A stock Purchase Agreement is required when you are interested in purchasing certain shares of stock in a company and would like to agree on the price and terms of purchase. A Stock Purchase Agreement explains the terms of a stock purchase between the owner of corporate stock and another part
y. The stock owner can be the corporation itself, or one of the corporation’s shareholders.
A stock purchase agreement provides the terms for the purchase and sale of shares between a company and its investors. It is an agreement between a closely-held or private firm and its shareholders for regulating the sale and transfer of firm’s shares. It covers items such as who has the right of first refusal, and provides a mechanism for the purchase (redemption) of the shares of the shareholder who becomes bankrupt, is discharged, resigns, retires, becomes incapacitated, or dies
The Stock Purchase Agreement (“SPA”) is the definitive agreement that finalizes all terms and conditions related to the purchase and sale of the shares of a company. It is different from an Asset Purchase Agreement (“APA”) where the assets (not the shares) of a company are being bought/sold.
The stock purchase agreement covers the following sections:
- Interpretation – provides the definitions for all the major terms used in the overall body of the agreement;
- Purchase and sale of stock – itemizes the purchase price, any purchase price adjustments, the purchase price allocation for tax purposes between the seller and the buyer, and dispute resolution mechanisms;
- Representations and warranties of the seller and buyer – provides all the statements that the seller and buyer are signing off to be true;
- Matters related to employees – provides terms on how employee benefits and any accrued bonuses are to be handled post transaction;
- Indemnifications – provides details on all indemnifications to be provided by either the seller or buyer to each other for any costs that may arise post transaction resulting from conditions that existed prior to the deal closing;
- and Tax matters – specifies any special tax treatment that either the seller or the buyer may be entitled to.
The key provisions that make up a stock purchase agreement are:
- The opening recital gives the date of the agreement as well as the name of the parties, the seller and purchaser, who are entering into the agreement.
- Number and price of shares. This provision states the name of the corporation that issued the stock, the number of shares involved in the transaction, and the dollar value of each share of common stock.
- Purchase and sale. At the end of the transaction, the seller conveys ownership of the certificates of stock to the purchaser. All certificates will be endorsed as needed for transfer and the seller will pay any transfer taxes.
- Representations and warranties of the seller. Warrants the corporation as being legally able to issue the stock, and that the corporation is in good standing. This provision also validates that the seller owns the stock and, as such, is able to sell the stock to the purchaser.
- Representations and warranties of seller and purchaser. All parties stipulate that there have been no omissions by the corporation, seller, or purchaser. Everything has been disclosed.
- General provisions. These provisions include the entire agreement clause and a statement that the agreement complies with the governing laws of the location where the contract is being executed.
- This is the section where witnesses sign the document. You must have witnesses for the agreement to be legally binding.
- Amount and payment of purchase price. Sets the exact terms of when the purchaser will pay the consideration to the seller for the purchase of the stocks. This is often a percentage paid upon signing with the remainder paid when the contract is executed.
While the entire SPA should be reviewed, a seller should focus specifically on two sections: the purchase and sale section and the representations and warranties.
The purchase/sale section should match exactly to the the terms stipulated on the letter of intent (LOI). If there are any differences, they likely resulted from the buyer due diligence, and should have been formally negotiated prior to the completion of the SPA.
The representations and warranties need to be fully scrutinized to ensure there is no statement that is believed to be untrue. There is usually recourse and potential legal action if it is later found out that the representations and warranties provided were untrue. Even post-transaction, this may result in a purchase price adjustment where the seller is required by the legal courts to reimburse the buyer for any misrepresentations.
We provide the drafting and reviewing services of the following Contracts and Agreements.
- Buy-Sell Agreement
- Corporate Bylaws
- Corporate Minutes
- Executive Employment Agreement
- Investors Agreement
- Offering Memorandum
- Private Equity Right of First Refusal Agreement
- Private Placement Memorandum
- Redemption Agreement
- Shareholder Agreement
- Shareholder Waiver
- Shareholders Rights Agreement
- Stock Certificate
- Stock Purchase Agreement
- Stock Repurchase Agreement
- Unanimous Consent
- Voter Agreement
- Waiver of Notice