assignment of stock purchase agreement

Stock Purchase Agreements - Everything You Need to Know

You’ve got a company and it looks like things are going well for you. Now you might be thinking about next steps for financing and growth. One of the most clear cut ways to do that is sell off parts of your ownership as stock.  How does all that work exactly? We’ll cover all the details of Stock Purchase Agreements so you know all the ins and outs!

A stock purchase agreement (SPA) is the contract that two parties, the buyers and the company or shareholders, written consent is required by law when shares of the company are being bought or sold for any dollar amount.

In a stock deal, the buyer purchases shares directly from the shareholder. Stock acquisitions are the most common form of acquiring a private business. They are mostly used by small corporations selling stock, but not usually when the owner is the sole stockholder, or when the buyer is acquiring 100% of the stock.

It is important to note that in a stock deal the buyer also assumes title of all assets and liabilities. Contrast this with an asset deal, the other method of acquisition, in which the buyer purchases an agreed-upon set of assets and liabilities. 

With a stock acquisition, it’s as if there was no change of ownership for the asset and liabilities - disclosed or undisclosed - and the target continues on as before. This potentially includes liability for past actions of the company. 

SPAs can seem more straightforward than asset purchase agreements (APA), because SPAs does not need to itemize the assets and liabilities. However, they come with more opportunities for financial risk.

 Whether buying or selling, it is helpful to have an attorney on hand to help you prepare or review the contract. They can also assist you if you need to file a claim.  

Steps to file:

Prepare the legal document. 

The parties may set forth some terms in an informal letter of intent (LOI). If they’re interested in pursuing the deal, they’ll prepare the primary transaction agreement. This could be a Stock Purchase Agreement, Asset Purchase Agreement, or Merger Agreement. The buyer may do due diligence, and if so, this could account for a purchase price adjustment if they move forward with the SPA.

Sign the entire agreement. 

A witness whereof can also sign, but there must be a witness for the statement to be legally binding

Make signed copies.

Exchange payment and the stock certificates.

You may need to file the paperwork with the SEC .

What is a Stock Purchase Agreement?

An SPA is the contract containing the principle agreement between the parties in which the buyers purchase stocks from the shareholders. It is sometimes called a Securities Purchase Agreement, or just a share Purchase Agreement. 

The key provisions detail the terms of the transaction:

the number and type of stock sold (i.e. common, preferred)

the purchase price

when the transaction will take place

price per share

It also has articles detailing the conditions of the sale. That way, the parties can refer to the SPA in case one needs to file a claim. 

Key Provisions of a Stock Purchase Agreement

The major sections of the stock purchase agreement are as follows. Sellers should particularly pay attention to the purchase and sale of stock, and the representations and warranties section. 

Definitions – Here is where you include the definitions of terms used in the document, including the types of applicable law that will be used. 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."

While it may be tempting to gloss over this article, terms such as “Liabilities,” “Material Adverse Effect” or “Seller’s Knowledge” can be a focus of debate, and are used throughout the contract.

This section must include the name of the buyer or “Acquirer” and the “Target” in which the outstanding shares are being sold. 

Purchase and sale of stock – This section has transaction details such as the purchase price and 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. 

• Make sure to include purchase price adjustments, if any. The seller will want to note any differences here from the Letter of Intent (LOI). This will usually be the result of due diligence on the part of the buyer, and the adjustment should be negotiated pre-closing.
• Share certificates and other agreements to be exchanged upon completion of the sale.
• Legal opinions. 
• Escrow agreements.
• Employment agreements, detailing how employee issues will be handled after the transaction. Employment agreements do not need to be renegotiated, unlike with a APA. 
• Other ancillary documents. 

Representations and warranties of the seller and buyer – Here the buyer and seller list all of the statements they are signing off to be true. For example, the seller warrants that they own the stock, and that the corporation is in good standing, and where the buyer warrants their ability to consummate the transaction. Any false statements can potentially open up costly litigations post transaction, including having the purchase price adjusted.

Covenants and Closing Conditions --  If there is a space of time between signing and closing date, the two parties will make covenants here for how the two parties will handle the gap. These are mostly assurances requested from the buyer to ensure that the business will continue to operate in the way it did when the buyer did due diligence. Closing Conditions 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.

Indemnifications --   This provides the terms for how the buyer or seller will handle protections and compensations against damage, loss, or injury post-transaction as a result of conditions that existed before the deal closed.

Tax purposes - this section covers any special tax treatments or financial statements either buyer or seller are entitled to.

Termination -- This provides you the details for each party's right to terminate the contract.

General Provisions -- Every agreement will close out with a section that covers any miscellaneous provisions.  

How Does a Stock Purchase Agreement Differ From an Asset Purchase Agreement?

With a common stock acquisition, the buyer assumes all assets and liabilities, whether disclosed or not. With an asset purchase, the buyer is selecting specific assets and liabilities they want to buy.

An asset purchase agreement (APA) might benefit a buyer who wants to exclude liabilities or redundant assets. For example, a target may have uncollectible accounts receivable. All assets and liabilities being bought and sold must be itemized in the APA. This can include licenses, contracts, equipment, agreements, goodwill, customer lists, leases, or inventory. 

Sometimes, contracts may have a specific clause that prevents licenses from being transferred over. This could include an exclusive distributorship, license, or right. It could be titles for a fleet of cars. A stock purchase agreement may be the best choice when the target has exclusive contracts or licenses that cannot be transferred over.  

When is a Stock Purchase Agreement More Desirable Than an Asset Purchase Agreement?

Stock deals might be good in a situation where the buyer thinks that the liability is low or manageable, or who sees growth potential in the company. Or the buyer may be looking for a tax write-off.

Because the assets and liabilities don’t need to be itemized, it can seem less complicated to go with an SPA. But they can come with risk.  It is important for a buyer to do their due diligence. 

In a stock acquisition, it’s as if there was no change of business owner for the assets and liabilities. The tax attributes of the assets and the liabilities carry over as well. The buyer assumes the same tax responsibilities and the deprecation schedule of the assets. This includes the existing tax status of the corporation.  

Stock acquisitions can also be less expensive because they are not subject to the Bulk Sales Act, often resulting in a lower selling price.  The seller is considered to have disposed of equity, and instead is subject to a capital gains tax. 

Also, in cases where both the buyer and seller are C corporations , the transaction may qualify for tax treatment as a tax-free reorganization. Stock purchase agreements can also be useful in cases where the buyer needs a tax write-off. 

Two reasons not to use a SPA include: 

You have a limited capacity offering that qualifies for Regulation D exemption.

You are the only shareholder in the organization.

There are various tax implications with a SPA. However, it can still be good to have a purchase agreement. It is best to speak with an accountant before filing. You can learn more about the differences between a SPA and an APA at CFI Education, Asset Purchase vs Stock Purchase - Pro/Cons Reasons for Each Type .

Do I Need a Lawyer to Help Me Fill Out a Stock Purchase Agreement?

It is important to conduct a stock acquisition properly. You should have legal advice, whether preparing or reviewing a claim. Typically, it is  lawyers who prepare the SPA. 

SPAs can be found to be invalid when they violate business or corporate governing law. This is common when they have securities violations, such as insider trading. 

Because they have to do with the sale and purchase of stocks, SPAs are subject to applicable securities laws. This can lead to penalties, and even federal charges and costly court fees.

SPAs can also be found to be invalid if there is fraud, deceit or duress. For example, if there is a misrepresentation about the type of stocks, this can open up the seller to litigation.

A common mistake people make is trying to fill out a SPA template on their own. You are highly advised to consult a lawyer for legal counsel, whether drafting an SPA or reviewing one. They can help you throughout the process, and represent you if you ever need to file a claim. 

https://www.divestopedia.com/definition/890/stock-purchase-agreement-spa

https://www.divestopedia.com/definition/893/asset-purchase-agreement-apa

https://corporatefinanceinstitute.com/resources/knowledge/deals/asset-purchase-vs-stock-purchase/

https://corporatefinanceinstitute.com/resources/knowledge/deals/stock-acquisition/

https://www.themalawyer.com/documents-you-need-to-buy-or-sell-a-business/#APA

https://www.themalawyer.com/anatomy-of-a-stock-purchase-agreement/

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Stock Purchase Agreement

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ContractsCounsel has assisted 46 clients with stock purchase agreements and maintains a network of 62 financial lawyers available daily.

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.

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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Stock purchase agreement legal requirements.

I am looking to purchase stock in a company and I want to ensure that I am legally protected. I am looking to enter into a Stock Purchase Agreement with the company, and I want to make sure that all legal requirements are met before I sign the agreement. I am looking for advice on what legal requirements need to be met in order for the Stock Purchase Agreement to be legally binding.

