Table of Contents
A Share Purchase Agreement (SPA) in Nepal represents the definitive legal instrument governing the sale and purchase of equity interests in Nepalese companies. This document meticulously codifies commercial terms, allocates transactional risks between buyers and sellers, and ensures compliance with the Companies Act, 2063 and ancillary regulations. The SPA functions as the central transaction document, transforming negotiated deal points into binding contractual obligations while establishing frameworks for regulatory approval, payment mechanics, and post-closing recourse.
Share Purchase Agreement Nepal structures mitigate three primary transaction risks: defective title to shares, undisclosed corporate liabilities, and compliance failures with foreign investment or securities laws. These agreements provide buyers with contractual warranties regarding ownership validity, protect sellers through disclosure mechanisms, and obligate both parties to satisfy regulatory pre-conditions before closing.
2. TL;DR – Share Purchase Agreement (SPA) in Nepal
- Core Function: The SPA constitutes the principal legal contract documenting sale and purchase of shares in Nepalese private or public companies.
- Governing Law: Companies Act, 2063 fundamentally regulates share transfer mechanics, while Securities Registration and Issuance Regulation, 2079 applies to listed entities.
- Pre-Condition: Comprehensive legal due diligence must precede SPA finalization to validate corporate standing, title integrity, and compliance status.
- Regulatory Authority: Office of Company Registrar (OCR) exercises statutory jurisdiction over share registration and transfer approvals.
- Risk Allocation: Representations, warranties, and indemnification clauses allocate liability for historical matters, undisclosed risks, and breach consequences.
- Foreign Investment: Transactions involving non-Nepali acquirers require mandatory approval under Foreign Investment and Technology Transfer Act provisions.
3. Legal and Regulatory Framework Governing SPAs
The Share Purchase Agreement Nepal operates within a multi-layered statutory regime. Companies Act, 2063 establishes foundational protocols for share transfer, pre-emption rights, and shareholder approvals. Securities Registration and Issuance Regulation, 2079 imposes additional disclosure and filing obligations for public companies. Foreign Investment and Technology Transfer Act, 2075 governs inbound investment approvals, pricing mechanisms, and sectoral restrictions. Income Tax Act, 2058 triggers capital gains and withholding tax liabilities upon share transfer, while National Civil Code, 2074 may govern ancillary contractual principles.
| Applicable Law | Relevance to SPA | Regulatory Authority |
|---|---|---|
| Companies Act, 2063 (Sections 53-60, 107-110) | Governs share transfer procedures, board approvals, share certificate issuance, and pre-emption rights | Office of Company Registrar (OCR) |
| Securities Registration and Issuance Regulation, 2079 | Mandates prospectus-like disclosures, lock-in periods, and public offering restrictions for share acquisitions in listed companies | Securities Board of Nepal (SEBON) |
| Foreign Investment and Technology Transfer Act, 2075 | Requires prior approval for foreign acquisitions, regulates pricing formulas, and imposes post-closing reporting obligations | Department of Industry (DOI) and Investment Board Nepal (IBN) |
| Income Tax Act, 2058 (Sections 95, 116) | Imposes capital gains tax on sellers and withholding tax obligations on buyers; necessitates tax indemnities in SPA | Inland Revenue Department (IRD) |
| Labour Act, 2074 & Social Security Act, 2074 | Requires warranties regarding employee liabilities, provident fund compliance, and potential retrenchment obligations | Department of Labour |
4. Structure of a Comprehensive SPA: Core Clauses Explained
A robust Share Purchase Agreement Nepal contains eleven essential sections that collectively define transaction mechanics and risk allocation. Parties and Recitals identify contracting entities and transaction background. Sale and Purchase clauses specify share numbers, classes, purchase price, and payment structure. Conditions Precedent (CPs) suspend closing until regulatory approvals, due diligence satisfaction, and material adverse change absence. Representations and Warranties provide factual guarantees about corporate status, title, finances, and compliance. Covenants obligate parties to conduct pre-closing business ordinarily and facilitate post-closing filings. Indemnification establishes remedies for breach, with caps, baskets, and survival periods. Confidentiality restricts information disclosure, while governing law and dispute resolution clauses designate Nepalese law jurisdiction and arbitration venues.
