Due diligence is essential in a Share Purchase Agreement

Posted Aug 1, 2018

Where a buyer is purchasing all of the shares of a company, it is commonplace to document the agreement in the form of a Share Purchase Agreement (SPA). This agreement sets out the terms on which the sale and purchase should proceed.

In a share purchase, the buyer acquires the whole of the target company ‘warts and all’, and inevitably there will be increased risk assumed by the buyer. In order to reduce this risk, and to encourage the seller to highlight any known issues, extensive warranties and indemnities in favour of the buyer are often inserted into SPAs.

The importance of carrying out due diligence was highlighted in the recent case of Persimmon Homes Ltd v Hillier [2018].

Facts

In order to purchase a potential development site, Persimmon Homes Ltd (Persimmon) entered into an SPA with various individuals, including Mr Hillier (Sellers), to acquire all the shares in two companies. A subsidiary of one of the companies held options to purchase four plots within the site, which would be transferred as part of the share purchase.

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