It's important to note that this is not an exhaustive list, and specific considerations may vary depending on the circumstances. Consulting with a qualified attorney is crucial to tailor the agreement to your specific needs. Here are some key areas to focus on: 1. Stock Description: Clearly define the shares being purchased, including the class of stock, number of shares, and any special rights or restrictions associated with the shares. You absolutely want to see the full record of the articles of incorporation, bylaws and any possibly existing shareholder agreements that could modify your rights in any way. 2. Purchase Price and Payment Terms: Specify the agreed-upon purchase price, payment structure (e.g., lump sum or installment), and any contingencies or adjustments based on audited financial statements or other factors. 3. The stock sale transaction is approved by the Board of Directors and possibly the Shareholders. You should be able to see the corporate action, either as a Written Consent or a Resolution taken by vote and certified by the corporate Secretary, who is the officer responsible for recording the minutes. 4. Representations and Warranties: Require the seller to make certain representations and warranties regarding the company's financial condition, assets, liabilities, contracts, intellectual property, compliance with laws, and any pending litigation. 5. Conditions Precedent: Specify the conditions that must be met before the transaction can be completed, such as obtaining necessary regulatory approvals, consents, or waivers. 6. Due Diligence: You should conduct thorough due diligence on the company, its financial records, contracts, intellectual property, and any other relevant aspects to identify any potential issues or risks. Generally, an acknowledgement of your access to, and conduct of, due diligence is good to include in the agreement. 7. Proper completion of any securities filing. Particularly if you are not the only investor, past present, or future, you should expect and require the company to be compliant with securities rules. Failure to observe the securities rules is red flag. 8. Governing Law and Jurisdiction: Determine the governing law and jurisdiction that will apply to the interpretation and enforcement of the agreement. Remember also that if you are investing in a corporation that is incorporated in a state other than where you reside, that state corporation law will generally govern your shareholder rights.

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What is a stock purchase agreement?

I am a small business owner looking to purchase a company and I am interested in understanding more about a stock purchase agreement. I understand that this type of agreement is used when a buyer wishes to purchase the stock of a company, but I would like to learn more about the specifics of the agreement and what is involved in the process.

There are two ways to purchase a company. Buy its assets individually, or purchase the stock of the company. Buying the assets is more legal work, and more expensive and disruptive to the purchased business' relationship with third parties such as employees, customers, vendors, and banks, but avoids assuming the liabilities of the selling company. Buying the stock of the company is far less disruptive, but runs the risk of assuming undisclosed liabilities of the company.

Stock purchase agreement and non-competition clauses?

I am in the process of buying a business and have been asked to sign a Stock Purchase Agreement. I am concerned about the language in the agreement that includes a non-competition clause, and would like to understand the implications of signing the agreement and if there are any potential risks that I should be aware of.

I would be happy to schedule a paid telephone consultation with you to review the non-compete (and any other provisions in the agreement), advise you on its scope and enforceability, and answer your questions. Please contact me via email at [email protected] to discuss.

When to use a stock purchase agreement?

I am a business owner looking to purchase a company and I am considering using a Stock Purchase Agreement to effectuate the transaction. I am uncertain when this type of agreement should be used and would like to understand the legal implications of using it. I am also interested in understanding any potential tax implications of using a Stock Purchase Agreement.

There are two ways to buy a company. 1. Asset purchase (you purchase the assets of the company directly) 2. Equity (stock) purchase. You purchase the equity of the company. Eauity purchases are far less expensive (legal fees). But in either case, you must hold back 10-20% of the purchase price in trust for a year to make sure the accounting records are in fact accurate, the receivables actually exist, and there are no undisclosed liabilities (tax, employee lawsuits, etc.)

Stock purchase agreement and post-closing obligations?

I am looking to purchase a business and I recently received a Stock Purchase Agreement from the seller. I am concerned about my post-closing obligations, such as continuing to fund the business or other contractual obligations, and would like to understand what these obligations are before I commit to the purchase. I would like to know what I should be aware of and what risks I may face if I accept the agreement.

I would focus on: What obligations do you have under the reps and warranties? Is there an escrow holdback? Is there any liabilities staying with you.

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Anatomy of a Stock Purchase Agreement

Most private M&A transactions are structured as acquisitions of stock , rather than mergers or asset purchases . The principal agreement governing such a transaction is typically a Stock Purchase Agreement (SPA), sometimes styled a Securities Purchase Agreement or simply a Purchase Agreement. At their most basic level, these agreements provide for the sale of shares in a target company to a buyer in return for cash or some other form of consideration ( i.e. , something of value). However, M&A transactions are anything but basic. They are riddled with substantial risk and potential rewards for both parties, and SPAs often become quite complex in an effort to address the many ways M&A deals might go wrong.

In this post, I’ll introduce you to the key provisions of an SPA and explain their purposes. In later posts on The M&A Lawyer Blog, I will examine each of these sections more closely and provide a more detailed and nuanced discussion of their contents.

If you’d like to compare my discussion with a sample Stock Purchase Agreement, here ‘s the SPA that governed AT&T’s attempted (and ultimately abandoned) acquisition of T-Mobile from Deutsche Telekom for $39 billion in 2001. You’ll notice some discrepancies between my references to Articles of the SPA and the Articles of the AT&T / Deutsche Telekom agreement. Although agreements like these do conform to customary standards and structure, variations do exist. Please keep that in mind as you read on.

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Preamble and Recitals

The first paragraph of an SPA is known as the Preamble. It usually names the agreement, introduces the parties and sets forth the effective date of the contract. More often than not, it will also create defined terms for each of these, such as the “Seller” and the “Purchaser.”

Immediately after the Preamble, the Stock Purchase Agreement often contains a series of statements beginning with the word “WHEREAS”. These are known as the Recitals. Unlike most of the rest of the agreement, the Recitals are not generally meant to be binding on the parties. Instead, they lay out the intentions of the transacting parties and provide context to anyone later attempting to interpret the SPA.

Article 1: Definitions

Article 1 of most SPAs provides an alphabetical list of definitions of important (usually capitalized) terms used throughout the agreement.  These definitions do not function as stand-alone terms and conditions but are instead incorporated into other operative provisions throughout the contract.  For example, Article I might provide definitions for the terms “Acquired Shares,” “Encumbrance” and “Environmental Law.”

Although you may be tempted to gloss over these definitions thinking they are immaterial boilerplate or difficult to make sense of devoid of context, they are critically important and may substantially alter the effect of the provisions in which they are used. Some, such as “Liabilities,” “Material Adverse Effect” or “Seller’s Knowledge” (or their equivalents) are used throughout the contract and may be the subject of extensive negotiations.

In addition to the list of definitions, this Article will frequently also contain cross-references to terms that are defined elsewhere in the Stock Purchase Agreement and a section devoted to rules of construction applicable to the contract.

Article 2: The Transaction

Article 2 of a standard SPA will usually provide the specific terms of the sale of the stock. It contains language to the effect of “the Seller will sell and transfer to the Purchaser, and the Purchaser will purchase and acquire from the Seller, all of the Shares.” It also sets forth the purchase price, any purchase price adjustments (such as an adjustment to account for variations in target net working capital at closing ) and documents and other things that must be exchanged between the parties at closing. These will include the purchase price and share certificates , of course, as well as legal opinions , any employment agreements, any escrow agreement and other ancillary documents.

Article 3: Seller Representations and Warranties

Article 3 of most Stock Purchase Agreements contains representations and warranties from the seller about itself and the target company. As discussed in a prior post , representations and warranties are statements of past or present fact relating to the business, assets, liabilities, properties, condition, operating results, operations and prospects of a subject company or set of assets made by one party to an M&A transaction to another. Inaccurate representations and warranties may result in the incurrence of liability by the party that made the statements.

Here’s a long list of subjects that may be addressed by seller representations and warranties:

• organization and good standing
• authority and enforceability
• absence of conflicts
• capitalization and ownership
• subsidiaries
• financial statements
• books and records
• accounts receivable and accounts payable
• inventories
• absence of undisclosed liabilities
• absence of certain changes and events
• real property
• intellectual property
• material contracts
• tax matters
• employee benefits
• employment and labor
• environmental, health and safety
• compliance with law
• legal proceedings
• customers and suppliers
• product warranties
• product liability
• related-party transactions
• brokers and finders fees and
• full disclosure.

Few, if any, transactions will include all of these representations and warranties, and many of them overlap at least in part.

Article 4: Buyer Representations and Warranties

Article 4 usually contains reciprocal representations and warranties from the buyer to the seller. (Occasionally, these are included within another section of Article 3 along with the seller representations and warranties.)  If the buyer is issuing shares as all or part of the purchase price, then its representations and warranties will mirror those of the seller fairly closely. More often, though, the buyer is paying cash and its representations and warranties are consequently significantly more limited in scope. After all, cash is cash.

Buyer representations and warranties frequently cover some combination of the following topics:

• governmental consents
• investment intent
• independent investigation.

Article 5: Covenants

Assuming your deal has a gap period between signing and closing, as most do, Article 5 of the SPA will contain covenants ( i.e. , promises to do or refrain from doing something) from the parties governing their activities during this time as well as after closing.

There’s usually an “Access and Investigation” covenant through which the seller promises to permit the buyer to access the acquired business and its books and records prior to closing.  Among other things, this enables the buyer to continue planning for and implementing its integration of the acquired business during the gap period.

This Article will also require the seller to operate the acquired business prior to closing in the ordinary course consistent with past practices. Such provisions sometimes include long lists of specific actions required to be taken (or prohibited from being taken) by the seller. Generally speaking, the more comprehensive and specific the list, the more favorable it is to the buyer. These conduct of business provisions help preserve the business in the form expected by the buyer and maintain it in a condition that is similar to what it investigated through due diligence.

In addition, Article 5 usually requires the seller to notify the buyer of certain material developments impacting the acquired business or the transaction. The goal here is not only to ensure real-time information flow to the buyer about its soon-to-be-owned business, but, depending on how the provision is written, to enable the buyer to declare a material breach of the SPA or failure of a closing condition if it has been notified of a breach or failed condition.

