of the transaction in some cases is also required particularly in relation to shareholdings by foreigners or non-Filipinos.
An SPA must be registered with the SEC which aims to "promote the development of fair and equitable business competition and protect investors." The SEC under the Securities Regulation Code (SRC) has the mandate to implement all the provisions of the SRC to effectively regulate the sale of shares in the Philippines. In addition to the SRC is the Corporation Code (CC) which, among other things, deals with both private and government/corporate issues. The Director of Corporations and Partnerships takes the lead, supported by SEC officials and with the assistance of SEC lawyers. The CC provides for the legal framework and requirements for the registration of corporations and corporations on behalf of which shares are issued. The application process requires payment of processing fees and submission of required information including execution of sworn statements by the corporation and corporate directors. As this is a government agency, appropriate due diligence should be followed to avoid delays and unnecessary complications.
The compliance process involves integrating all SEC registration requirements and dealing with support staff of the SEC for the legal compliance of the company and its shareholders. Regulatory requirements are quite extensive and include Notarial fees when payment upon subscription to the capital stock has been made. Other requirements, depending on each case, may also include:
For the compliance process, the client is required to submit:
The compliance process provides for the confirmation of the receipt of fee payment and the submission of documents and information by the SEC via confirmation slip which is then used as the tracking number for processing. The process at the SEC is generally expected to take about 16 business days.
Common Terms and Provisions of a Share Purchase Agreement
To ensure a mutual understanding of expectations and obligations, it is important to know the common terms and provisions found in a Philippines share purchase agreement.
Purchase Price and Payment Terms. The purchase price is typically defined as the amount to be paid by the buyer to the seller at closing. The amount can be fixed or it may include earn outs or contingent payments based on the future performance of the target company. The payment can take the form of cash, stock, debt assumption or a combination thereof.
Closing Conditions. Closing conditions can be structured to protect the parties in case the transaction does not go as planned. Typical conditions precedent include the approval of shareholders or lenders, the receipt of third party consents and government approvals, the absence of any material adverse effect, the truthfulness of representations and warranties, the absence of any insolvency proceedings.
Interim Covenants. These provisions set forth the conduct of parties between the signing and the closing of the share purchase agreement.
Non-Competition Agreement. Non-competition provisions can contain restrictions on the seller from competing with the company after the transaction, identifying client and customer information of the company and from soliciting employees, clients or customers of the company.
Indemnification. Indemnification provisions require one party (usually the seller) to compensate the other (the buyer) in the event that certain representations, warranties, covenants and obligations are not met.
Representations and Warranties. These are statements made by the seller to induce the buyer to enter into the transaction that the seller believes are true and accurate, such as financial statements, material contracts and intellectual property, or by the buyer that the seller requires to know such as the number of shareholders or preemptive rights.
Common Issues and How to Avoid Pitfalls
Diligence carried out by assuming parties should not be complacent as issues and concerns can still be raised after execution. One such concern is that the parties may be unable to perform their obligations under the agreement due to insolvency or legal proceedings that succeed the signing. The share purchase agreement can sometimes become a target of frivolous litigation. This is why it is important to have proper representations and warranties. Due diligence can highlight the problems for the prospective seller with solutions as appropriate, which can also highlight the issues that a buyer may want to consider before making the final decision. Where appropriate, having appropriate conditions precedent based on the outcome of due diligence can shield a party from exposure where problems are identified .
Another potential pitfall is the transfer of shares without approval of the board of the company or without proper disclosure to the stockholder. This often seldom happens but it has been known to occur. It is therefore important for the seller to disclose appropriately to the seller being made the purchaser that is to say to obtain a waiver of the right of first refusal for the stockholder other than the seller from the other stockholders.
Another issue is that the buyer must be diligent in terms of undertaking a valuation for the shares being sold. The valuation must reference the price of the shares in the market if listed and careful attention should be given if there is any uncertainty over the price to be offered.
Negotiation Tips for Share Purchase Agreements
Tips for Buyers
b. Define warranties.
The Buyer should be mindful of the warranties set forth in the share purchase agreement, a list of representations and guarantees made by the seller on specific issues related to its business. Such warranties are subject to extensive negotiations between the parties. In many cases, warranties may be excluded from the agreement to satisfy either or both parties.
c. Review the condition precedent and conditions subsequent.
The following consideration must be reviewed: payment; required corporate consents (board/shareholder/third parties); required regulatory approvals (governmental); restricted activities during the interim between signing and closing; makings of records available to buyer; representations and warranties; and reimbursement of fees.
d. Verify the warranties and indemnification provisions.
For the buyer, it is important that the seller be responsible for liabilities arising out of claims relating to breach of any warranty or indemnity and for all costs of such claims.
e. Gauge the seller’s post-closing obligations.
The buyer may request that at the closing, the seller provide an appropriate indemnity to compensate the buyer and to hold it harmless against losses from certain unindemnified liabilities and loss or damage arising out of a breach of any of the covenants, as well as other specified indemnities.
f. Know the limitations of liability for breach of warranty or indemnity.
Tips for Sellers
a. Limit scope of representations and warranties.
b. Consider appointment of an escrow agent.
c. Limit indemnification and liabilities.
Broadly limiting the amount of the indemnity is not reasonable, but if the indemnity is narrowly focused, limits must be set.
d. Evaluate indemnification procedures.
A mutual release of liability can be obtained. A subrogation clause may require the indemnifying party to immediately assume defense of any covered claim subject to the indemnity.
e. Determine if insurance is necessary.
Real-World Examples and Case Studies
Corporate acquisitions often involve share purchase agreements, where a buyer acquires an ownership interest in a target company. A look at recent transactional activity in the Philippines shows that share purchases are common in a number of sectors, including real estate, pharmaceuticals, food and beverage, and consumer goods.
For example, in 2016, a Japanese investor acquired 35% of the shares of a Philippine company involved in the construction of a big ticket infrastructure project. According to press reports, the deal involved the larger parent company of the target company subscribing for additional shares in a wholly owned subsidiary of the target company that was created for the project. The trial court in Iloilo City, where the target company is based, approved the issuance of the new subscription shares. In addition to establishing the arm’s length nature of the transaction, the target company consented to a valuation by an independent accounting firm acceptable to the court .
Another real-life example involves an equity investment by a portfolio company in a larger food and beverage group. Obtaining the approval of arriving from the substantial equity buy-in by a significant shareholder required a public disclosure and shareholder approval, both of which were announced in mid-2016.
There have also been a number transactions in the consumer health sector in Asia-Pacific and the Philippines, with investors like Mayfair Equity Partners acquiring shares in leading skin and body care brands in 2016. The size of the investment is not reported, but the strength of the potential return was attractive enough to draw in investment from global private equity funds.
These are only a few of the share transactions involving Philippine targets noted in press reports over the last couple of years. As indicated at the start, share purchase deals are commonly used in the acquisition of Philippine companies.