Termination of Share Purchase Agreement – A Comprehensive Guide

A share purchase agreement (SPA) is a legal document that outlines the terms and conditions of the sale or purchase of a company’s shares. It is a complex document that requires careful drafting and negotiation. However, even the most well-crafted SPA may need to be terminated before the parties can complete the transaction. In this article, we will discuss the termination of share purchase agreements and the legal consequences that follow.

Termination Causes

The termination of an SPA can occur for several reasons, including:

1. Breach of Contract: One party may fail to meet its obligations under the SPA, which allows the other party to terminate the agreement.

2. Mutual Consent: Both parties may agree to terminate the SPA before the closing date. This can occur due to various reasons, such as change in priorities, financial difficulties, or regulatory issues.

3. Force Majeure: An event beyond the control of the parties, such as a natural disaster or pandemic, may make it impossible to complete the transaction.

4. Material Adverse Change (MAC) Clause: The SPA may include a MAC clause that allows one party to terminate the agreement if there is a material adverse change in the business or financial condition of the other party.

Termination Procedures

When terminating an SPA, the parties must follow the procedures outlined in the agreement. The procedures may include:

1. Notice Requirement: One party must provide written notice to the other party stating the reason for termination.

2. Cure Period: The parties may agree to a cure period where the defaulting party can rectify the breach and avoid termination.

3. Dispute Resolution: The SPA may include a dispute resolution mechanism, such as arbitration or mediation, to resolve any disagreements that arise during the termination process.

Legal Consequences

The termination of an SPA has significant legal consequences for both parties. The consequences may include:

1. Return of Earnest Money: If the buyer has paid an earnest deposit, the seller may be required to return the deposit to the buyer.

2. Damages: The non-defaulting party may be entitled to damages for any losses resulting from the termination, such as expenses incurred during due diligence or lost profits.

3. Public Disclosure: If the SPA is terminated due to a material adverse change or regulatory issues, the parties may be required to disclose the termination to the public.

Conclusion

The termination of a share purchase agreement is a significant event that can have far-reaching consequences for the parties involved. It is essential to have a well-drafted SPA that includes termination provisions that address potential issues that may arise between the parties. By following the correct procedures and seeking legal advice, the parties can minimize their risks and protect their interests during the termination process.