Article 5 will generally also contain a covenant requiring the parties to exercise certain efforts to consummate the transaction, including obtaining regulatory approvals and securing third part consents .

Other covenants you may encounter in Article 5 include provisions governing confidentiality, no-shops, public announcements, preparation of interim financial statements, seller cooperation with financing, customer communications, employee matters and indemnification and insurance.

Article 6: Closing Conditions

Again assuming the deal has a gap period between signing and closing, the Stock Purchase Agreement will include conditions precedent that must be satisfied or waived before each party will be required to consummate the transaction. Among other things, these will generally require that the other party’s representations and warranties will have been true when made and remain true at closing, and they will require that the other party will have complied with its pre-closing covenants. As you might expect, all required regulatory approvals and third party consents will need to have been secured, as well. Frequently, a buyer will also require as a condition precedent that the acquired business will not have experienced a material adverse change—an adverse change in the target’s business that is consequential to the company’s long-term earnings power. Occasionally, a buyer may be able to negotiate for a requirement that it will have satisfactorily completed its due diligence examination of the target, too.

Article 7: Indemnification

Another SPA Article will provide for indemnification rights, which entitle each party to be compensated by the other for losses suffered on account of a breach of any of the other party’s representations, warranties and covenants. Indemnification may also be extended to losses arising from specific causes, such as an identified environmental condition.

This Article will not only outline each party’s basic rights to indemnity. It also usually:

• establishes a survival period for representations and warranties after which claims for breach cannot be brought,
• sets limits on indemnification, including a threshold or deductible and a cap,
• if applicable, outlines the use of any funds deposited in escrow for indemnification,
• lays out procedures to be followed to make indemnification claims and to handle third party claims,
• indicates the extent to which indemnification is a party’s exclusive remedy for breaches and
• clarifies how losses should be calculated for purposes of any recovery.

Article 8: Termination

The conditions to closing contained in Article 6 would be pointless without a corresponding right to terminate the SPA and the transaction if any of those conditions aren’t satisfied or waived. Every SPA thus contains an Article describing each party’s termination rights, which often include not only termination due to failure of a condition but also termination by mutual consent, termination by the buyer if the target company has suffered a material adverse effect, termination by either party if the transaction is enjoined or fails to obtain necessary governmental or third party consents or termination by either party if the deal hasn’t closed by a specified deadline.

In addition, this Article explains the effect of termination, usually that some provisions of the SPA will survive termination ( e.g. , governing confidentiality and miscellaneous provisions), that one party may owe a termination fee or expense reimbursement to the other and that the parties will remain responsible for any pre-termination breaches.

Article 9: General Provisions

Finally, virtually every SPA will contain an Article dedicated to miscellaneous provisions governing a variety of subjects, including expenses, governing law, notice, dispute resolution, expenses, severability, counterparts, assignment, amendment and more.

Other Articles

Aside from the more common sections described above, many Stock Purchase Agreements contain Articles devoted exclusively to other topics, including taxes, employment and labor and environmental matters. Such additional Articles will usually only appear in an SPA if their subject matter is particularly important and requires a more fulsome approach than it would otherwise receive.

*               *               *

Erik Lopez is the M&A lawyer responsible for this blog. Feel free to contact Erik at [email protected] or +1-214-601-1887 .

Partner at Jasso Lopez PLLC

Erik is an M&A lawyer with over 23 years of domestic and cross-border, public and private M&A experience. He has successfully closed hundreds of deals totaling tens of billions of dollars in value for a global client-base. He is a graduate of the University of Chicago and New York University School of Law. You can reach Erik at [email protected].

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How to Structure a Stock Purchase Agreement (Template)

Learn how to outline the sale of company stock to buyers and view a helpful template.

Table of Contents

Although your long-term business goals may include an IPO, most SMB equity events are stock purchase agreements. Stock purchase agreements help you raise capital by selling part of your equity to a private investor.

With stock purchase agreements, you can sell shares of your company directly to buyers outside the stock market. With the money you raise from company stock sales, you can fund new business initiatives without going public. Because you and your buyers sign legally binding agreements, you can protect your assets — and your company — as you raise money. 

We’ll explain everything business owners should know about stock purchase agreements and share a stock purchase agreement template to make the process easier.

What is a stock purchase agreement?

A stock purchase agreement is a two-party contract that dictates transactions around a company’s shares. Stock purchase agreements are standard among small corporations; they provide capital while allowing business owners to retain a controlling interest. Usually, a stock purchase agreement empowers the business owner and company shareholders to sell stocks.

How does a stock purchase agreement work?

A stock purchase agreement formally transfers ownership of your company’s stocks between two parties. Here are some crucial elements of stock purchase agreements: 

• Stock purchase agreements affect company ownership. When shares of your company’s stocks exchange hands, your company’s ownership also changes. Someone who sells all their stocks to another party no longer has any stake in your company, while the new buyer gains a stake in your company equal to what the seller previously had (or more if the buyer already had stock in your company).
• Stock purchase agreements differ from asset purchase agreements. Asset purchase agreements govern transactions of specific assets or liabilities rather than company ownership shares. For example, if you sell your equipment to another company, you may want to sign an asset purchase agreement because no company ownership changes will occur. But if you sold shares of your company to the other party, a stock purchase agreement would be in order. 
• Purchasers assume all assets and liabilities. Notably, when buyers purchase shares of your company, they assume all assets and liabilities tied to your stocks even if you don’t disclose them.

Who needs a stock purchase agreement?

Financial regulations state that, for any stock transaction, both parties must give written consent. If you’re preparing to sell stocks in your company, you’ll want to have a stock purchase agreement template readily available that you can easily modify to reflect the terms of the sale and the buyer’s information.

How do you create a stock purchase agreement?

Before you create the stock purchase agreement, you must take several crucial steps. 

1. Value the company before creating a stock purchase agreement.

To know how much to sell your shares for, you must know your company’s value. There are several ways for you and your finance team to value your business . One common way to calculate its value is by taking its net profits and using a multiple, usually between two and 10, depending on the business’s projected growth rate. 

Your valuation will hinge on several factors outside of EBITDA (earnings before interest, taxes, depreciation and amortization), including recurring revenue and revenue growth in the past year.

2. Get investor agreement before creating a stock purchase agreement.

Present your company valuation to the business investor as part of your business plan, and explain how you got to this number. When presenting to the investor , ensure they understand every aspect of the valuation. 

The business owner and investor must agree with the valuation. If the investor doesn’t agree with the valuation, a stock purchase won’t happen.

3. Decide on a share price before creating a stock purchase agreement.

Based on your valuation and the percentage of company equity you’re willing to give up, you will come up with two numbers: 

• The amount of money you are raising 
• What the investor gets for that amount

If you’ve ever seen the show Shark Tan k, you’re familiar with this concept. An entrepreneur might say, “I’m asking for $500,000 for 25 percent of the company.” In this example, the total company valuation would be $2 million. 

For the sake of easy math, you may need to issue more shares before your stock sale because you’ll be giving the investor a specific number of shares, and they must equal the investment amount at the agreed-upon valuation.

4. Agree on additional terms before creating a stock purchase agreement.

Some stock purchase agreements are relatively straightforward, while others are more complex. A simple one would be a sale of voting shares for money. However, you may agree that some or all the shares you sell will be non-voting, so the investor won’t have a say in how the business is conducted. Or an investor with more leverage may insist on having some options to buy more shares at specific profit triggers.

5. Have your financial statements ready before creating a stock purchase agreement.

Stock purchase agreements typically include financial information so the investor understands precisely what they’re buying into. Financial information usually includes the following: 

• Profit margin
• Tangible assets (like equipment)
• Intangible assets (like digital assets and intellectual property) 

There is also a period of due diligence during which the investor can verify this financial information. To ensure your stock sale goes smoothly, have your financial reports and other relevant documents in order so the investor can inspect them.

6. Write up stock the purchase agreement.

Consult a business attorney to help write your stock purchase agreement or review it and make suggestions before you present it to your investor. 

A stock purchase agreement typically includes the following information:

• Your business name
• The name and mailing address of the entity buying shares in your company’s stocks
• The par value (essentially the sale price) of the stocks being sold
• The number of stocks the buyer is purchasing
• The transaction’s date, time and location
• Seller and buyer warranties and representations
• Information on employee bonuses , employee benefits and potential employee issues
• An indemnification clause to address unexpected costs

The above information is typically grouped into several articles that comprise your stock purchase agreement’s structure.

Stock purchase agreement template

Here is a stock purchase agreement template you can copy and paste into a word processing program and save to your company files. This template is intended as a guide only and does not constitute legal advice. Always consult with legal counsel before finalizing legal documents.

This Stock Purchase Agreement (“Agreement”) details the terms and conditions of the contractual agreement between the below parties:

Buyer (“Buyer”): [Name, mailing address] Seller (“Seller”): [Name, mailing address]

WHEREAS, Seller plans to sell [number] shares of [type] stock, or [number] percent of the outstanding shares belonging to [Your company name] (“Company”), a [State] corporation, and

WHEREAS, Buyer plans to purchase the stock and agrees to the terms and conditions outlined below.

THEREFORE, Buyer and Seller (individually, “Party”; together, “Parties”) agree as follows:

Seller will sell each individual stock to Buyer for $ [number]. Buyer will thereby pay a total of $ [number] to the buyer. [ Optional inclusion: Within [number] days of signing this agreement, Buyer will place a deposit of $ [number] to Seller.]

