Module III: Terms and Conditions of M&A
As the process of executing term sheets and conducting due diligence is through with, and the
acquirer/ partner is satisfied with the results of the due diligence report, both the parties may take
the deal further in accordance with the summary mentioned in the term sheets.
The acquirer/ partner may collaborate by merging with the identified target company or
acquiring the target company. In both the cases, there is certain movement of shares involved;
this is to say there is change in the shareholding pattern by transfer of shares or by issue of new
shares. The acquirer may acquire ether majority stake or minority stake or may even acquire
100% stake. Based on the quantum of stake to be acquired, different laws, regulations and
documentations are applicable.
M&A if is in the nature of Merger or de-merger, a merger/de-merger scheme is required to be
prepared in compliance with the Companies Act and has to be filed in the court (NCLT). The
manner of preparation of merger scheme is altogether different from the acquisition documents
such as share purchase agreements, shareholders agreement etc.
In this module, we shall be covering the M&A Transaction which are “Acquisition” transaction
and is based on privately negotiated documents.
Types of agreements in M&A transactions:
Depending on the type of transactions, there are different types of documentations to be
executed. However, a common M&A (acquisition) transaction involves 2 basic agreements:
a) Share purchase agreement/share subscription agreement
b) Shareholders agreement
a) Share Purchase Agreement:
A Share Purchase Agreement (SPA) is a document which is executed when there is a
transfer of shares from an existing shareholder to another prospective investor. The
purpose of this document is to enable the transfer/sale and purchase of the shares from
the existing shareholder in favour of the incoming investor. Such an agreement details the
consideration and the number of shares to be sold and on what conditions. Let us
understand with the help of an example: there is a company named “A Ltd”. Mr. X is a
shareholder of “A Ltd.” who holds 10000 shares. Mr. Y another shareholder wishes to
purchase 5000 shares from Mr. X which he holds in “A Ltd.” consequent to which both
Mr. X and Mr. Y shall be holding 50% of the share capital in the Company. Pursuant to
communication of interest, Mr. X and Mr. Y execute a term sheet in this regard, and
further execute a detailed binding agreement which is known as a Share Purchase
Agreement in which the target company, i.e. A Ltd may also be made a party.
Secures the interest of parties: It gives the liberty for both to guard their concerns well
ahead of the transfer of shares. As an all-inclusive agreement, it protects all facets of the
business dealings and is vital for the parties involved to analyse every condition included
in the agreement and thereby comprehend its meaning. Such a document gives both
parties a chance to protect their own interests before the shares are transferred. Being a
wide-ranging document, it covers each and every aspect of the transaction and is essential
for both the parties to examine each and every clause mentioned in the document and
understand its meaning.
Features of Share Purchase Agreement:
• Title of the document: The document must state the title as to whether it is a share
purchase agreement or some other document.
• The parties to the agreement: The parties to the agreement should be clearly defined to
ensure it is not a transfer to any fictitious person. Besides this also avoids ambiguity with
regards to persons dentty to whom shares are being sold. In case of purchasers being
corporate enttes, their CIN and registered office details.
• Recital Clause: This clause is inserted at the beginning, which describes the summary/
intent of parties to execute this agreement.
• Date: An agreement must be dated to avoid any legal casualties against ether of the
parties to the agreement.
• Definitions: Definitions are important to provide a context and meaning to certain words
and phrases as used in the agreement. If a word is defined in the text of the agreement,
the clause referencing needs to be done diligently in the definitions section for ease of
reference. Ideally, a definition should be limited to the meaning of the term and should
not contain any covenants that are meant for inclusion only in the main text.
• Transaction and consideration: An exhaustive structure of payment needs to be spelt out
including the deposit to be given at the time of execution; the sum that is payable on
closing (pricing formula to be determined on a case to case basis) and if applicable, the
sum held in escrow to be set off against indemnities or breaches of representations and
warranties and the amount payable in case any security is registered against the company.
• Conditions Precedent: The conditions precedent clause should be exhaustive providing
for all authorizations, permissions and permits which are necessary, both internal and
external and the person responsible for obtaining each of these should also be stated.
Normally a clause on the right of the acquirer to waive any condition is also included to
provide flexibility in case certain routine approvals that do not impact a transaction from
closing are not forthcoming or are delayed. The conditions precedent clause should also
provide for fulfilling all the representations, warranties, obligations, execution of
agreements and covenants under the agreement.
• Closing Conditions: This clause will detail out the manner and process of transfer of
shares which will include all the secretarial compliance as per the Companies Act such as
execution of transfer form, updating the share certificates, holding of board meeting,
appointment of director(s) (if agreed between the Parties) etc.
In addition to above, the SPA will have following clauses:
• Representations and Warranties: Representations and warranties are ordinarily
submission of the elemental facts, on the grounds of which the parties decide
whether to enter into and consequently arrive at a consensus on the transaction or
to avoid entering into the transaction. Depending upon the nature of the deal,
definite representations and warranties shall be given by the Seller Company in
favour of the Purchaser on the entire business affairs and the shares sold of the
Company. The representations and warranties shall be based upon the due
diligence conducted by the Acquirer.
• Indemnities: The Seller/promoter shall be required to provide indemnities
(compensation for the loss) to the Purchaser for any loss caused to the Purchaser
on account of breach of any of the representations and third party claims on the
Purchaser or Company resulting in loss of value to the Purchaser/Investor.