| SPA Clause | Purpose | Common Negotiation Points |
|---|---|---|
| Parties & Recitals | Identifies buyer/seller entities and states transaction rationale | Precision in legal names, registration numbers; recital accuracy to avoid misrepresentation claims |
| Sale & Purchase | Defines specific shares, purchase price, payment timing, and currency | Price adjustment mechanisms, escrow arrangements, currency conversion for foreign buyers |
| Conditions Precedent | Suspends closing until approvals, consents, and due diligence completion | Materiality thresholds, waiver rights, long-stop dates (typically 60-90 days) |
| Representations & Warranties | Allocates risk via factual guarantees about target company status | Scope breadth, knowledge qualifiers, disclosure letter exceptions, survival period (usually 2-3 years) |
| Indemnification | Provides monetary remedy for breach of representations/warranties | Cap limits (10-50% of deal value), deductible baskets, third-party claim procedures |
| Covenants | Obligates parties to preserve business value and cooperate post-closing | Non-compete durations, key employee retention, transitional support obligations |
5. The Heart of the Deal: Representations and Warranties
Representations and warranties constitute the central risk allocation mechanism within Share Purchase Agreement Nepal documentation. These contractual statements of fact, made by the seller regarding the target company’s condition, enable buyers to assess risk and determine appropriate pricing. Corporate standing warranties confirm valid incorporation, good standing with OCR, and authority to execute the transaction. Title warranties assert clean ownership, absence of liens, and full voting rights. Financial statement warranties guarantee accuracy of audited accounts, proper revenue recognition, and absence of undisclosed liabilities. Material contract warranties ensure enforceability of key customer, supplier, and financing agreements. Compliance warranties cover tax filings, labour law adherence, environmental permits, and litigation absence.
The most heavily negotiated warranties in Nepalese acquisition practice include:
- Tax compliance: Extent of coverage for historical filings, assessments, and potential demands from Inland Revenue Department
- Litigation disclosure: Scope of “threatened” claims requiring disclosure versus actual proceedings
- Material contracts: Definition of “materiality” threshold and specificity of change-of-control consent requirements
- Employee liabilities: Coverage of provident fund contributions, gratuity obligations, and potential social security arrears
- Environmental compliance: Verification of IEE/EIA approvals for manufacturing targets, particularly in Koshi Province jurisdictions
6. Due Diligence: The Foundation for a Robust SPA
Due diligence represents the systematic investigative audit of the target company that must precede Share Purchase Agreement Nepal finalization. This process validates the factual basis for representations and warranties, identifies deal-breaker risks, and informs negotiation strategy. Legal due diligence examines corporate records, board minutes, shareholder registers, and charter documents to confirm title validity and corporate authority. Financial due diligence scrutinizes audited statements, management accounts, tax returns, and debt instruments to assess earnings quality and contingent liabilities. Commercial due diligence reviews customer contracts, supplier agreements, intellectual property portfolios, and operational assets. Compliance due diligence investigates labour law adherence, environmental permits, industry-specific licenses, and litigation exposure.
| Due Diligence Area | Key Documents to Review | Red Flags |
|---|---|---|
| Corporate & Title | OCR registration certificate, MoA/AoA, shareholder register, board resolutions approving transfer | Discrepancies in shareholding records, unauthorized share issuances, pending pre-emption disputes |
| Financial & Tax | Last 5 years audited statements, IRD tax clearance certificates, VAT returns, bank loan agreements | Unrecognized tax liabilities, aggressive revenue recognition, related-party transactions without arm’s-length documentation |
| Commercial & Operational | Material contracts (>NPR 1 million), lease deeds, IP registrations, asset title deeds | Change-of-control clauses requiring third-party consent, expired permits, unclear land ownership under Lalpurja |
| Labour & Social Security | Employee census, provident fund contribution records, Social Security Fund registrations, gratuity calculations | Non-compliance with minimum wage revisions, unpaid SSF contributions exposing buyer to retrospective liability |
| Litigation & Regulatory | Court case status reports, Department of Industry inspection records, environmental compliance certificates | Undisclosed cases at Dhankuta Bench or Supreme Court, pending DOI penalties, lack of IEE approval for manufacturing |
7. Step-by-Step: Transaction Process from SPA to Closing
The Share Purchase Agreement Nepal lifecycle follows six distinct phases, each requiring meticulous execution to ensure regulatory compliance and risk mitigation. Term Sheet execution establishes non-binding deal parameters, pricing, and exclusivity periods. Comprehensive due diligence follows, typically lasting 3-5 weeks for mid-market transactions. SPA drafting and negotiation consumes 2-4 weeks, with particular focus on representations, warranties, and indemnification mechanics. Conditions Precedent satisfaction period requires obtaining FITTA approvals, board consents, and tax clearances, typically requiring 4-8 weeks. Closing involves simultaneous execution of share transfer instruments, payment disbursement, and share certificate delivery. Post-closing OCR filing must occur within 15 days of share transfer under Companies Act, 2063.