IV. CLOSING DATE

Upon signing the Agreement, Seller shall commence the transfer of shares to Buyer. The closing of this transaction shall take place on or before [date] (“Closing Date”). On the Closing Date, Buyer shall send money to Seller via [specific money transfer method].

[ Optional Clause] V. DUE DILIGENCE

Buyer requires a due diligence period in which Buyer will inspect the finances of Seller and Company. Buyer will have sole discretion over whether the shares are valid for the intended sale, with Buyer’s decision being final and binding for the Parties. Buyer shall deliver the verdict of their due diligence no later than [month and day], 2024, at [time]. Should Buyer choose to terminate this Agreement after performing due diligence, all deposits made shall be returned to Buyer.

VI. REPRESENTATIONS

Seller represents, warrants, and agrees to and with Buyer as follows on the Closing Date.

• The Company is a legally recognized corporation formed according to the laws of [State];
• The Company is in good legal standing in [State]; Seller and the Company are not aware of government or third-party proceedings, investigations or claims against the Company;
• Seller claims full ownership of the shares being sold; Seller holds share titles void of restrictions on transfer, encumbrances or other title defects;
• Seller is able, by state and federal law as well as Company bylaws, to enter into and carry out the Agreement, including the offer, sale and transfer of shares to Buyer, and has taken all required steps to legally do so;
• Seller is not a party to any contract regarding the shares being sold;
• There are no restrictions, other than relevant securities laws, regarding the offer, sale and transfer of the shares.

VII. INDEMNIFICATION

Buyer and Seller agree to indemnify both Parties from and against all claims, liabilities, losses, damages, costs and expenses (including attorney’s fees) arising directly or indirectly from:

• Failure to execute the obligations established in this Agreement;
• Inaccuracies or breaches in representations and warranties established in this Agreement; Actions, suits, arbitration, litigation, investigations, proceedings, claims or liabilities that arise as a result of the sale of shares.

VIII. MODIFICATION

No modification will be made to this Agreement unless in writing and signed by the Parties.

IX. ENTIRE AGREEMENT

This agreement comprises the entire agreement of both Parties relating to the subject matter herein and supersedes all prior written and oral agreements, understandings, discussions and negotiations between the Parties.

This Agreement and the terms herein shall be construed and governed in accordance with the laws of the State of [State]. The Parties irrevocably submit to the jurisdiction of any and all federal and state courts located in [County], [State].

IN WITNESS WHEREOF, both Parties have agreed to this Stock Purchase Agreement electronically or in person by duly authorized officers as of the below day and year.

Buyer’s Signature: Print Name: Date: Seller’s Signature: Print Name: Date:

Jennifer Dublino contributed to this article. 

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Mastering the Stock Purchase Agreement: A Comprehensive Guide

Short Answer:

• A Stock Purchase Agreement is a crucial legally binding document that guarantees legal requirements are met and offers protection to all parties in a stock transaction, and must be in written form to ensure compliance and modification transparency.

Introduction & Background

With a decade of experience in the legal intricacies of corporate transactions, particularly in real estate and venture capital, I’ve seen firsthand how vital clear, precise agreements are in business dealings. My journey through esteemed law firms, including Lowndes, Drosdick, Doster, Kantor & Reed, P.A., and Locke Lord LLP, has armed me with the expertise to navigate the complex waters of Stock Purchase Agreements.

In the realm of business, buying or selling shares in a company is a significant move that can shape the future of both the buyer and the seller. Every transaction of this nature requires a solid foundation, typically in the form of a Stock Purchase Agreement. But what does it entail? How is it formulated? What are the key components and legal considerations? Let’s delve into the world of Stock Purchase Agreements and demystify its complexities.

In this article, I aim to demystify this key legal document that underpins the buying and selling of company shares. I’ll dissect the crucial components and legal nuances of Stock Purchase Agreements, offering clarity and guidance for those embarking on such significant transactions. My goal is to ensure that you, as a buyer or seller, are well-equipped to handle these pivotal moments that shape the future of businesses and investors alike.

Key Takeaways

• Key components of a well-drafted Stock Purchase Agreement include identification of parties involved, clear recitals and definitions, and detailed transaction specifics to ensure a comprehensive and legally sound agreement.
• Challenges in Stock Purchase Agreements can be mitigated by thorough legal due diligence, clear terms defining purchase price structure and indemnification provisions, while available templates offer a starting point, legal counsel is necessary for enforceability and compliance.

Understanding Stock Purchase Agreements

Imagine being in the middle of a significant stock transaction, the stakes are high, and the anticipation is palpable. Now, imagine diving into such an endeavor without a solid, legally binding document to guide the process. A gamble, isn’t it? This is where Stock Purchase Agreements step in. In the complex world of stock transactions, they act as a beacon, formalizing the process and offering protection to all parties involved while guaranteeing legal requirements are met.

But, is a verbal agreement not enough? Can’t we just shake hands and call it a deal? Technically, yes. Practically, no. When shares are being bought or sold, a written Stock Purchase Agreement – also known as a share purchase agreement – becomes indispensable, encapsulating specific legal terms and ensuring compliance with applicable securities laws . Any modifications to the agreement require a written agreement signed by all involved parties.

Disputes and potential liabilities that can jeopardize the long-term viability of the startup may arise if co-founders or other parties proceed without a Stock Purchase Agreement. A written agreement that includes the review of financial statements and other relevant information is essential to mitigate such risks.

So, when do we need these agreements? Whenever an individual, business entity or a corporation sells or purchases stocks in another business or corporation, these agreements are necessary. They play a key role in establishing the transaction’s terms and conditions.

Key Components of a Stock Purchase Agreement

Now that we’ve covered the basics of Stock Purchase Agreements, let’s delve into the nuts and bolts of these documents. The key components that form the foundation of a well-drafted agreement include:

• Identifying the parties involved
• Outlining recitals and definitions
• Detailing the transaction specifics
• Ensuring compliance with applicable law

By including these elements, you can ensure that your entire agreement constitutes a comprehensive and legally sound Stock Purchase Agreement.

Parties Involved

In a Stock Purchase Agreement, the plot revolves around both the buyer and the seller, taking into account the buyer desires. As the name suggests, the buyer is the entity interested in purchasing the shares. They are responsible for purchasing the shares of stock from the seller, thereby acquiring a stake in the company ownership.

On the other side of the transaction, we have the seller. Their responsibilities revolve around selling their stocks to the buyer at a mutually agreed-upon price. But the stage isn’t always set for just these two players. Other stakeholders, such as investors or legal representatives, may also play a part in the agreement.

For instance, investors may engage in a Stock Purchase Agreement through the purchase of shares from the company, with the agreement outlining the terms and conditions of the issuance and stock sale of those shares.

Recitals and Definitions

Recitals and definitions in a Stock Purchase Agreement may seem like legal jargon, but they serve a critical role in clarifying the agreement. By articulating the agreement’s intent, background, and terminology used within the document, recitals provide context and precision.

The definitions section, on the other hand, reinforces this clarity by establishing a shared terminology between the purchaser and the seller. It ensures mutual understanding of important terms utilized in the agreement, such as ‘shares,’ ‘purchase price,’ and ‘closing date,’ which are vital for the precise comprehension and implementation of the agreement.

So, when you come across this section in your agreement, don’t skip over it – it plays a pivotal role in guiding your understanding of the agreement.

Transaction Details

The deal’s crux lies in the transaction details section of this agreement. It encompasses aspects such as share price, payment terms, and closing conditions, and it’s where the rubber meets the road in terms of the specifics of the transaction.

The price of each individual stock is determined based on various factors, and the total amount that the buyer will pay is the summation of the cost of individual stocks purchased. This section also usually includes payment-related information, such as the number of shares available for purchase, payment arrangements, and details regarding share certificates.

Lastly, closing conditions are incorporated to ensure adherence to pre-closing agreements and the acquisition of essential regulatory approvals by both parties. The inclusion of detailed transaction information is essential to mitigate the risk of unforeseen issues causing significant losses to the buyer between the agreement and its closure.

Legal Considerations in Stock Purchase Agreements

Now, let’s shift gears and discuss the legal arena surrounding Stock Purchase Agreements. When drafting these share purchase agreements, the legal landscape becomes a vital aspect to consider. One of the key legal considerations is indemnification, which refers to an agreement made between the buyer and seller to safeguard both parties from potential claims, liabilities, losses, damages, costs, and expenses that may arise from the transaction.

It’s also common to find a cap on indemnity in these agreements, which restricts the maximum liability that the seller will assume in the event of legal or financial matters. However, certain types of indemnity, such as those concerning the seller providing incorrect information or committing fraud, should never be subject to a cap. The function of an indemnification clause is to provide protection for both parties in the event of potential legal or financial complications.

Drafting and Negotiating a Stock Purchase Agreement

Despite seeming like a daunting task, drafting and negotiating a Stock Purchase Agreement can be a smooth process with the right approach. This involves a meticulous process of due diligence, consultation with legal counsel, and effective communication between parties.

Due Diligence

In the process of drafting a Stock Purchase Agreement, due diligence serves as a safety net. It plays a vital role in ensuring the soundness of the investment or purchase by uncovering potential liabilities and enabling the buyer to make well-informed decisions.

To conduct due diligence, there are key procedures to follow. These include Legal and Regulatory Due Diligence, which involves examining a company’s ownership structure, legal standing, contracts, agreements, and intellectual property , and Financial Due Diligence, which includes analyzing company capitalization, revenue, margin trends, competitors, industries, and valuation multiples.

