A stock purchase agreement is used when someone buys shares of a company. It allows them to finalize their purchase by signing a legally binding document.
When selling parts of an owned company, you may sign a stock and asset purchase agreement. Companies with investors wishing to become shareholders will need to know the elements of a stock purchase agreement.
Here are 11 things to include in a stock purchase agreement.
1. Buyer and Seller Information
The stock purchase agreement opens with an introduction of the buyer and seller. Company names and legal first and last names are acceptable.
Whenever a business or individual buys or sells shares to another business or individual, they need a stock purchase agreement that illustrates the relationship between buyers and sellers.
The exact type of SPA and the legal language it includes will vary by company, scale, and industry.
If one or both parties are corporations, then the SPA must specify:
- The full legal names of signing parties
- Parties’ professional titles and the operating names of their companies
Here is an article that overviews a stock purchase agreement and provides an example contract for you to review.
2. Transaction Date and Time
The stock purchase agreement should include the effective date and time of the transaction. This date differs from the settlement date, which is generally two days after the agreement’s execution date.
Here is an article where you can learn more about the difference between trade and settlement dates.
3. Value of Shares
Most notably, the value of the shares sold or acquired should be written in detail.
The value of the shares should reflect a cash amount the buyer will pay upon closing.
The current shareholders’ ownership of the company should be clear. You can also express how much ownership the investor will acquire after completing the purchase.
In cases of employers selling stocks to employees, there may be a restricted stock plan in place. This plan complies with the Securities and Exchange Commission (SEC). In addition, it helps protect the company against premature sales that could negatively impact its financial standing.
Here is an article that explains how to create a stock purchase agreement.
4. Number of Shares Being Sold
State the specific number of shares in the stock purchase agreement and their selling price.
The number of shares available to sell can only be determined by the company’s sole owners or shareholders. For example, restricted stock is unable to be sold without SEC permission. On the other hand, float stock can be freely sold and bought without public restrictions.
There are also authorized shares, the total amount of shares a company can issue to buyers.
Here is an article where you can learn more about the basics of different types of shares and stock.
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5. Representations and Warranties
Representations are statements made by sellers about the transaction. They may make statements on behalf of their companies in cases of corporations buying shares of another company.
The representations in a stock purchase agreement include:
- The seller’s standing on the purchase
- Their company’s market reputation, value, directors, and capital structure
- The seller’s rights over the shares in question
- The number of shares that the seller currently owns in the company
- Validity of terms, conditions, and factual information presented about the company
The buyer can also make representations and warranties. These include the buyer’s standing, company capital structure, market value, and rights to enter into stock agreements.
Here is an article that explores the legal nature of stock representations and warranties.
6. Payment Terms
Whether an employee stock purchase plan or transfer agreement between shareholders, the agreement must lay out payment terms and structure.
The payment terms outline the process that transfers stock ownership from the seller to the buyer.
Information such as the closing amount, deposit, and sum are held in escrow for breaches of contract.
You should also include information about how any assets will be transferred and when the investor can expect to receive dividends.
Here is an article to learn more about payments and stock dividends.
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7. Due Diligence
A due diligence investigation takes place before selling a company’s stock. The buyer reviews all relevant financial, operational, and performance forecasts to make an informed decision about their purchase.
The buyer agrees to commence due diligence upon the effective date of the contract, and they agree to complete their due diligence research before closing.
You should specify a deadline that the buyer must complete their due diligence review. If unsatisfied and wish to proceed no longer, they have the right to back out of the agreement and receive a deposit reimbursement.
Here is an article where you can review the steps of the due diligence process.
8. Indemnification
In SPAs, the hold harmless clauses allow one party to hold another accountable (indemnify) if they fail to act upon the agreed-upon terms and conditions of the contract.
This portion of your SPA can grant the seller the right to indemnify the buyer, their affiliates, and organizations accountable for damages or losses caused by negligence, omissions, or breaches of representation, warranty, or covenant.
9. Termination Clause
If one or both parties default or want to end the contract, a termination clause outlines the processes for formally ending the agreement.
Termination clauses can also be a part of employment contracts. For example, in an SPA, employers may specify what will happen to an employee’s shares or stake in the company if terminated.
The termination clause can be as general or specific as parties see fit; during negotiation, the parties can discuss what circumstances and events they are willing to accept as reasonable cause for termination without dispute.
Here is an article that covers termination clauses.
10. Closing Conditions
The closing conditions portion of the stock purchase agreement covers what terms and conditions must be fulfilled to complete the transfer of shares or assets.
Closing conditions will range from company to company and even from company to individual buyer.
After closing conditions are met, the buyer and seller agree to sign on an official closing date. The closing date marks the completion of the transaction, as the seller transfers ownership of the shares/assets to the buyer in exchange for a monetary sum.
Here is an article that explores the details of closing conditions.
11. Signature of the Buyer and Seller
Formally close the stock purchase agreement with signatures from all parties. There should be clear signature lines and datelines at the bottom of the document’s last page.
Buyers and sellers should use their legal names, as well as their professional titles and organizations, e.g., “Chief Executive Officer of [Company Name].”
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