| Stage | Key Action | Typical Timeline |
|---|---|---|
| Term Sheet/Heads of Agreement | Execute non-binding term sheet; establish exclusivity and confidentiality | 1-2 weeks |
| Due Diligence | Conduct legal, financial, commercial, and compliance audits | 3-5 weeks |
| SPA Drafting & Negotiation | Finalize SPA, Disclosure Letter, and ancillary documents | 2-4 weeks |
| Conditions Precedent Satisfaction | Obtain FITTA/DOI approval, board resolutions, tax clearance | 4-8 weeks |
| Closing | Execute share transfer deed, effect payment, deliver share certificates | 1 day (simultaneous) |
| Post-Closing | File Form-25 with OCR; update shareholder register; notify IRD | 15 days post-closing |
8. Special Considerations: Foreign Investment & FITTA Compliance
Foreign investors acquiring Nepalese company shares must navigate Foreign Investment and Technology Transfer Act, 2075 requirements integrated within Share Purchase Agreement Nepal frameworks. The SPA must explicitly condition closing upon Department of Industry approval, typically requiring 30-45 working days. Pricing mechanisms must comply with FITTA valuation principles, often necessitating chartered accountant certification of share valuation. Sector-specific restrictions prohibit foreign investment in certain industries, requiring SPA carve-outs and warranty confirmation of permissible business activities. Post-closing obligations include 30-day notification to DOI and Investment Board Nepal regarding share transfer completion.
Documents required for FITTA approval that must be referenced in SPA conditions precedent:
- Valuation report from Nepal Chartered Accountants or designated financial advisor
- Board resolution of target company approving foreign share acquisition
- Certificate of incorporation and good standing from OCR
- Projected financial statements demonstrating investment utilization plan
- Source of funds declaration from foreign buyer with banking documentation
- Sectoral approval from relevant ministry if investing in regulated sectors (hydropower, telecommunications)
9. Taxation Implications in a Share Transaction
Tax consequences fundamentally influence Share Purchase Agreement Nepal structure, necessitating explicit warranty and indemnification provisions for tax liabilities. Capital Gains Tax at 5% to 25% applies to sellers based on residency status and holding period, with rates reaching 25% for non-resident sellers on short-term holdings. Withholding Tax obligations may arise for buyers purchasing from non-resident sellers, requiring tax deposit at 5-15% depending on treaty applicability. Stamp Duty of 0.5% on share transaction value must be paid during share transfer deed registration. Tax indemnity clauses protect buyers against pre-closing tax periods, with survival periods often extending 4-7 years given IRD assessment timeframes.
| Tax Type | Who is Liable? | Triggering Event |
|---|---|---|
| Capital Gains Tax (5-25%) | Seller (resident or non-resident) | Transfer of shares pursuant to SPA execution and payment receipt |
| Withholding Tax (5-15%) | Buyer (when purchasing from non-resident) | Payment to non-resident seller; treaty relief requires advance approval |
| Stamp Duty (0.5%) | Buyer and Seller (jointly) | Registration of share transfer deed at OCR |
| Income Tax on Dividends | Target Company (post-acquisition) | Historical undistributed profits declaration during due diligence |
10. The Disclosure Letter: Its Critical Role alongside the SPA
The Disclosure Letter functions as the companion document to Share Purchase Agreement Nepal, enabling sellers to qualify representations and warranties with specific exceptions. This instrument protects sellers from indemnification claims for matters explicitly disclosed, provided disclosures are sufficiently detailed. The document typically categorizes disclosures into corporate matters (litigation, contracts), financial matters (related-party loans), and compliance matters (pending tax assessments). Effective disclosure requires specificity: generic warnings insufficiently particularized to enable buyer risk assessment may not constitute valid disclosure under Nepalese contract principles.