The due diligence period typically spans 60-90 days, but this can vary based on the complexity of the business and the mutual agreement between the parties involved.

Legal Counsel

In the drafting of a Stock Purchase Agreement, legal counsel assumes a pivotal role. They meticulously review the relevant documents, for accuracy, ensure legal compliance, and elucidate the intricate details within the agreement. This expertise ensures the enforceability of the agreement by:

• Drafting a legally binding contract
• Precisely delineating the terms and conditions of the agreement
• Adhering to all legal stipulations and industry standards.

Legal counsel also plays a crucial role in the negotiation process. They specialize in:

• reviewing the agreement
• negotiating key aspects such as purchase price adjustments and representations and warranties
• managing the finalization and signoff process to safeguard the interests of their client.

Communication and Negotiation

Despite the crucial roles of due diligence and legal counsel, the importance of effective communication and negotiation between parties must not be overlooked. The most effective strategies for communication and negotiation in stock purchase agreements include:

• Recognizing negotiation tactics used by buyers
• Fostering open communication
• Establishing rapport
• Being transparent about intentions
• Actively listening to the other party

Effective communication fosters understanding and trust among the involved parties, leading to mutually beneficial agreements and reduced conflicts. Furthermore, negotiation enables the exploration of various terms and conditions, ensuring the consideration and addressal of both parties’ interests.

Clear and effective communication holds great significance in the negotiation process of a stock purchase agreement, serving to prevent misunderstandings, confusion, and ensuring mutual understanding of each party’s expectations, obligations, and limitations.

Common Challenges and Pitfalls in Stock Purchase Agreements

Even though Stock Purchase Agreements are essential, parties often encounter challenges and pitfalls. Some of these include:

• Inadequate legal due diligence
• Overlooking ongoing litigations and legal compliance
• Failure to clarify crucial terms like purchase price structure and representations and warranties
• Ambiguous terms that can result in uncertainty and misunderstandings about the rights, responsibilities, and anticipated outcomes of the parties, leading to disagreements over the understanding of the agreement, including matters like price modifications and indirect losses.

Additionally, commonly overlooked potential liabilities or contingencies in Stock Purchase Agreements may involve undisclosed liabilities, successor liability risks, and contingent liabilities, which have the potential to create issues post-execution of the agreement.

However, these challenges can be mitigated by meticulously formulating an agreement with unambiguous terms, ensuring legal assurance and payment at closing, and incorporating indemnification provisions to address protections and compensations for damage or loss.

Stock Purchase Agreement vs. Asset Purchase Agreement

In the business world, not all purchases are created equal. In the context of buying a company or its assets, Stock Purchase Agreements and Asset Purchase Agreements are the two types of agreements that come into play. While both facilitate the transfer of ownership, they do so in distinct ways. A Stock Purchase Agreement facilitates the transfer of a company’s stocks, while an Asset Purchase Agreement entails the sale of the company’s individual assets and liabilities.

But which one is better? It depends. Buyers may consider a Stock Purchase Agreement when they assess the assumed liability to be minimal or controllable, anticipate potential business expansion, or aim to capitalize on tax deductions. On the other hand, Asset Purchase Agreements may offer advantageous tax outcomes for the buyer by allowing allocation of the purchase price to specific assets, thereby bolstering depreciation and amortization deductions. However, in asset sales, the seller may encounter elevated taxes as certain assets are subject to ordinary income rates.

Templates and Resources

While understanding the intricacies of these agreements is crucial, it doesn’t mean you have to start from scratch. Available templates and resources can offer a starting point for drafting an agreement. These can be accessed from reputable platforms and websites such as:

• Charles Schwab
• Interactive Brokers
• Merrill Edge
• Ally Invest
• Financial Modeling Prep

However, even with a template, tailoring the agreement to meet specific requirements is key. This process requires the inclusion of pertinent details like the business name, the buyer’s name and address as well as adjustments to terms such as the number of shares and price per share. It’s important to remember, though, that while templates can be a useful starting point, legal counsel is essential to ensure that the agreement is legally binding and enforceable.

In the intricate world of business transactions, a Stock Purchase Agreement is a guiding star. From understanding its basics to decoding its key components, from legal considerations to drafting and negotiation, we’ve unravelled the complexities of these critical business documents.

We’ve also highlighted the common challenges and pitfalls, compared it with Asset Purchase Agreements, and provided resources for templates. It’s clear that while the process may seem daunting, with the right understanding, due diligence, and legal counsel, a Stock Purchase Agreement can be a powerful tool to facilitate smooth and successful transactions.

Frequently Asked Questions

What is in a stock purchase agreement.

A Stock Purchase Agreement includes purchase and sale terms, representations and warranties, covenants, conditions precedent, termination, and indemnification provisions, as well as details about the company’s assets, business and the buying entity.

Who gets the cash in a stock purchase agreement?

The purchasing company pays the proceeds to the equity holders in a stock purchase agreement. This means that the equity holders receive the cash from the agreement.

Do you need a share purchase agreement?

Yes, you need a share purchase agreement to outline the specifics of the stock deal and to ensure a clear and tailored agreement for each transaction.

What is the difference between a Stock Purchase Agreement and an Asset Purchase Agreement?

The main difference between a Stock Purchase Agreement and an Asset Purchase Agreement is that the former involves the transfer of stocks, while the latter involves the sale of individual assets and liabilities. Choose the agreement that aligns with your specific transaction needs.

Where can I find Stock Purchase Agreement templates and resources?

You can find templates and resources on reputable platforms and websites like Fidelity, Charles Schwab, Interactive Brokers, E-Trade, Merrill Edge, Robinhood, Ally Invest, and Financial Modeling Prep. These sources offer a variety of options for your needs.

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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Legal Templates

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Stock (Shares) Purchase Agreement Template

Use our stock purchase agreement to record the purchase of stock and protect the buyer and seller.

Updated January 26, 2024 Written by Sara Hostelley | Reviewed by Brooke Davis

A stock purchase agreement (SPA) is a legal document outlining the terms of a buyer and seller’s transaction of company shares.

What Is a Stock Purchase Agreement?

Why use a stock purchase agreement, what to include in a stock purchase agreement, how to purchase stock privately, stock purchase agreement sample, frequently asked questions.

A stock purchase agreement or share purchase agreement is a contract a buyer and seller enter to solidify the transfer of company stock.

Most commonly, this agreement is between the company’s shareholders and an external party. The external party may purchase stock from the company or sell it back to the shareholders. Alternatively, this contract may be between two external parties looking to transact company stock that one of them owns.

This agreement strives to protect both parties since it lays out the sale of company shares, their price, and which party is obtaining them.

Fast Facts About Stock Purchases

• Companies also refer to stocks as “equities.”
• Buying shares makes you a partial owner of the company.
• Partial ownership through owning stocks may give you voting rights for business decisions.
• Stocks usually trade on exchanges like the Nasdaq Composite or the New York Stock Exchange (NYSE), but companies can sell stocks privately.

Types of Stocks

Purchasing stocks privately typically refers to acquiring shares in private companies or obtaining shares from existing shareholders in a private transaction. Here are the types of stocks someone can purchase privately:

• Common stock: Common stock represents ownership in the company. Holders of this stock often have voting rights. They may also receive dividends, shares of the company’s profits that vary based on company performance.
• Preferred stock: Preferred stock provides a combination of debt and equity features. Preferred stockholders usually have a higher claim to dividends and asset distribution but often don’t have voting rights.
• Convertible preferred stock: This type starts as preferred stock, but the holder can convert it into a reestablished number of common shares. Convertible preferred stock can protect investors if the business performs poorly, but it can also let them reap the benefits if the company does well.
• Restricted stock: Restricted stock has limitations on when and how holders can trade it. Employee stock is a common restricted stock, as employees must abide by certain vesting conditions and schedules.
• Stock options: Stock options give individuals, such as employees, the right but not the obligation to buy stock at an established price.
• Warrants: Warrants are similar to stock options, but companies issue them to investors instead of employees.
• Sweat equity shares: A company gives sweat equity shares to consultants, employees, and founders as compensation for their contributions to the company.

Explore some reasons to use a stock purchase agreement:

It Lets Sellers Raise Capital

This agreement lets sellers raise capital (or other agreed-upon compensation) to fund the development and expansion of their company. You can also use stock as an incentive to draw in highly skilled talent. Offering stock gives you a competitive advantage over other companies that don’t offer stock to reward employees.

It Lets Buyers Become Partial Owners

Buyers can become partial company owners through this agreement, allowing them to grow their wealth and meet their investing goals. As the company succeeds, buyers can achieve financial benefits for themselves. They can generate dividend income with common stock and profit when they sell their shares back to the company or another external buyer.

It Shows Proof of the Transaction

This agreement shows proof of the transaction of company shares. Once both parties sign it, the seller can administer a stock certificate to the buyer so the buyer has a representation of their ownership.

It Clearly Defines the Sale’s Terms

An SPA provides a thorough account of the transaction, including the closing date, total purchase price, number of shares the seller is selling, and price per share. These details prevent any confusion or misunderstandings between the parties.

You need a stock purchase agreement if you plan on selling shares of your company. Please use a business purchase agreement if you need to record the sale of a business.

It Gives Legal Protection to Both Parties

This document gives legal protection to both parties in several ways. For example, it stipulates how to resolve disputes if they arise. It may also outline the right of first refusal, demanding that the buyer offer the company the right to buy back their stock if the buyer wishes to sell their shares one day.