• Miscellaneous Clauses:
There would be certain standard miscellaneous clauses such as notice clause (i.e.
where to serve any notice), arbitration, dispute resolution, governing law etc.
Notices or other communication to be given or made under the Agreement shall be
written, personally delivered or sent by post with recorded delivery, or email addressed
to the intended recipient at its address.
There are various mechanisms for resolving such disputes. Arbitration is a popular mode
of dispute resolution, with a number of arbitral institutions being established in India.
While it is usually faster than approaching the courts, various factors need to be
considered in choosing arbitration. In India, arbitration is governed by the Arbitration and
Conciliation Act, 1996. One of the significant advantages of arbitration is a reduction in
or elimination of procedural delays. Arbitration generally tends to be more expensive
Each Party shall keep all information relating to each other Party, relating to the
transactions and Share Purchase Agreement confidential. None of the Parties shall make
any public disclosure concerning the information without the prior approval of the other
Party. However, Parties may be free to disclosing any information as may be required
under applicable Law.
Governing Law: Sample clause: “This Agreement and the relationship between the
Parties shall be governed by the Laws of India. The courts in India shall have the
jurisdiction over all matters arising pursuant to this Agreement.”
b) Share Subscription Agreement:
A Share Subscription Agreement (SSA) is similar to a Share Purchase Agreement as both
contain identical clauses and both are identical in nature. The main difference between
the two agreements is, a share purchase agreement is executed when there is a transfer of
shares from one holder to the other, and on the other hand, a share subscription
agreement is executed when there is a fresh issue of shares by the company i.e. from
company to the investor. Thus, when SPA is executed, the money is received by the
person or entity selling its shares, while in case of SSA money is received by the
company issuing the shares.
For eg., New investor X intends to invest in “ABC Ltd.” But, instead of purchasing
shares held by A and B, “ABC Ltd.” will issue fresh shares to X. In other words, X will
subscribe to fresh shares in “ABC Ltd”. This understanding is typically recorded in a
share subscription agreement. The parties to a SSA are typically the new investor, the
exiting investor and the company that is issuing fresh shares.
c) Shareholders Agreement:
A shareholders’ agreement is a contract that contains the rights and obligations of the
shareholders in a company and describes how the company should be operated. The
agreement also includes information on the management of the company and privileges
and protection of shareholders. Once the purchaser/investor has acquired the shares,
either under the SPA and SHA, the investor becomes a shareholder in the Company along
with other shareholders.
Thus, it is important to have agreements on how to deal with certain shareholder rights
and management of the company till the time Investor remains a shareholder in the
It is not possible to cover all the aspects of the shareholders agreement (SHA) in one
module, however, some of the key clauses of the SHA are as follows:
• Business Objective: The business objective of the Target Company will be
detailed out along with right of the Shareholders to prepare business plans in each
year and ensure that the business is conducted in accordance with these business
• Further Issue/Pre-emptive Right: The Investor and all other shareholders will have
a right to retain the same percentage of shareholding in the Company in case
Company decides to raise further funds by way of new issuance of shares. In such
new issuance, all the Shareholders will have a right to participate pro-rata as per
their existing shareholding. In case any of the shareholder does not invest in such
new issuance, the other shareholders shall have the right to acquire shares not
subscribed by the other shareholder. As a consequence, the shareholder not
subscribing shall agree to be diluted.
• Board Seat: Based on the Term sheet, the incoming investor may have a right to
appoint its nominee director on the Board. Once this right is provided, the parties
may also negotiate and agree that the investor ` nominee director will have a right
to veto certain matter or not and whether such nominee director will be
considered to part of the necessary quorum.
• Share Transfer rights: These rights are totally based upon the agreement between
the parties and it is not possible to spell which one should form part of the sample
SHA. Broadly, these rights either cast a restriction on the share transfer by any
shareholder to a third party and/or allows free transferability by any specific
shareholder. Further, these rights may also provide a right to one or more of the
shareholders to participate in any sale of shares by any other shareholder and
vice-versa give a right to any shareholder to forcefully and compulsorily require
any other shareholder to sell their shares to a common third-party buyer. These
rights are typically titled as “Right of first Refusal”, “right of first offer”, “tag
along rights”, “drag along rights”. In addition, there can be a right in favour of
shareholder to acquire shares from another shareholder to sell its shares to such
another shareholder upon happening of any event. Such rights are termed as “Call
Option” and “Put Option”.
• Exit rights: A financial investor may not want to remain invested in the Company
for a longer time and thus may want certain “exit rights”, i.e. a right to sell its
shares in the company after certain time. However, as it may be difficult for such
investor to find a third-party buyer on its own, an obligation is cast upon the
Company and the Promoter to ensure that such investor is able to sell its equity
shares in the Company after certain time period. Such rights can be granted by
way of requiring the Company to conduct an IPO, third party sale, Buy-Back, Put
• Event of Default Provisions: There should be provisions in the SHA on the
consequences of default committed by shareholders of the SHA. However, before
such consequences to be spelt, it is important to spell out what are the actual
defaults that can be committed in addition to general default of the SHA. Once
these are spelt out, then, parties may agree on certain specific consequences of
defaults such as , right to buy back shares, right to remove as director etc. in case
of defaulting shareholder.
• Lastly, there would be certain miscellaneous clauses as mentioned above.