Common disclosure categories within Nepalese acquisition practice include:
- Ongoing litigation at Supreme Court, High Court Dhankuta Bench, or district courts with case numbers
- Contract defaults under material agreements where counterparties have issued formal breach notices
- Tax disputes involving pending IRD assessments or objections filed against demand notices
- Related-party transactions exceeding arm’s-length terms requiring shareholder ratification
- Environmental deficiencies where IEE/EIA approvals remain pending for operational facilities
11. Common Pitfalls and How to Avoid Them in Nepal
Share Purchase Agreement Nepal transactions frequently encounter preventable errors resulting in closure delays, post-closing disputes, or regulatory penalties. Inadequate due diligence on legacy compliance issues constitutes the most critical failure, particularly regarding Social Security Fund contributions where retrospective liability can exceed NPR 5 million for mid-sized employers. Weak representations and warranties drafting, especially vague materiality qualifiers or absence of fundamental warranties, exposes buyers to undisclosed liabilities. Ignoring mandatory OCR filing timelines attracts penalties of NPR 1,000 per day of delay and may invalidate transfer registration. Failure to secure necessary third-party consents for change-of-control clauses allows counterparties to terminate material contracts post-closing. Vague indemnification mechanics without clear baskets, caps, and survival periods create enforcement difficulties.
| Pitfall | Consequence | Mitigation Strategy |
|---|---|---|
| Inadequate due diligence on SSF compliance | Buyer inherits retrospective liability plus 15% annual penalty | Conduct SSF audit reviewing last 5 years’ contributions; obtain seller indemnity with 7-year survival |
| Weak title warranties without fundamental guarantee | Discovery of encumbrances post-closing without recourse | Include fundamental warranty for title; require seller personal guarantee for title defects |
| Missing OCR filing within 15-day statutory period | Transfer registration invalidation; NPR 1,000/day penalty | Insert SPA covenant mandating simultaneous filing; retain portion of purchase price in escrow until confirmation |
| Overlooking material contract change-of-control consents | Contract termination jeopardizing revenue base | Create detailed CP schedule listing required consents; review all contracts >NPR 500,000 during diligence |
| Ambiguous tax indemnity without IRD assessment protection | Buyer bears pre-closing tax demands after seller receipt of funds | Draft specific tax indemnity covering pre-closing periods; retain 10-20% holdback for 4-year assessment period |
12. Role of a Law Firm in SPA Drafting and Transaction Management
Corporate law firms function as transaction architects, ensuring Share Purchase Agreement Nepal documentation withstands judicial scrutiny while optimizing commercial objectives. Legal counsel conducts and supervises multi-jurisdictional due diligence, coordinating with chartered accountants, tax advisors, and sectoral consultants. Drafting and negotiation responsibilities encompass SPA core clauses, Disclosure Letter preparation, and ancillary documents including board resolutions and shareholder consents. Regulatory approval management involves interfacing with Department of Industry for FITTA clearance, OCR for registration, and Inland Revenue Department for tax compliance certificates. Transaction structuring advice addresses acquisition vehicle selection, tax efficiency, and post-closing integration planning. Post-completion support includes OCR filing, share register updates, and transition assistance for control transfer.
Law firm service scope in SPA transactions typically includes:
- Conducting legal due diligence covering corporate, litigation, labour, and compliance verticals
- Drafting SPA, Disclosure Letter, and transaction ancillary documents with risk-optimized terms
- Managing regulatory approval processes with DOI, IBN, OCR, and IRD within specified long-stop dates
- Advising on acquisition structuring to minimize tax leakage under Income Tax Act, 2058
- Coordinating closing mechanics including escrow arrangements, payment flows, and document execution
- Providing post-closing support for OCR filings, statutory register updates, and transitional governance
13. Frequently Asked Questions (FAQs)
What distinguishes a Share Purchase Agreement from an Asset Purchase Agreement in Nepal?
A Share Purchase Agreement transfers company ownership by selling equity shares, preserving corporate identity and liabilities, whereas an Asset Purchase Agreement transfers specific assets and liabilities, enabling cherry-picking while requiring separate title transfers for each asset.
Can a shareholder sell shares without first offering them to existing shareholders under Nepalese law?
Companies Act, 2063 mandates pre-emption rights; shareholders must offer shares to existing members pro-rata unless articles of association expressly waive this requirement or shareholders pass special resolution approving third-party transfer.
What is the typical timeframe for OCR approval of share transfer registration?
Office of Company Registrar typically processes share transfer registrations within 7-15 working days of receiving complete Form-25 submissions, provided supporting documents include valid board resolution, transfer deed, and stamp duty payment evidence.
Is notarization mandatory for Share Purchase Agreement Nepal execution?
Notarization is not statutorily required under Companies Act, 2063, though parties often notarize signatures for evidentiary purposes; however, share transfer deed registration with OCR requires stamp duty payment, not notarization.
Who bears capital gains tax liability in cross-border share acquisitions?
Seller bears primary CGT liability; however, SPA must include tax indemnity protecting buyer against IRD pursuing target company for seller’s unpaid taxes, particularly where buyer failed to withhold tax from non-resident seller as required under Income Tax Act, 2058.