It Outlines the Conditions for the Sale to Occur

This contract lays out all of the warranties and provisions of the sale. It specifies what conditions both parties must meet for the sale to occur.

The federal and local governments highly regulate stocks, so all share purchase agreements must adhere to the regulations and laws applicable to each sale. The agreement may be invalid if any portion of the contract violates state or federal laws.

Please also ensure all sections are factual. If the representation of the company or stock is false or fraudulent, the agreement will be invalid.

A solid stock purchase agreement constitutes of the following sections:

Definitions

Define all terms you’ve used in the agreement. For example, you can specify any affiliates you include in the transaction and the nature of the business you’re selling.

Parties’ Information

Include the buyer’s and seller’s names and addresses. Clarify who each party is.

Transaction Details

Define the shares, including how many shares, their type, the company they belong to, and the state where the company operates.

Then, outline the purchase and sale details. Include the number of shares, the price per share, and the total price.

Share Delivery

Write the date when the buyer and seller agree to exchange stock certificates.

Seller’s Representations and Warranties

Have the seller include representations and warranties, such as the following:

• The company is in good standing under its state laws.
• The seller is the true owner of the stock.
• The stock is free and clear of equities, encumbrances, liens, security interests, and other charges.
• The stock doesn’t have other claims or restrictions.
• No act or omission would give rise to any claim for fees, commission, or other payment.
• The seller has received approval to sell their shares, or they don’t need approval.

In addition to the seller’s representations and warranties, ensure the buyer represents and warrants to the seller any agreed-upon provisions.

Closing Conditions

The closing conditions will specify the amounts of money that either party needs to distribute at different times to carry out the agreement.

For example, the buyer might owe a specific amount of money as a deposit at closing. They may also need to place a specific amount of money in escrow to secure it for possible breaches of representations or indemnities.

Other Clauses

Here are some other clauses to include in a SPA:

• Indemnification: An indemnification or “hold harmless” clause involves both parties agreeing to hold the other harmless from any claim arising from their failure to perform their obligations.
• Expenses: An expenses clause states that each party is responsible for legal, accounting, or other fees when writing this agreement.
• Dispute resolution: A dispute resolution clause outlines how the parties will resolve disputes.
• Binding effect: This clause states that the agreement is legally binding.
• Severability: This clause states that the null parts of the agreement won’t affect the enforceability of the rest of the agreement.
• Governing law: The agreement contains the state laws that will govern it.
• Entire agreement: Specify that the parties reach an understanding that supersedes and cancels prior agreements.
• Amendments: The amendment clause outlines how the parties can amend or modify the original agreement.
• Termination: This section discusses how the buyer and seller can terminate the agreement.

Purchasing stock privately involves a different process than buying shares on a public exchange. When you buy privately, you often deal directly with the seller rather than conduct the transaction through a broker.

This process is generally more complex and requires a good understanding of legal and financial matters. Here’s a step-by-step breakdown of how the process typically unfolds:

Step 1 – Identify a Seller and Negotiate Terms

The first step in purchasing stock involves identifying a seller and negotiating the terms of the sale. This step includes determining the price, the number of shares you want to buy, and other conditions relevant to the transaction.

Step 2 – Conduct Due Diligence

Once you have a tentative agreement, it’s time to conduct due diligence. Perform thorough research to help you understand the financial, legal, and operational status of the company whose shares you want to purchase.

Review financial statements, reports, and other relevant documents to understand what you might buy into.

Step 3 – Draft and Sign a Stock Purchase Agreement

The SPA should detail all the transaction terms, including the representations and warranties, indemnification provisions, and any conditions precedent to closing.

Negotiate the terms with the seller and their legal counsel.

Make any necessary revisions until both parties are content with the terms. Obtain both parties’ signatures.

Step 4 – Close the Transaction

Once you’ve satisfied all conditions, proceed to closing. Pay the purchase price, and the seller will transfer the shares to you.

Secure financing to cover the purchase price and other associated transaction costs if necessary.

Download a stock purchase agreement template in PDF or Word format below:

Are “Stocks” and “Shares” the Same Thing?

Yes. In most contexts, buyers and sellers use “stocks” and “shares” interchangeably.

What’s the Easiest Way to Buy Stocks?

The easiest way to buy stocks depends on your goals and experience. If you’re new to investing, consider opening a brokerage account with an online broker. With this account, you can research stocks to buy and conduct online transactions. This option is secure, as reputable brokers register with the Securities and Exchange Commission (SEC) and follow its regulations.

However, you may purchase stocks privately through individual companies if you know what you want to buy. Please exercise caution and ensure the company abides by your jurisdiction’s legal requirements.

How Do I Know Which Shares to Buy?

Reflect on your financial situation and investment goals when deciding which shares to buy. Conduct thorough research to ensure you understand the stock you’re buying. Here are some additional tips:

• Assess your risk tolerance.
• Research the company’s return on equity, profit margins, revenue growth, earnings growth, and overall financial health.
• Review the market and industry trends.
• Study the company’s management.
• Consider diversifying your investments.

Can I Buy Stocks on My Own (Without a Broker)?

Buying stocks independently without a broker is possible, but you still need a platform to facilitate the transaction. For example, you can buy stock directly through a private company and submit your stock purchase agreement electronically or in person. You might also be able to participate in your employer’s Direct Stock Purchase Plan (DSPP).

What’s the Difference Between a Stock Purchase Agreement and an Asset Purchase Agreement?

A stock purchase agreement results in the buyer assuming the company’s assets and liabilities as a whole. Alternatively, an asset purchase agreement allows the buyer to pick and choose which assets or liabilities they purchase.

Entering both agreements requires due diligence. However, buyers entering stock purchase agreements need to conduct more due diligence when researching the company’s entire financial history. Alternatively, buyers entering asset purchase agreements usually only need to research the specific asset or liability they’re purchasing.

Related Documents

• Letter of Intent : Use this document to declare your interest in a potential sale.
• Non-Compete Agreement : Use this document to stipulate that one party will not compete in the same industry or geographical area with another party.
• Non-Disclosure Agreement : Establish a contract between two parties promising to keep shared information confidential.
• Legal Resources
• Partner With Us
• Terms of Use
• Privacy Policy
• Do Not Sell My Personal Information

The document above is a sample. Please note that the language you see here may change depending on your answers to the document questionnaire.

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Stock Purchase Agreement Templates

Say you’re interested in purchasing stocks for a business that’s doing well the past couple of years. You might be new to stocks or a long-term veteran investing in multiple soaring companies. Either way, you’ve come to the right place.

We’ll dive into what a stock purchase agreement is, what it entails, and how to write this document in this article. Keep reading to discover more about stock purchase agreements and how they help finalize this process when considering an investment.

Stock Purchase Agreement Template

Stock Purchase Agreements by State

• Connecticut
• Massachusetts
• Mississippi
• New Hampshire
• North Carolina
• North Dakota
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• West Virginia

What Are The Different Types of Stock?

It’s important to establish what stocks are and why they’re valuable before diving into what a stock purchase agreement entails. The six types of stocks are the following:

• Corporations
• Limited liability companies
• Partnerships
• General partnerships
• Limited partnerships

Stocks allow someone to buy ownership of a business through its share of stock. Or, buyers can purchase a percentage of the company. With private businesses, stock purchase agreements go through a due diligence period. Whereas, with public businesses, the transaction can occur right away. In the same vein, private businesses transfer a physical stock certificate to the buyer.

What Is a Stock Purchase Agreement?

A stock purchase agreement, or a SPA, is an agreement between a buyer looking to invest in shares of a business for a set price from the seller. A stock purchase agreement details the number of shares, the price, the sales date, and other terms established by both parties. After they sign, they exchange the funds for the stocks as soon as possible.

A purchase agreement for stock establishes the buyer and seller’s names. Additionally, this document lists the description of shares, the purchase price, closing date, and a due diligence period, if applicable. You can purchase stock through an in-person agreement or online. A stock purchase agreement also clarifies whether you can trade the stock publicly or not.

Why Stock Purchase Agreements Are Important

A stock purchase agreement creates a contract between two parties – the buyer and the company, or shareholders. A stock purchase agreement shows written consent between these parties. Law requires that you describe the company shares being sold and bought for a specific amount. Typically, lawyers prepare a stock purchase agreement because many legalities can be tricky to cover without a background. We’ll talk more about that later.

A stock purchase agreement details the number and type of stock sold, alongside the purchase price and further transactions, such as the price per share. Stock purchases break down definitions of important terms used within the document – for example, how the stock purchase agreement uses applicable law types.

Additionally, stock purchase agreements establish the purchase and sale of the stock, detailing the transaction with purchase prices and the number of shares.

When You Should Use a Stock Purchase Agreement

Legal opinions and escrow and employment agreements adjust stock purchase agreements. A stock purchase agreement shows the representations and warranties of the seller and buyer. They need to verify that these descriptions are true via their signatures.

A stock sale contract makes the contract official between the buyer and seller. They must establish how they intend to spend the time between the signing and closing date. In other words, will the business continue to operate as it did before this transition of stocks?

A stock purchase agreement handles the protection and compensation against damage, loss, or injury within the company.

To summarize, this documentation is a formality between the buyer and seller to discuss everything we’ve covered thus far. A stock purchase agreement also clarifies financial statements and requirements to end the contract if that situation arises.

