What Is a Share Purchase Agreement (SPA)?
A Share Purchase Agreement (SPA) is a binding contract between a buyer and seller(s) setting out the terms under which shares in a target company are transferred. It is one of the most critical documents in any Nigerian M&A transaction, private equity investment, or corporate restructuring deal.
An SPA allocates rights, obligations, and most importantly risk. It addresses what consideration is paid, what representations the seller must make about the company, what recourse the buyer has if those representations prove false, and the conditions under which the transaction may be terminated before closing.
Beyond deal mechanics, SPAs must respond to commercial urgency. Parties may proceed despite due diligence red flags, particularly where speed of execution is vital to raise capital quickly, pre-empt a competitor, or accelerate integration. In those cases, the SPA becomes the primary instrument for absorbing and distributing residual transaction risk.
Three Categories of Risk Addressed by an SPA
Transaction lawyers typically structure SPA protections around three core risk categories:
- Completion risk: the risk that the deal will not close as planned — arising from regulatory hurdles, third-party consents, or corporate approvals.
- Misevaluation risk: the risk that the buyer has mispriced the target company based on inaccurate or incomplete information.
- Value-shift risk: the risk that the target’s value changes materially between signing and closing.
Each of these risks is addressed by specific contractual provisions, discussed below.
1. Conditions Precedent to Closing
Conditions Precedent (CPs) are milestones that must be satisfied before a transaction is deemed completed. They are the primary mechanism for managing completion risk in Nigerian share purchase transactions.
Typical CPs in a Nigerian SPA include:
- Board and shareholders’ resolutions approving the transaction
- Regulatory approvals from the Securities and Exchange Commission (SEC), the Federal Competition and Consumer Protection Commission (FCCPC), or sector-specific regulators such as the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) for oil and gas transactions
- Rectification of compliance deficiencies identified during due diligence
- Third-party consents (e.g., from lenders, joint venture partners, or licensors)
- Completion of agreed filings or corporate registrations
If CPs are not satisfied by the agreed longstop date, the buyer is typically entitled to terminate the SPA without liability. For foreign investors and diaspora Nigerians acquiring interests in Nigerian companies, regulatory CP timelines — particularly those requiring CAC filings, FIRS tax clearance, and sector approvals must be factored into deal structuring from the outset.
2. Representations and Warranties
Representations and Warranties (R&Ws) are statements of fact made by a party, usually the seller about the target company. They address misevaluation risk by requiring the seller to confirm the accuracy of information on which the buyer has relied in pricing the transaction.
In a well-structured Nigerian SPA, R&Ws typically cover:
- Accuracy and completeness of the target’s financial statements
- Absence of material undisclosed liabilities or indebtedness
- No pending or threatened litigation or regulatory proceedings
- Good and marketable title to the shares, free from encumbrances
- Compliance with applicable Nigerian law, including tax obligations and corporate governance requirements
- Validity of material contracts and absence of change-of-control triggers
R&Ws serve a dual purpose: they flush out information through the disclosure process, and they create contractual grounds for a claim if the statements prove untrue. Sellers will typically seek to qualify warranties by reference to a disclosure letter, which carves out known facts from the scope of warranty protection. Buyers must scrutinize the breadth of those disclosures carefully; an overly wide disclosure letter can hollow out the warranties entirely.
Where a potential liability is foreseeable but unquantifiable, consideration should be given to securing a guarantee from a creditworthy third party or warrantor.
3. Indemnity Provisions
While representations create grounds for a claim, indemnity clauses define how that claim is processed and what the buyer can recover. An indemnity is a promise to reimburse the buyer for specified losses, it typically operates independently of proof of breach, and may extend to legal costs that would not otherwise be recoverable under Nigerian common law.
A well-drafted indemnity provision achieves several objectives:
- Shifts the financial burden of specified risks from buyer to seller
- Compensates the buyer for risks it did not contractually assume
- Allocates responsibility for defending third-party claims
- Provides a mechanism for recovering legal and advisory costs
Without an explicit indemnity, representations in many Nigerian SPAs are treated as dying at completion they provide limited recourse once the deal closes. It is the combination of R&Ws and indemnity clauses that constitutes the principal risk-allocation mechanism in any acquisition contract.
Sellers typically seek to limit indemnity exposure through time caps (a limitation period, often 12–24 months post-closing), financial caps (a maximum aggregate liability), and de minimis thresholds. Buyers must push back on limitations that are disproportionate to the risks identified during due diligence.
4. Holdback and Escrow Arrangements
Holdback clauses allow the buyer to retain a portion of the purchase price post-closing as security against warranty and indemnity claims. Escrow arrangements achieve a similar result but through a neutral third party, funds are deposited with an escrow agent under agreed conditions for release.
These mechanisms are particularly valuable in Nigerian transactions where:
- The seller is a special-purpose vehicle that may be wound up post-transaction;
- There is uncertainty about the seller’s ability to satisfy a future judgment;
- The buyer is a foreign investor with limited ability to enforce Nigerian court judgments against offshore sellers.
The choice between holdback and escrow depends on the relative bargaining power of the parties. Most sellers prefer escrow (as the funds are held by an independent agent rather than controlled by the buyer), but will accept a holdback where the buyer is a substantial entity with sufficient covenant strength.
A related technique is seller financing, where the seller accepts a portion of the purchase price in the form of a deferred payment or loan note, aligning seller incentives with post-closing performance.
5. Why Contractual Protections Are No Substitute for Due Diligence
SPA protections are designed to allocate risk, not eliminate it. A buyer who discovers a material problem post-closing must still pursue a claim, incur legal costs, and prove loss. In the Nigerian context, enforcement can be protracted.
Thorough legal, financial, and regulatory due diligence remains the most reliable risk mitigation strategy. It informs the scope of representations and warranties sought, identifies matters that should be carved out or priced into the deal, flags CP requirements, and reveals whether holdback or escrow arrangements are warranted.
Speak to our Corporate Transactions Team
Olamide Oyetayo & Co advises buyers, sellers and foreign investors on share purchase transactions, corporate restructurings and M & A across Nigeria’s oil and gas, real estate and banking sectors.