Stock Purchase Agreement

A stock purchase agreement is a legal contract that governs the sale and purchase of shares in a company, specifying the transaction's terms and conditions. It is the basis of any equity-based transaction and summarizes the provisions the buyer and seller must know during the stock acquisition procedure. So, if you are an enterprise owner planning to share your company's stake, having an overview of the Stock Purchase Agreement is essential for safeguarding your interests and ensuring a seamless transaction.

Stock purchase agreements address the complicated legal issues that these types of transactions face. However, drafting the proper documentation will help you avoid legal pitfalls and future disputes. Contract drafting requires knowledge about how they work, what to include, and other vital details.

In this article, we’ve described stock purchase agreements and what you should know before drafting or signing one.

What is a Stock Purchase Agreement?

A stock purchase agreement, also known as an SPA, is a contract between buyers and sellers of company shares. This legal document transfers the ownership of stock and specifies the terms of shares bought and sold by both parties.

Other names for stock purchase agreements include:

• Stock transfer agreements
• Shares purchase agreements
• Shares transfer agreements

Regardless of what you call your agreement, prioritize the drafting of the terms and conditions . A wrongly worded contract can create unintended legal consequences, which means that it’s essential to get this aspect right.

Steps to Write a Stock Purchase Agreement

You write a stock purchase agreement if you are the seller. Delegate this responsibility to your legal department to draft the terms and conditions. If you don’t have in-house or outside counsel, consider a virtual provider to help you through the legal drafting process.

Below, we’ve outlined a hypothetical example of how a stock purchase agreement works:

• Senpai Corporation sells stocks on the public corporation
• Argus Smith wants to purchase 1,000 shares from Senpai
• Senpai drafts a stock purchase agreement to formalize the transaction
• The SPA specifies that Mr. Smith will buy 1,000 shares
• The price is set according to the closing date of the transaction
• Smith agrees to complete his due diligence reporting within 30 days
• Both parties sign the agreement
• Senpai transfers the stocks to Mr. Smith
• Smith performs his due diligence audit and analysis
• He finds no problem and indicates as such in writing to Senpai
• The transaction is complete

Stock purchases are relatively straightforward transactions. However, there are legal issues to consider that are more complex, such as due diligence and timing, that you may want to discuss with securities lawyers , and they can offer guidance during the contract and transaction process.

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What’s Included in a Stock Purchase Agreement?

Stock purchase agreements contain specific terms and conditions that set the relationship between buyers and sellers. The seller transfers and delivers all certificates from the transaction, and buyers reasonably expect one built on good faith. Creating a comprehensive stock purchase agreement will help parties avoid legal disputes and navigate their legal relationship.

These are the nine terms you may want to include in your stock purchase agreement:

• Parties and Agreement Date: The opening paragraph should include party names and agreement date, and it needs to communicate that both parties are entering into an agreement that doesn’t begin until the date specified. You do not have to make this section overly lengthy either.
• Price and Shares: This section contains information about the issuing corporation or shareholder, quantity, and each share’s value. The value of stock shares is usually set at market value on the day of closing.
• Purchase and Sale: Your contract needs a statement acknowledging that the seller transfers ownership of the stock certificates to the purchaser upon transaction completion. The seller must transfer all certificates while taking care of any applicable transfer taxes.
• Warranties and Representations: Buyers and sellers must work in good faith and fair dealing during a stock purchase and sale. Stock purchase agreements should verify the corporation’s good standing and bonafide ability to sell the stocks. Seller’s and buyer’s representations signify that no parties have made any errors or omissions and that the transaction is presented transparently and as communicated.
• Choice of Law: The corporation should establish the choice of law that will oversee a civil lawsuit should litigation arise. Otherwise, the purchaser could require you to travel to their state for meetings, hearings, and other legal proceedings. This situation can add time and expense to handling disputes with the other party.
• Payment Terms: Stock purchase agreements establish the terms under which the purchaser will pay the seller for shares of stock. This number is often a percentage paid upon contract signing, with the remaining balance paid upon final contract execution.
• Due Diligence: Most buyers need a due diligence period to inspect the seller’s and company’s financial records. They often have sole discretion regarding the validity of the shares for the intended sale. It is not unusual for sellers to require a due diligence report by a specific date.
• Closing Date and Time: The closing date and time is a reference to when the stock closing occurs. This date is essential for determining share price, and it usually occurs within a few days of signing the stock purchase agreement. Many contracts also include buyer and seller requirements to deliver tax forms and final closing statements before and after the transaction as negotiated in the agreement. You should discuss the closing date terms and conditions since this provision is more important than it appears.
• Signature and Date: The last section of your stock purchase agreement includes a signature and date line for both parties’ signing. Most stock purchase agreements do not require notarization, and a simple acknowledgment of the willful desire to enter into a contract is usually sufficient.