A stock purchase agreement is necessary if you plan on growing your company with skilled employees and creating shares.

Stock Purchase vs. Asset Purchase vs. Restricted Stock Purchase Agreements

There is a minor difference between a stock purchase agreement and an asset purchase agreement. The buyer doesn’t obtain the seller’s liabilities. The stock has all the company’s obligations in addition to any assets.

On the other hand, a restricted stock purchase agreement allows companies to protect their ownership more. Stock options lure talented employees in, meaning they will stay loyal to their company.

Think about it this way: an employee resigns after two years, but the company’s stock allows them to purchase their stocks back during a four-year schedule. The longer the employees stay, the more interested and motivated they’ll be in the success of the business they work for, meaning that the total shares will increase.

Frequently Asked Questions

We’ll answer some common inquiries about stock purchase agreements in this section.

Firstly, you write a letter of intent to negotiate, set terms, and place the bid to begin the process of a stock purchase agreement. The letter allows the seller to determine whether or not they want to sell.

The seller can collect the necessary company documents, draft the agreements and contracts, and gather other financial reports within this time. The buyer also has the opportunity to confirm that the seller is legitimate and provides accurate information.

The stock purchase agreement must be written and signed by both parties, and the closing occurs immediately with the appropriate funds exchanged for the stocks. After both parties agree on the primary transaction agreement, or the deal, the witness also signs.

Once finalized, the buyer is the official owner. It’s advisable to make signed copies, exchange the payments and certificates, and file the necessary paperwork to prove this transaction occurred.

As for writing the stock purchase agreement, the seller normally drafts this paperwork with assistance from a legal department, virtual provider, or other legal counsel. Despite the transaction being relatively easy, purchasing stocks can lead to more difficult legal issues later.

A stock purchase agreement needs proper attention and timing. You could reference lawyers for guidance.

While you can write this document yourself after downloading a free stock purchase agreement, it’s not recommended. If you decide to do it yourself, remember to attach the stock purchase agreement to the appropriate jurisdiction and complete the stock transaction provisions as needed.

A stock purchase agreement outlines the specific terms and conditions that set the relationship between buyers and sellers. The seller transfers and delivers all the stock certificates from this purchase.

This document includes the parties and their names. A stock purchase agreement formulates a specific agreement date, or the time the stock purchase agreement will begin. A stock purchase agreement also lists the prices and shares, establishing the corporation and shareholder, alongside the quantity and value.

A SPA acknowledges that the seller transfers the stock ownership to the buyer and clarifies any transfer laws. A stock purchase agreement has a few more key elements:

• Warranties and representations
• Payment terms
• Due diligence
• Closing date
• Deposit status
• Necessary signatures

You could write a stock purchase agreement yourself, as previously stated, but you must include the previous elements after downloading the stock purchase agreement template. You must establish the business behind the shares, and they will sign the stock purchase agreement, as well.

A stock purchase agreement is the prime opportunity to discuss the concerned shares, listing the prices and the payment method.

A stock purchase agreement is a legal document, describing the terms and conditions for a sale of company stocks. Thus, this document is binding and creates obligations and rights to fulfill for both parties involved.

State and federal laws regulate stock sales. Therefore, all stock transactions must conform to the laws established, and a stock purchase agreement verifies that the sale is permitted. 

Law requires that the purchaser must be identified and the seller provides their information. By providing the names of the seller and purchaser, the stock type, the quantity, the selling price, and other necessary information, you will not run into legal issues down the road.

Any false portion of the stock purchase agreement could disprove the entire document. The government highly regulates stock purchase agreements.

There are countless benefits to having a proper stock purchase agreement, such as proper price documentation and the number of shares. So, it’s best to ensure a correct write-up the first time rather than placing your company at risk

You can back out of a stock purchase agreement if there is proof that the process is invalid, such as if the stock purchase agreement violates any business or corporate laws. Insider trading is an example of a security violation. If the buyer and seller form the stock purchase agreement under conditions of deceit or fraud, then that could pose another legal issue.

If the company or seller made false representations about their stocks, that poses legal liability for all parties involved. Breaking laws regarding stocks can lead to penalties, so a financial lawyer needs to review and draft the purchase agreement.

Additionally, they can provide you with advice throughout the process. Like any contract, know your rights before signing to not lose deposits.

What Is a Stock Purchase Agreement?

Stock purchase agreements (SPAs) are legally binding contracts between shareholders and companies. Also known as share purchase agreements, these contracts establish all of the terms and conditions related to the sale of a company’s stocks. They differ from asset purchase agreements (APAs), which outline how a company’s assets are being sold.

SPAs play an important role in the business world, particularly in the transfer of business ownership. Read on to learn more about stock purchase agreements and how you can write them. At the end of this article, you’ll also learn how you can use contract management tools like Ironclad to draft and manage stock purchase agreements.

• What is a stock purchase agreement?

Stock purchase agreements or SPAs are transaction contracts for stock sale and acquisition. Their primary purpose is to establish the price of the stock being sold. SPAs achieve this by:

• Listing out the prices of the stock being sold
• Providing a roadmap for the transaction to prevent and mitigate risk.

Since risk prevention and mitigation is one of the primary goals of writing an SPA, SPAs spend a lot of time covering potential situations and variables that could put the investment at risk.

SPAs are required whenever an individual or corporation sells or purchases stocks in another business or corporation. For example, let’s say you work at a small corporation with two C-suite executives. If one of the C-suite executives wants to quit the business and sell their shares to the other partner, they can do this through an SPA.

Like most other agreements, SPAs don’t have a standard format. The clauses and language contained within each SPA differ greatly depending on the needs, industry, and size of your company. However, every SPA should have some essential features to ensure that the transaction goes smoothly.

• Clauses often included in a stock purchase agreement

Here’s what you should include in your SPA:

List out the full legal names of the parties in the agreement. The names provided must match the parties’ official documentation. If one or both of the parties are corporations, you’ll need to include:

• The full legal name of the signing officers
• The corporations’ legal and operating names.

Identify who is the buyer and who is the seller. You should also establish the objective of the transaction.

Definitions

Include detailed definitions of the terms you’ll be using in your SPA. Here are some definitions that most SPAs use:

• Affiliate: Any person or company that directly or indirectly controls, is controlled, or is under common control by one of the parties.
• Average trading price: The volume-weighted average of the trading prices of common stock as reported on financial news company such as Bloomberg or Dow Jones for 30 consecutive full trading days.
• Business: Refers to the business of selling, marketing, and providing your company’s industry services in a particular geographic area, such as the United States.>
• Business day: Any day other than a Saturday, Sunday, a state or federal holiday, or a day which the banks in either of the parties’ jurisdictions are obligated by law to close.
• Business marks: Refers to the trademarks licensed or owned to the seller, its affiliates, and its subsidiaries.

Consideration

Consideration—the value that’s being exchanged between the parties—is one of the six essential elements of a contract. In this section, you need to establish the payment needs and how the buyer will pay the seller. Include the following information:

• Sum payable on closing (include a pricing formula if needed)
• Deposit required at time of execution
• Amount payable in case a security is registered against either party
• Sum held in escrow for breaches of warranties and representations and indemnities.

Seller’s representations and warranties

These are a series of statements made by sellers about the company and its assets, status, and liabilities. Buyers will rely on these statements to determine whether they should proceed with the purchase. As such, you need to be as transparent as possible when writing this section.

Include the following in this section

• Your standing as the seller
• Your company’s market reputation, capital structure, and directors
• Your rights over the shares
• The number of shares you currently own

Buyers’ representations and warranties

Buyers also have to make representations and warranties. However, this section doesn’t have to be as detailed as the seller’s representations and warranties.

• All of the buyers’ rights
• How buyers can enter into subsequent stock purchase agreements
• If the buyer is a corporation, information about the corporation. This includes the corporation’s market reputation, directors, and capital structure.

Indemnification

This is one of the most highly negotiated clauses in the SPA. Also known as a “hold harmless” clause, the purpose of an indemnification clause is to compensate a party for loss or harm arising from the other party’s failure to act.

For example, let’s say you’re the in-house counsel of a software development company that wants to sell its shares to a buyer. You would want to include an indemnification clause in the SPA so you can indemnify the buyer for any intellectual property or copyright infringement claims.

Here’s what the clause could look like:

Indemnification . [Your company] agrees to indemnify and defend Buyer and its Affiliates and their officers, directors, and employees from and against all costs, losses, expenses, damages, and liabilities that may be incurred or suffered by Buyer and its Affiliates as a result of or arising out of a claim relating to:

• Any omission or negligent act of [your company], its Affiliates, and its personnel
• [Your company]’s breach of any warranty, representation, or covenant covered in this Agreement

Force majeure

Force majeure clauses relieve a party from performing a contract if performance is highly impractical or impossible due to an event that the parties couldn’t have reasonably anticipated or controlled.

Many companies rely on this clause to remove liability for unexpected and unavoidable events such as lockdowns, economic catastrophes, and sudden financial crises. To cover your bases, remember to include:

• A list of potential force majeure events, such as earthquakes, tornados, and strikes
• A catch-all like “and other causes reasonably beyond either party’s control.”

All the rest

Like other business agreements , SPAs require the following clauses:

• Jurisdiction
• Termination
• Dispute resolution.
• Managing stock purchase agreements

SPAs can be difficult to write and manage since they contain so many clauses and details. If you don’t have premier contract management software to help you locate, organize, and execute contracts, you would have to spend a lot of time and energy finding, emailing, and editing contracts. This is doubly true if your company is still storing contracts in USBs, hard drives, and physical cabinets.

