Review basics for indemnity, price adjustment and closing clauses in an SPA
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An SPA (share purchase agreement) tends to draw attention to representations, warranties and the headline price, but indemnity, price adjustment and closing provisions carry just as much weight in negotiation. Who bears a risk found in due diligence, what date sets the price adjustment, and what must happen before closing: these determine whether the deal is actually executable.
How the three provisions connect
Indemnity, price adjustment and closing provisions function together. Indemnity allocates loss when representations or covenants are breached, or when a specific liability such as a tax or labor exposure materializes; for the buyer it is the mechanism for recovering problems discovered after closing, for the seller it defines how much liability survives the deal. Price adjustment resets the purchase price against the financial position at closing, usually based on cash, debt and working capital. Closing provisions set the date and mechanics of the transfer, the conditions precedent, and the deliverables. Signing the SPA does not complete the deal until these are met. Whether an issue found in diligence is fixed before closing, priced into the adjustment, or handled through indemnity changes the shape of the whole agreement, which is why reading these three provisions together is the core of an SPA review.
Indemnity clauses read differently before and after a finding
Indemnity exists because due diligence has limits: unpaid overtime, past tax treatment or gaps in IP ownership can surface only after closing. Without an indemnity clause, the buyer would simply absorb that risk after taking over the target, so the contract should specify which breaches are covered, for how long, up to what cap and through what procedure. Broad language such as "any loss arising in connection with this agreement" tends to overreach for whoever bears it, and coverage should specify whether it extends only to direct loss or also to indirect items such as lost profits and legal costs. Indemnity periods often differ by subject: a standard period for general representations, a longer one for tax and fundamental matters, and the cap, basket and treatment of matters already disclosed in due diligence are central to negotiation, since buyers want the cap to cover material risk while sellers want to avoid claims on what was already disclosed.
Price adjustment is a calculation rule fixed before closing
Whether an issue found in diligence is handled through price adjustment, a closing condition, specific indemnity or a covenant should be decided before closing, based on amount, likelihood, the seller's creditworthiness and each side's negotiating strength. Price adjustment turns on the reference and closing balance sheets, net debt and normalized working capital; what counts as cash or debt is often contested, and items like director loans, unpaid bonuses and lease liabilities should be defined clearly. The mechanics should also cover who prepares the closing statement, how long the other side has to object, and how a third-party expert resolves disagreement. The dispute procedure matters as much as the calculation method itself.
Why closing provisions deserve careful drafting
Signing an SPA does not end the deal. Consents from key counterparties and lenders, shareholder and board approvals, and key-person employment terms are among the items that must be completed before closing, and whether each is a condition precedent or a post-closing covenant shifts risk between buyer and seller. Closing conditions test whether representations remain true and covenants have been performed, and the list of closing deliverables (share transfer approvals, an updated shareholder register, seal certificates, director resignations) matters just as much, since missing documents are a common source of confusion on closing day.
Risk on each side
For the buyer, the risk is being unable to recover for problems discovered after closing. Vague representations, a short indemnity period, or blanket carve-outs for disclosed matters can leave the buyer effectively holding the risk that diligence found. For the seller, the risk is prolonged, broad liability after the deal: an indemnity with no real cap or time limit leaves the seller exposed even after receiving payment, and overly broad definitions of debt or working capital can shrink the price unexpectedly. Both sides share the risk of closing conditions that cannot realistically be satisfied: making every counterparty consent a condition precedent can destabilize closing, while pushing important consents to after closing raises the buyer's risk. An SPA works best when it breaks the uncertainty surfaced in diligence into price, conditions, liability and procedure, rather than shifting it entirely onto one side.