Buying stake in startup? Read Share Purchase Agreement carefully before investing

In the past few years, you’ve probably watched with envy as friends and colleagues struck it rich on the latest hot initial public offer (IPO), turning modest investments into crores overnight. It’s easy to wonder: what if I’d gotten in on India’s next unicorn? That question has fuelled a booming market for pre-IPO shares, where everyday investors—doctors, teachers, small business owners—are staking serious money on startups yet to hit the bourses. But before you sign on the dotted line of a share purchase agreement (SPA), there’s a little noticed court ruling that could transform how, and where, you seek remedy if things go awry.

A recent Karnataka High Court ruling in Bhaskar Naidu vs Aravind Yadav case has drawn a distinction between SPAs—contracts for buying/selling shares—and shareholders’ agreements (SHAs)—contracts governing relationships among shareholders and the investee company, such as voting rights, transferability of shares, exit rights, and dispute resolution—under the Commercial Courts Act, 2015 . The court ruled that only disputes pertaining to SHAs can be heard in commercial courts because it qualifies as a “commercial dispute” under the act.

In other words, disputes arising from SPAs don’t qualify as commercial disputes and must be filed in regular civil courts, not the speedier commercial benches. Thus, if you’ve been misled or defrauded in a share deal, you won’t get the fast hearing or domain expertise of a commercial bench and your case may languish for years in a civil court.

But here’s the twist: it appears that the ruling overlooked Section 2(1)(c)(xviii) of the Commercial Courts Act, which explicitly includes disputes arising from “agreements for the sale of goods or provision of services”. Under the Sale of Goods Act, 1930, “goods” include “stock and shares.” A combined reading of these provisions suggests SPA disputes should qualify as commercial disputes. Had the court applied this interpretation, it would have opened the commercial courts route to expedite one’s SPA-related claims.

How does it matter to investors? Because time is money. Commercial courts were set up to deliver swift justice (even within a year) in high value, complex business cases, while civil courts can take 2-5 years or more to reach a decision. In a market as fast-paced as unlisted startups, delays can mean watching share values evaporate, or worse, missing the window to unwind or salvage a bad investment.

What can investors do

Be ready for delays: If your SPA claim ends up in civil court, don’t expect outcome timelines in months. Factor in likely multi-year waits while sizing up your investment risk.

Arbitration may help, but read the clause: A robust arbitration provision embedded in your SPA has the potential to bypass civil courts entirely. However, any application or plea arising out of an arbitration pertaining to a SPA shall have to be made before the regular benches of a high court (having original side jurisdiction) or any principal civil court of original jurisdiction, and not before the commercial division of such high court or before the commercial court exercising territorial jurisdiction over such arbitration. A watertight arbitration clause which limits the rights of the parties to go for such applications or appeals may streamline the remedies of the disputing parties and also expedite disposal of the dispute.

Draft with laser focus: Ambiguity is your enemy. If an agreement is ambiguously worded, a court might not treat it as a commercial dispute, delaying enforcement or recovery. Keep share purchase and governance terms in separate contracts. Build explicit language into the SPA so as to recognise it as a “commercial agreement” and shares as “goods”.

Review your portfolio: If you hold stakes in startups via SPAs, revisit each agreement now. Engage a counsel to assess whether a retrospective amendment or side letter could bring your deal into the commercial courts’ fold without jeopardising its enforceability.
Watch the appeals: The aforementioned Karnataka High Court ruling may reach the Supreme Court, or prompt legislative clarifications. Stay informed, a favourable overturn may unlock faster dispute resolution for current and past SPAs.

The bigger picture

In the world of wealth creation, timing isn’t just important, it’s everything. The fastest path from signature to settlement can be the difference between a quick rebound on a sour deal and watching your capital slog through the backlogged civil court system.

So, as you line up those pre-IPO opportunities, whether it’s the latest fintech darling or a stealth mode biotech, you owe it to yourself to heed the fine print of your SPA. Make sure your contract doesn’t leave you stuck in the slow lane; demand clarity, carve out commercial or arbitration corridors, and keep those documents distinct. After all, a single overlooked provision can change the game, and your returns, forever.

The author is Partner, IC Universal Legal

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)