That’s why you should consider getting Ironclad. A top-notch contract management platform, Ironclad arms you with powerful tools that will transform the way you write, manage, and execute contracts.

Our Data Repository enables you to find, draft, and manage SPAs. Codeless and zero-training-required, Data Repository lets you bring in SPAs from all over your company. By putting all of your SPAs in one place, you can rest assured that all of your information is secure. Plus, you’ll be able to find answers to questions within seconds. For example, if you want to know the renewal date of the SPA you signed last month, you just have to use Data Repository’s filters to locate the agreement.

You can also give other users as much (or as little) access to your SPAs as needed. This will help break down your company’s contract silos and give Legal the support they need to draft and manage SPAs that interest more than one department.

Ironclad also has a Workflow Designer that empowers you to create and approve automated workflows for SPAs. User-friendly and sleek, Workflow Designer works straight out of the box, without the need for technical expertise or long implementation times. Anyone can use its simple drag-and-drop user interface to build and launch SPA generation and approval processes in minutes. All they have to do is:

• Upload an SPA template
• Tag fields as needed
• Add approvers and signers.

All of our templates are up-to-date and contain guardrails to ensure 100% contract compliance <, which means that all of your SPAs will comply with relevant legislation.

• Stay on top of stock purchase agreements

A stock purchase agreement or SPA is a contract that establishes all of the terms related to the sale of a company’s shares. SPAs are ubiquitous in the business world and are often used by companies and individuals to buy and sell company ownership.

SPAs can be difficult to write since they contain many details and clauses, particularly if you have to deal with hundreds or thousands of active contracts at once. To simplify the contract management lifecycle, consider getting Ironclad. A powerful digital contracting software, Ironclad will make creating, managing, and executing SPAs easier than ever. Our Data Repository, Workflow Designer, Editor, and other tools will help you keep track of deadlines, answer contract questions within seconds, break down contract silos, and draft complex SPAs with just a few clicks of your mouse.

Interested? Try our free sandbox demo today.

Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.

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stock purchase agreement

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A stock purchase agreement is a contract under which a seller transfers  stock of a corporation  to a  buyer .

Although the content of a stock purchase agreement may vary in complexity depending on the sophistication of the transaction, it commonly includes the following sections:

• Recitals that describe the relevant background of the transaction.
• A list of definitions of the words that shall rule the interpretation of the stock purchase agreement.
• The terms and conditions for the sale and purchase of the stock  including the purchase price and the terms and conditions for its payment.
• The terms and conditions for the closing of the transaction, such as the need to require any previous governmental authorization (i.e., antitrust authority).
• The representations and warranties of the seller and the buyer regarding, among others, their authority to enter the stock purchase agreement, the legal characteristics of the sold stock, the legal and financial information and the obligations of the company, and any other relevant matter related to the transaction, the company and the stock.
• Post-closing obligations of the parties, such as a non-compete or non-solicitation clause.
• The indemnification rules, such as the procedure for indemnification, maximum indemnification limitations, prohibition for double compensation, and third-party claims.
• Rules for the termination of the stock purchase agreement.
• Other miscellaneous clauses, such as applicable law and jurisdiction , arbitration clause, and other interpretation rules.

A stock purchase agreement may also be called a “share purchase agreement” or referred to as “SPA”.

[Last updated in July of 2021 by the Wex Definitions Team ]

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Stock Purchase Agreement

The formal stock purchase agreement sample documents the sale of stock to the founders of a Delaware corporation. It will list the number of shares purchased and at what price. One major provision of this agreement is the purchase option or vesting that may be placed on the sold stock.

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Any [ GREEN ] highlighted language is intended to be filled in by the user. Any [ YELLOW ] highlighted language is considered optional or conditional by the attorney community. Consult with an attorney before using this document. This document is not a substitute for legal advice or services. Refer to our Terms of Use for more details.

This form has been prepared for general informational purposes only. It does not constitute legal advice, advertising, a solicitation, or tax advice. Transmission of this form and the information contained herein is not intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. You should not rely upon this document or information for any purpose without seeking legal advice from an appropriately licensed attorney, including without limitation to review and provide advice on the terms of this form, the appropriate approvals required in connection with the transactions contemplated by this form, and any securities law and other legal issues contemplated by this form or the transactions contemplated by this form.

What is a Stock Purchase Agreement?

A stock purchase agreement is the primary agreement made when the owner of the company sells his stock. Stock purchase agreements are also referred to as SPAs. The agreement details the terms of the sale, the removal of any assets by the seller before the sale, and whether or not the agreement is related to real estate.

Simply, a stock purchase agreement is a contract between a privately held firm and the buyer to transfer the firm's shares. The agreement describes different conditions, such as:

• Who has the right to refuse the deal.
• What happens to shareholders' stock if they retire, die, or become bankrupt.
• The number of transferable shares.
• Representations and warranties of the selling party and the buyer.
• Employee-related issues.
• Indemnification.
• Tax issues.
• Interpretation.

Stock Purchase Agreement: What Does It Do?

Stock purchase includes the buying of the stock's current owner's stock directly, obtaining ownership. In this agreement, the assets and liabilities that are not included in the stock purchase agreement are settled or sold before the contract is signed.

The sale of stock is different from the sale of assets for several reasons. Selling stocks instead of assets has tax benefits, as it has a lower rate of capital gains tax. Asset sales can include the sale of equipment, licenses, or even intellectual property.

The first part of a SPA is the Preamble and Recitals. It introduces the contracting parties and identifies the seller and purchaser, as well as the terms used in the agreement. The main parts of the stock purchase agreement are listed below.

• Article 1 contains the definitions.
• Article 2 defines the terms of the transaction.
• Article 3 includes the seller's warranties and representation.
• Article 4 covers the buyer's representation and warranties.
• Article 5 contains the covenants; promises to refrain from certain actions for a given period of time.
• Article 6 lists the closing conditions.
• Article 7 details the rights and conditions of indemnification.
• Article 8 covers the conditions of termination.
• Article 9 includes the general provisions of the sale contract.

Additional articles and clauses can be added to a stock purchase agreement, depending on the individual case. It is recommended to consult with a professional UpCounsel corporate lawyer to design a SPA that covers all eventualities.

Why is a Stock Purchase Agreement Important?

It is necessary to have a stock purchase agreement to put the terms of sale in writing and prevent causing damage to the company by not highlighting responsibilities and limitations of parties.

Without SPAs, warranties cannot be applied, and all parties would potentially lose out.

If there is a need to submit the stock purchase agreement to a board for approval, the terms have to be clearly defined in writing.

Having a stock purchase agreement in place prevents future disputes and legal challenges of sales.

Examples: Using a Stock Purchase Agreement

There are some cases when it is necessary to use a stock purchase agreement, for example when the sale needs to be approved by third parties. Corporate lawyers will need to review the agreement's details in order to ensure that it delivers benefits for both parties and provides adequate protection for the seller and the buyer.

The agreement needs to be in line with the "letter of intent" sent to the board, and all details have to represent the truth and the current situation of the company, otherwise the seller can be held liable for damages.

Without clearly defining the rights of parties to warranties and representation, the agreement will be hard to interpret for corporate lawyers. For example, listing shareholders' rights to redeem their shares in certain conditions can clarify issues in the future.

Examples: Not Using Stock Purchase Agreement

When there is only one shareholder, it might not be necessary to complete a stock purchase agreement, as, in most cases, the stock and assets of the company are sold at the same time.

Stock purchase agreements should not be used for selling assets.

If there is a Regulation D exemption. and a limited capacity is offered, the SPA is not used.

Frequently Asked Questions

• What are the consequences of not using stock purchase agreements?

Not using stock purchase agreements will reduce the legality of the contract, and both parties' legal protection will be limited. For example, without a detailed timeline for transferring the stocks or making a payment, unnecessary delays will occur.

• What are the examples of warranties?

These describe who has the authority to sell and purchase the shares, highlights due diligence in the transaction, and provides statements related to the financial standing of the company. For example, if the SPA states that the company is in a sound financial situation, and it is not, this can be disputed, as incorrect information was provided.

• Should I use a template to create my own stock purchase agreement?

There are many sites offering templates, however, every stock sale is different, and cases are generally complicated. You should always seek professional legal advice before drawing up an agreement, as leaving anything out can have long-term consequences for the future of the business.

• What are the Covenants and what is their role in SPA?

Covenants are basically legally binding promises made by parties. For example, a company agreeing to file securities regulation documents following the completion of the sale.

Steps to Create a Stock Purchase Agreement

• Identify the buyer and seller.
• Draw up the basic conditions of sale.
• Define the price.
• Think about completion and benchmarking deadlines.
• Consult with a corporate lawyer to complete the different sections of the agreement.
• Negotiate the terms of stock sale.
• Finalize the agreement.
• Sign the contract.

Common Mistakes

• Companies often create SPAs when selling assets and stock at the same time. To develop an agreement that applies to the sale of stock and assets as well, always consult with a legal professional.
• Not specifying timescales for completion can result in unnecessary delays.
• Negotiating the terms with other stockholders can make the sale more straightforward. Still, several owners of stock forget about this step.

Do stock purchase agreements seem confusing? Why not visit UpCounsel's expert resources on SPAs or chat with one of our top Harvard- or Yale-educated corporate lawyers?

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