Importance of a Stock Purchase Agreement

Below are the key purposes of a stock purchase agreement:

• Offers Clarity and Certainty: The primary purpose of a stock purchase agreement is to offer unambiguous provisions for both parties concerned. By explicitly defining the purchase cost, payment provisions, and closing date, the contract reduces the threat of misinterpretations and conflicts during and after the transaction. It serves as a lawfully binding document that specifies the rights and obligations of each individual, ensuring shared knowledge throughout the process.
• Protects Rights and Interests: A well-written stock purchase agreement offers security to the purchaser by including representations and warranties from the seller. These assurances cover various aspects of the company, such as its financial health, legal compliance, and disclosure of liabilities. In case of any misrepresentation or breach, the buyer may seek remedies, such as compensation or rescission of the deal.
• Provides Regulatory and Legal Requirements: Stock purchase agreements ensure compliance with regulatory authorities and legal provisions controlling stock sales. Depending on the state, specific regulations and rules may apply, and the SPA can handle these prerequisites, including necessary approvals from regulatory bodies, shareholders, or antitrust authorities.
• Includes Non-disclosure and Confidentiality: Confidential information regarding the company being acquired is frequently involved in business transactions. Moreover, the stock purchase agreement incorporates confidentiality and non-disclosure provisions to safeguard this sensitive data from unauthorized sharing. It is especially vital when the customer investigates the organization's financials, agreements, and other proprietary details during due diligence.
• Ensures Smooth Transaction Process: Stock purchase agreements contribute to a smoother transaction process by addressing potential issues and contingencies upfront. The SPA outlines the conditions that must be met for the deal to close successfully, reducing uncertainty and streamlining the process of obtaining necessary approvals and fulfilling specific obligations before completion.

Types of Stock Purchase Agreements

Below are different types of stock purchase agreements:

• Simple Stock Purchase Agreement: This principal agreement summarizes selling a limited number of shares at a specified cost. It may comprise representations of warranties, and provisions precedent to the sale.
• Stock Purchase Agreement with Due Diligence: In more complicated deals, parties must perform due diligence before executing the agreement. This type of agreement comprises prerequisites for the buyer to perform due diligence analyses on the organization's financial and legal status.
• Asset Purchase Agreement with Stock Component: In some circumstances, a stock purchase agreement is part of a more extensive transaction, such as acquiring business assets and transferring them.
• Securities Purchase Agreement: This agreement is used when a business issues new shares of stock to investors, such as in a private placement or a venture capital investment. It includes terms related to the purchase of newly issued securities.
• Convertible Note Purchase Agreement: Convertible notes are often used in startup financing. This agreement outlines the terms of the convertible note, including the conditions under which it can be converted into equity.
• Stock Subscription Agreement: This is used when investors subscribe to purchase shares in a private placement offering. It outlines the subscription terms, such as the number of shares, purchase price, and closing conditions.
• Joint Venture Stock Purchase Agreement: In joint ventures, partners may acquire stock in the joint venture company. This agreement governs the purchase of shares by the joint venture partners and outlines their rights and obligations.
• Cross-Purchase Agreement: In closely-held corporations, shareholders may enter into cross-purchase agreements to facilitate the purchase of shares from a departing shareholder. This agreement outlines the process and terms for such purchases.
• Stockholder Agreement: While not a direct purchase agreement, a stockholder agreement may contain provisions related to the sale of shares among existing shareholders. It can specify rights of first refusal, drag-along rights, and other mechanisms for handling stock sales.

Who are the Parties in Stock Purchase Agreements?

The parties in a stock purchase agreement are the buyers and sellers of shares. Sellers are stock-issuing corporations or shareholders, and buyers are the ones who want to purchase stocks. Stock purchase agreements should expressly refer to the parties and their roles to make them legally binding.

Stock Purchase Agreement vs. Asset Purchase Agreement

Buyers and sellers use stock purchase agreements when they want to buy or sell stocks. They use asset purchase agreements when purchasing company assets, not through a merger or acquisition. Stock acquisitions, by nature, are also less expensive than asset purchases since they are not subject to additional taxes.

Here are a few other differences between stock purchase agreements versus asset purchase agreements below:

• Asset Purchase Agreements: Asset purchase agreements, also called buyer purchase agreements and APAs, outline the terms around the purchase of assets from a buyer to a seller. Buyers usually use them to acquire devalued company assets, allowing the buyer to increase the tax value of those assets, while the seller has the opportunity to liquidate them for cash or in exchange for other assets.
• Stock Purchase Agreements: Companies can use stock purchase agreements to purchase, sell, and transfer ownership over stocks and shares. Even though stocks are financial assets, asset purchase agreements do not sufficiently address the legal issues of a stock purchase. Always get legal advice from an attorney when you have questions.

Final Thoughts on Stock Purchase Agreements

Stock purchase agreements hold considerable importance in streamlining transparent and secure stock transactions. These lawfully binding agreements provide clarity, protect the rights and interests of buyers and sellers, address legal prerequisites, and ensure confidentiality to reduce risks and enhance the efficiency of business acquisitions.

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