Choosing Between Share Purchase Agreement and Business Transfer Agreement in M&A Deals

In any mergers and acquisitions transaction, one of the earliest and most strategic choices is whether to proceed through a Share Purchase Agreement (“SPA”) or a Business Transfer Agreement (“BTA”). This decision determines the precise subject of the acquisition (shares or business undertaking), how assets and liabilities are treated, the extent of historical risk assumed, the steps required at closing, and the tax and regulatory implications for both parties.

This article provides a structured comparison of SPAs and BTAs in the Indian legal context, touching upon Companies Act 2013, GST implications, income-tax considerations, and practical aspects like contracts, licences and employees.

1.1 Core Concept

A Share Purchase Agreement is a contract where the buyer acquires shares in the target company from the existing shareholder(s). The legal entity of the target remains unchanged; what shifts is the ownership of that entity.

The consequence is critical:

The company continues to hold all its assets, contracts, licences and employees, and
All existing liabilities and historical exposures remain with that company, which the buyer now owns.

1.2 Typical Contents of an SPA

An SPA will generally cover, at minimum, the following aspects:

Number and class of shares being sold
Purchase price / consideration
Mode and timing of payment (upfront, deferred, escrow, earn-out, etc.)
Conditions precedent (regulatory approvals, consents, internal corporate actions)
Closing actions (documents to be executed and delivered at completion)
Representations and warranties provided by seller (and often the company)
Indemnity provisions for breach of warranties or specific risks
Post-closing covenants (non-compete, transition support, etc.)
Governing law and dispute resolution mechanism

Because the entity continues uninterrupted, the buyer effectively steps into the shoes of the prior owner with respect to all historical matters, subject only to contractual protection and diligence.

1.3 Risk Profile in an SPA

Under an SPA, the buyer indirectly assumes all historical liabilities of the target, whether known or unknown, including:

Contractual disputes
Past non-compliances
Tax exposures
Employee claims
Regulatory issues

Therefore, in share deals, due diligence, robust representations, warranties and indemnities are the primary tools used to allocate and manage this risk.

2. Understanding a Business Transfer Agreement (BTA)

2.1 What Is a Business Transfer Agreement?

A Business Transfer Agreement is used when the object of the transaction is the business or undertaking itself, not the shareholding of the company that currently runs it.

In the Indian context, such transfers are often structured as a slump sale, generally understood (for income-tax purposes) as:

Transfer of one or more undertakings, by any means, for a lump-sum consideration, without attributing individual values to specific assets and liabilities included in the transfer.

2.2 Requirement of an “Undertaking”

For a valid business transfer aligned with slump sale concepts, the subject of transfer must be an “undertaking”, which generally means:

An identifiable business or division
With its own set of assets, liabilities, employees, contracts and licences
Capable of operating on an independent, stand-alone basis and generating income on its own

A mere sale of scattered individual assets without cohesive business functionality typically does not qualify as such a transfer of undertaking.

2.3 How a BTA Differs From Simple Asset Purchase

A BTA for a business as a going concern is distinct from a cherry-picked asset sale. In a true business transfer:

The entire business activity (or identifiable division) moves,
Along with the elements required to operate it (plant, machinery, contracts, employees, IP, licences, etc.), and
It is intended that the buyer can continue the operations immediately after completion.