SHARE PURCHASE AGREENENT

Transfer of shares of a company, except a private limited company, is allowed under the provisions of the Companies Act, 2013. One person may purchase the shares of a company belonging to another person at a rate as determined by both of them and executed in a particular day. Now-a-days the shares are traded in the stock exchanges in India. For this purpose, an agreement is made between the purchaser and the seller. This agreement is called as ‘Share Purchase Agreement’. This agreement may be drafted by the individuals but it is advised to draft the agreement with the legally qualified persons.

Section 56 of the Companies Act, 2013 provides the procedure for the transfer and transmission of shares. Sectio 56(1) provides that a company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.

For transferring shares from one person to another person, there shall be an agreement to be executed by both the transferor (‘seller’) and the transferee (‘purchaser’) which is called as ‘share purchase agreement’.

A ‘Share Purchase Agreement’ is a legally binding contract for the sale and purchase of a company's shares. This agreement deals with the terms and conditions for the transfer of ownership between a seller and a buyer. The agreement also includes critical information such as the number and type of shares, the purchase price, representations and warranties from both parties, and any conditions that must be met before the sale is final. The Share Purchase Agreement is designed to provide clarity, protect the interests of both parties, and ensure a smooth and fair transaction. 

The following are the features of the Share purchase agreement-

• The agreement identifies the buyer and seller of shares.
• The agreement indicates the specific number of shares to be transferred and the purchase price of the share.
• The seller may make statement about the details of the company, the shares of which are going to be transferred.
• The buyer is to declare about his ability to pay the price of shares to be purchased by him to the seller.
• If the conditions set forth in the agreement is contravened by either by the seller or the buyer the same can claim against the other party.
• Conditions may be prescribed in the agreement for the transfer of shares, such as regulatory approvals or the buyer securing financing. Such conditions must be satisfied before the sale can be completed.
• The promises made by each party to perform or refrain from performing certain actions, often related to the management of the company between the signing of the agreement and the closing of the sale.
• An indemnification shall also be found place in the agreement.
• An agreement where one party agrees to pay the other for losses resulting from a breach of the agreement or other specified events.
• The agreement shall contain necessarily a dispute resolve mechanism.  A clause that outlines the process for handling any disagreements that may arise between the parties, which can help save time and money. 

The benefits that arise on the share purchase agreement are as below-

• The agreement clearly defines the conditions for the share transfer to avoid future misunderstandings.
• The agreement gives legal protection to the seller as well as to the buyer and provides remedial measures to those affected in contravention of the provisions of the agreement by party.
• The agreement makes the transaction legally enforceable and ensures that all parties are aware of and agree to their respective obligations.
• The Share Purchase Agreement process includes the buyer's due diligence, a critical step where the buyer investigates the company's health and liabilities to ensure the transaction is sound. 

The dispute on share purchase agreement is not a commercial dispute. The Karnataka High Court in ‘Basker Naidu v. Aravind Yadav’ held that a dispute arising from a Share Purchase Agreement (SPA) is not a 'commercial dispute' under the Commercial Courts Act, 2015, unlike a dispute from a Shareholder Agreement. This case clarifies that Share Purchase Agreements do not fall under the exclusive jurisdiction of commercial courts, which can streamline litigation by directing cases to the appropriate forum from the outset. 

The Supreme Court, in VB. Rangaraj Versus VB. Gopalakrishnan - 1991 (11) TMI 195 - Supreme Court held that that an agreement stipulating pre-emption rights on share transfers was binding on the company's members and the company itself, establishing the principle that shareholder agreements are enforceable. This case is a cornerstone for SPA enforceability, demonstrating that an agreement to transfer shares is a valid and binding contract that the courts can uphold. 

 A transfer made in contravention of the Articles of Association is invalid, reinforcing the importance of proper legal and procedural compliance in a Share Purchase Agreement.  A Share Purchase Agreement can contain additional obligations beyond the simple transfer of shares, emphasizing the importance of a detailed and comprehensive agreement. 

In SRI. R. KRISHNA MURTHY Versus SRI. M. AVINASH - 2014 (7) TMI 1396 - KARNATAKA HIGH COURT, pursuant to the share purchase agreement, the petitioner paid certain amount to the respondent. The respondent did not come forward to perform his obligation under the agreement. Therefore, the petitioner issued a notice to the respondent on 17.10.2007 for the appointment of an arbitrator to settle the dispute as per the dispute resolution procedure contained in the agreement. The respondent filed a reply to the notice on 29.10.2007 informing the petitioner that he has assigned his right under the agreement in favour of one shri O. Angusamy. Therefore, he contended that the appointment of arbitrator did not arise.

The High Court observed that it is not a dispute that the share purchase agreement contains an arbitration clause for the resolution of the dispute.  The respondent contended that he has assigned his right to another person and therefore no question arises as to the appointment of arbitrator.

The High Court held that the question raised by the respondent is required to be adjudicated by an arbitrator. Therefore, it is just and proper to appoint an arbitrator to resolve the dispute.