Stock Purchase Agreements - Everything You Need to Know (2022)

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:

  1. 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.

  1. Sign the entire agreement.

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

  1. Make signed copies.

    (Video) Stock Purchase Agreement: Everything You Need to Know

  2. Exchange payment and the stock certificates.

  3. 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:

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.

  1. 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.

      (Video) Share Purchase Agreements

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

  1. 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.
  1. 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.

  2. 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.

  3. 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.

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

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

  6. 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?

(Video) What You Need to Know About Share Purchase Agreements

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.

(Video) Stock (Shares) Purchase Agreement - EXPLAINED

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.

Sources:

FAQs

When would you use a stock 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.

What does a share purchase agreement contain? ›

A share purchase agreement (SPA) is the main contract used in a private sale of shares. The SPA will: Describe the main commercial terms of the transaction (what shares are being sold, the identity of the buyer and seller, and the sale price), and the duties of the parties in relation to the sale.

How does a share purchase agreement work? ›

A share purchase agreement (“SPA”) is typically entered into by and between a buyer and seller(s) of a target company's shares whereby the seller(s) agrees to sell a specific number of shares to the buyer for a specified price.

Who prepares an SPA? ›

The buyer's lawyers will generally prepare the first draft of the share purchase agreement (SPA).

What is the difference between shareholders agreement and share purchase agreement? ›

Shareholder's agreement is primarily entered to rectify the disputes that occurred between the company and the Shareholder. Meanwhile, the Share Purchase agreement is a document that legalizes the process of transaction of share held between the buyer and the seller.

How do you structure a stock purchase? ›

First, the buyer can purchase all the assets of the company. Second, the buyer can purchase the stock (or interests, if you own an LLC) of the company. Third, the buyer can conduct a statutory merger, which is essentially a filing with the secretary of state that, by law, merges the companies together.

What happens to liabilities in a stock purchase? ›

Once an asset purchase is complete, the assets and liabilities that have been purchased are moved to the new entity and the old entity (and any assets or liabilities it still owns) must be wound down. In a stock purchase, the buyer purchases the entire company, including all assets and liabilities.

Do stock purchase agreements need to be notarized? ›

Share Purchase Agreement Signing Requirements

The Share Purchase Agreement needs to be signed by both the purchaser and seller of the shares. Before you put pen on paper, you want to review all the details and provisions for accuracy and your comfort level. It is not necessary to get the agreement notarized.

What are some of the key terms that should be in a purchase and sale agreement? ›

Among the terms typically included in the agreement are the purchase price, the closing date, the amount of earnest money that the buyer must submit as a deposit, and the list of items that are and are not included in the sale.

What is a spa legal? ›

A sales and purchase agreement (SPA) is a binding legal contract between two parties that obligates a transaction to occur between a buyer and seller.

Should an SPA be a deed? ›

The SPA will usually be executed as a deed. Execution as a deed will be necessary where the terms of the SPA creates a power of attorney (where the seller grants the buyer a power of attorney to exercise the rights relating to the sale shares for the period between exchange and completion).

What is an APA agreement? ›

An asset purchase agreement (APA) is an agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company's assets. It's important to note in an APA transaction, it is not necessary for the buyer to purchase all of the assets of the company.

Which agreement is required to sell the shares? ›

A share purchase agreement is an agreement between two parties in which the seller agrees to sell the stated number of shares to the buyer at a particular price.

What is an SHA agreement? ›

A shareholders' agreement (hereinafter SHA) outlines the internal management framework of the company to effectively protect the overall interest of shareholders by setting out their rights and obligations.

Is an SPA legally binding? ›

A Sales and Purchase Agreement (SPA) is a legal contract between the buyer and seller of a property. This agreement is legally binding and outlines the terms and conditions of the transaction. The purpose of a SPA is to define the legal obligations and protect the rights of the parties to the transaction.

Who should draft the purchase agreement? ›

Either the seller or the buyer can prepare a purchase agreement. Like any contract, it can be a standard document that one party uses in the normal course of business or it can be the end result of back-and-forth negotiations.

Who drafts the sale and purchase agreement? ›

The buyer's solicitor will prepare and draft the sale contract, no matter whether it is an Asset Purchase Agreement or an SPA, this is because the contract will provide for a number of warranties (and possibly indemnities) but it will also govern who the purchase will be carried out, the purchase price to be paid, ...

What is the difference between SPA and SHA? ›

At the time of investment into a company, the investors will definitely execute a SPA (Share Purchase Agreement mentioned earlier). A SHA is executed when an investor does not acquire 100% of the company.

What is the difference between SPA and SSA? ›

A SPA refers to an agreement to purchase previously issued shares from a shareholder, whereas an SSA refers to an agreement to subscribe for shares being issued by the company in question.

What is condition precedent in share purchase agreement? ›

Conditions precedent are all actions that are required to be carried out by both the parties before the actual transaction of sale of shares occurs. For the seller, these conditions culminate out of the due diligence carried out by the buyer.

Is goodwill tax deductible in a stock purchase? ›

First, in the case of a stock sale, buyers often pay a premium over the value of the hard assets, which takes the form of goodwill. In a stock sale, the buyer can't obtain a tax benefit from this goodwill.

