A stock purchase agreement is an agreement between two or more parties signed when either party is buying or selling the shares of a company. These agreements are commonly used by small corporations who sell the stock. In such corporations, either the company or shareholders can sell the stock to the buyers. A stock purchase agreement is usually meant to protect both the buyer and the seller when entering into such agreements.
There is a difference between a stock purchase agreement and an asset purchase agreement. A stock purchase agreement is meant to raise money or transfer ownership of shares by selling them, while asset purchase agreement finalizes the sale of the company’s assets.
Components of a Stock Purchase Agreement
Several things make up a stock purchase agreement, including:
- Name of the company
- Name of the buyer
- Par value of shares
- The total number of shares being sold
- When and where the transaction is to take place
- Warranties and representations made by both the purchaser and the seller
- Any potential employee issues such as bonuses and other benefits
- Indemnification agreement over unforeseen costs
All the information listed above is usually broken down into a variety of sections, which help in defining what certain concepts mean, thereby explaining how the transaction process works. The following are the different sections of a stock purchase agreement:
- Transaction details
- Seller’s warranties and Representations
- Buyers warranties and representation
- Closing conditions
- General provisions/Misc.
The Preamble is usually the first section of a stock purchase agreement. This section contains a brief definition of the agreement, the parties involved, and the date of the contract.
This section lists down all the various definitions to be used in the contract in alphabetical order. Usually, the terms in this section are capitalized to show the importance of such terms in the agreement.
The buyer needs to read through this part keenly, as this can significantly change the meaning of parts of the agreement. Some of the terms to watch out for include:
- Seller’s knowledge
- Material adverse effect
This section clearly outlines the terms of the sale of the stock. It also includes the prices and any adjustments made to the purchase price as well as any other items that are to be shared between the parties after closing the deal. Some of the things included in this section include:
- Legal options
- Escrow agreements
- Purchase price
- Share certificates
- Employment agreement
- Other ancillary documents
Seller’s Representations and Warranties
This section states and defines the warranties from the seller. These can include any statements regarding both past and present facts that directly relate to the business, such as:
- Operations and prospects
- Operating results
Buyers Warranties and Representation
This section is almost the same as sellers’ representation and warranties, although, in this section, the representations and warranties are coming from the side of the buyer. The two sections often mirror each other. Since the buyer, in most cases, pays cash for the stock, their representation and warranties can be more limited compared to the sellers.
A covenant section is usually created to define the activities that each party is barred from doing during the period, as most deals have a set period between the time the parties sign and close the deal. It usually involves a long list of actions that must be undertaken during this time, as well as any actions that are prohibited.
This section comprises of the conditions that need to either be taken care of or waived before closing the deal. This often includes both parties performing pre-closing covenants and all regulatory approvals being completed.
This section lays out the terms under which the other party will be compensated if one party in the agreement breaches the contact. It also includes losses that can arise from specific causes. Some of the things included in this section are:
- The time limits for indemnification
- How the losses shall be calculated for recovery
- The outlined period in which the claims against representations and warranties cannot be brought
- The degree to which indemnification is the key remedy for a breach
- The use of escrow funds for indemnification, if applicable
This section contains a detailed explanation of the conditions that may prompt either party to terminate the agreement. Some of the reasons you will find listed in this section include:
- Termination in the event of expiration
- Termination by the buyer if the company had a material adverse effect
- Termination due to failure of a condition
- Termination for failure to get government or third-party consent in a timely fashion
- Termination by mutual consent
This is usually the last section of the agreement. This section touches on a variety of subjects including:
- Government laws
- Dispute resolution
Free Templates & Examples
Why is a Stock Purchase Agreement Important?
Stock purchase agreements are important as they put the term of a sale into writing. It helps prevent any misunderstandings that may lead to litigations. The agreement allows the seller to show and explain that they are the owner(s) of the stock being sold, giving the buyer some assurance when doing the transaction.
Another benefit of having a stock purchase agreement is that it provides specific information on the transfer of stock. This simply means that all the warranties from the seller are clearly spelled out. Additionally, the stock purchase agreement lists dispute resolution measures.
Reasons to consider NOT using stock purchase agreements
Stock Purchase agreements are usually meant to protect all the involved parties. There are very few instances when you should consider not using one:
- You should not consider using a stock purchase agreement if you are the sole shareholder in the organization
- Consequently, you should not use a stock purchase agreement if you are offering limited capacity offering that qualifies for Regulation D exemption
Reasons to consider using a stock purchase agreement
Some of the reasons why you may consider using a stock purchase agreement include:
- A stock purchase agreement creates a binding agreement assuring both parties of the sale
- It also allows businesses to generate revenue for the organization
- Both the buyer and the seller have time to review the agreement before finalizing the deal
- The stock purchase agreement explains any special tax treatments the parties may receive for the transfer.
Frequently Asked Questions
One does not necessarily need to use a stock purchase agreement; however, failure to use one may create a financial risk for you and your business.
There is no specific number of warranties that one can provide. You can make any legal warranties you like, but you must make sure that they are correct. Making sure that the representations are accurate may prevent you from litigations that may arise during the purchase.