A stock purchase agreement is an agreement that two parties sign when shares of a company are being bought or sold. These agreements are often used by small corporations who sell stock. Either the company or shareholders in the organization can sell stock to buyers. A stock purchase agreement is meant to protect you, whether you're the purchaser or the seller.
A stock purchase agreement is separate from an asset purchase agreement. Stock purchase agreements merely sell shares of the company to raise money or transfer ownership of shares. An asset purchase agreement finalizes the sale of the company's assets. The stock purchase agreement lists several things:
Before an agreement is finalized, a letter of intent (LOI) is created explaining the proposed sale. A buyer should have due diligence and ensure the purchase agreement has the same terms as the LOI.
Stock purchase agreements are broken up into a variety of sections which help to define what certain concepts mean and explain how the transaction process works. When broken down into parts, the anatomy of a stock purchase agreement is as follows:
The first section of your stock purchase agreement is often referred to as the preamble. In this section, the agreement will be named, the parties identified, and the date of the contract will be set. In the preamble, you will often see parties referred to as "seller" and "purchaser."
Directly after the preamble, you will come to the section that is referred to as the Recitals. It is this section that will have a series of statements often starting with the term "whereas." While these statements are made to layout the intentions of the contract, they are not meant to be binding agreements between the parties.
The first article of your stock purchase agreement is the definitions section. It is in this section that the various definitions used throughout the agreement will be listed in alphabetical order. You will usually find the terms defined in this section capitalized throughout the agreement to show their importance. These terms are not made to stand on their own but are used throughout the contract to have a shared language between "seller" and "purchaser."
The temptation is to run through these definitions quickly, assuming they are standard terms. However, it is important to read through them thoroughly, as these terms can significantly change the meaning of parts of the agreement depending on how they are defined early on. Some terms that can have a significant effect based on their context include the following:
In this section, the specific terms of the sale of the stock will be clearly outlined. You will see language in this section referring to the seller transferring or selling to the purchaser or the purchaser acquiring from the seller a certain number of shares.
In this section, you will also find the price and any adjustments made to the purchase price as well as any other items that were shared between the parties when the deal was closed. This will include the following:
In this section, the warranties from the seller will be defined and stated. This can include statements regarding both past and present facts that are related to the business, such as the following:
Inaccurate representations can result in the liability of the party that made the statements.
This section is similar to section 3, although it is the representations and warranties that are coming from the side of the buyer. These two sections will often mirror each other. Since the buyer is most likely paying cash for the stock, their representations and warranties can be more limited than the seller's.
Since most deals will have a period of time between the time the parties sign and the closing, a covenants section will be created to define activities that each party should refrain from doing during this time period. This usually involves a long list of actions that need to occur during this time as well as actions that are prohibited.
This section will be comprised of conditions that either need to be taken care of or waived before the time that closing occurs. This will often include both parties performing their pre-closing covenants and all regulatory approvals being completed.
This section will outline the indemnification rights, laying out the terms under which the other party will be compensated in the event that one party breaches the contract. Article 7 will often include losses that can arise from specific causes as well. The article will also include the following:
Under Article 8, you will find the details for each party's right to terminate the contract. This includes such reasons for termination as the following:
Every agreement will close out with a section that covers any miscellaneous provisions. These can touch on a variety of subjects, such as the following:
Stock purchase agreements are important because they put the terms of a sale into writing. This can prevent misunderstandings that may end up in the courtroom. The agreement also allows the seller to show and explain that they are the owner of the stock being sold. This gives the purchaser more faith in the transaction.
Another important benefit of a stock purchase agreement is that it provides specific information on the transfer of stock. This means all of the warranties from the seller are spelled out. It can also list dispute resolution measures. You can even document that the seller or purchaser will cover certain costs if an unknown preexisting issue causes loss.
Because stock purchase agreements are meant to protect everyone involved, there are very few instances when you should consider not using one:
Keep in mind that it's still safer to create a stock purchase agreement. These are only possible reasons for not creating an agreement. This doesn't mean that forgoing a stock purchase agreement is the best decision.
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