What is Pre-Closing Covenants Clause in An SPA?

What is Pre-Closing Covenants Clause in An SPA

What is an Agreement to Purchase Shares?

A legal contract for the sale and purchase of company shares is known as a Share Purchase Agreement.

The seller provides numerous guarantees and representations regarding the company’s various aspects in this agreement.

The buyer pays the purchase price, and after the transaction is completed, the parties sign documents transferring shares. It is essential to verify the stamping procedures and requirements in the relevant jurisdiction. One should be aware of the stamp duty on share purchase agreement and the various important clauses in a Share Purchase Agreement are as follows.


An escrow agent is appointed to ensure that the parties’ actions and responsibilities are carried out and to hold the transfer shares and the purchase price as security. This is especially important when adjustments, earn-outs, and holdbacks cause the purchase price to change. An escrow agent is appointed through a separate contract between the parties, giving it authority to act in the best interests of both parties and in accordance with the Share Purchase Agreement.

Representations and Warranties 

Representations and warranties are statements of facts made on a specific date to convince the other party to sign a contract. In a Share Purchase Agreement, where the parties are entering into the agreement to carry out an action in the future, representations and warranties play a crucial role. Both the seller and the company make representations and warranties regarding the company’s operations and dealings in a Share Purchase Agreement. Any disputes, litigations, tax status, and any other particular representation or warranty based on the company’s business and the requirements of the buyer would be covered by additional warranties.

On the other hand, the buyer would make statements about how well it could buy the company’s shares and do other things that the agreement said it would do. These warranties and representations are valid until the closing date, and in some instances they extend beyond that date. Limiting representations and warranties’ expiration dates is critical. In the event that one party’s assertions turn out to be false and the transfer is prevented, they assist in protecting the other party. The indemnity and termination provisions of an agreement safeguard representations and warranties.

Pre-Closing Covenants 

The sellers would continue to operate the business of the company from the time the Share Purchase Agreement was signed until the actual transfer of the shares. However, the company’s books would have been used to determine the shares’ value beforehand; however, the company would normally use its assets and incur liabilities. Pre-closing covenants are incorporated into the Share Purchase Agreement to guarantee that the company’s position will not change during the interim period.

The company’s permissible actions in the normal course of business are outlined in the pre-closing covenants. In accordance with this, the buyer is responsible for specifying the actions that the business is permitted to carry out without its consent. In addition, the buyer has the option of setting a maximum transaction value. This way, major decisions and actions that would make the company liable in the future would need to be approved by the buyer, and the buyer would be told about actions that would affect the company’s value.

The agreement’s indemnity and termination provisions would apply to any action taken in violation of this clause.

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