Why do sellers prefer stock sales? ›

Sellers generally prefer stock sales due to the lower favorable capital gain treatment. From a non-tax perspective, sellers also prefer stock sales as this type of transaction generally affords them liability protection by relieving them of both known and unknown liabilities.

How is a stock sale taxed? ›

Generally, any profit you make on the sale of a stock is taxable at either 0%, 15% or 20% if you held the shares for more than a year or at your ordinary tax rate if you held the shares for a year or less. Also, any dividends you receive from a stock are usually taxable.

Is a stock acquisition taxable? ›

In a normal stock acquisition of a company, there is no transfer or recordation tax and no sales tax because neither the real estate nor personal property is sold to a new owner. Conclusion. Choosing a form of transaction can have significant tax and non-tax consequences for both Buyer and Seller.

Why do buyers generally prefer asset sales instead of stock sales? ›

Additionally, buyers prefer asset sales because they more easily avoid inheriting potential liabilities. For example, lawsuits that stem from negligence from previous owners would not impact the new owners if the transaction was an asset sale.

What is an F reorganization? ›

An F-reorganization is a type of typically tax-free reorganizational structure that often involves a target company taxed as an S-corporation. The F-reorganization is so named because it involves a change in “form” of the target, while not changing the substance of the target for tax purposes.

Can you exclude assets from a stock purchase agreement? ›

This can manifest in the agreement in one of two ways - the agreement can list only the assets that the buyer will choose to purchase, or an agreement can state that the buyer will purchase all the assets of the business, excluding certain listed assets.

What makes a document legally binding? ›

What is Legally Binding? Legally binding requires both party's signatures on a document. A legally binding document is an agreement that has been made between two parties where specific actions are prohibited or required on behalf of one or both of the parties.

What is the importance of a disclosure schedule in a stock purchase agreement? ›

Disclosure schedules provide supplemental, factual information that support each of the representations (an assertion of facts) and warranties (a promise about the future) made by the seller, such as lists of stockholders, important contracts, intellectual property, employee benefit plans, outstanding debts, and other ...

What do I need to know before signing a purchase agreement? ›

The names of the parties, a description of the property, and the purchase price. The rights and obligations of the parties. The condition of the property, including what is - and is not - included in the sale. The amount of the earnest money deposit.

How binding is a purchase agreement? ›

A purchase agreement is a legal document that is signed by both the buyer and the seller. Once it is signed by both parties, it is a legally binding contract. The seller can only accept the offer by signing the document, not by just providing the goods.

What is a non tipping basket? ›

A “non-tipping” (or true “deductible”) basket (illustrated in italics in the sample language in paragraph (a) above) provides that once the $X basket amount is exceeded, the Seller is only liable for losses in excess of $X.

What type of business is a spa? ›

Società per azioni (S.p.A. or spa) is a form of corporation in Italy, meaning "company with shares" (although often translated as "joint-stock company", which may or may not be a limited liability entity). It is more or less equivalent to S.A. or public limited company (Plc) in other countries.

What is spa acquisition? ›

In any transaction, the Sale and Purchase Agreement (SPA) represents the outcome of key commercial and pricing negotiations. Purchasers and Sellers are becoming increasingly sophisticated in seeking to exploit the potential value to be gained through the negotiation and execution of the SPA.

What is a spa pool? ›

Spa Pool means a pool which uses therapy jet circulation, hot water, cold water, bubbles produced by air induction, or any combination of these, to impart a massaging effect upon a bather. Spa pools include, spas, whirlpools, hot tubs, or hot spas.

Can you rescind a share purchase agreement? ›

To rescind a share purchase agreement, a person has to be induced to enter into a contract due to a fraudulent misinterpretation of another party. The buying party can rescind a share purchase agreement or clean damage. However, the intention to deceive has to be proved.

What is a share purchase deed? ›

A Share Purchase Agreement is a sales agreement used to transfer and assign ownership (shares of stock) in a corporation. The Seller is the current Shareholder of the Shares for sale.

What is arm's length price? ›

The price at which a willing buyer and a willing unrelated seller would freely agree to transact or a trade between related parties that is conducted as if they were unrelated, so that there is no conflict of interest in the transaction.

What is safe Harbour rules? ›

LET'S DISCUSS SAFE HARBOUR RULES

Safe Harbour refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met. A safe Harbour is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule.

What is double tax avoidance? ›

The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between India and another country ( or any two/multiple countries) so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.

How do I set up a buy-sell agreement? ›

Here is how buy-sell agreements work:
  1. Determine which events invoke a triggered buyout.
  2. Establish who has rights and purchase obligations.
  3. Identify the names and address of the purchasers.
  4. Set a purchase price or valuation with applicable discounts.
  5. Establish payment terms as well as their intervals.

What is an equity purchase agreement? ›

What is an Equity Purchase Agreement? An equity purchase agreement is a contract that governs the terms of a sales transaction of a company's equity interests. Equity purchases include the name of the business, stocks, membership interests, the reputation, the intellectual properties, etc.

Do I need a share sale agreement? ›

When buying or selling shares in a private company it is important to enter into a share sale agreement to protect your interests. The share sale agreement sets out each party's legal rights and obligations. The buyer can further reduce their risk by undertaking due diligence.

Can I write my own shareholder agreement? ›

Here's the key takeaways. No matter the legal status of your business, you can finalise a shareholders' agreement. A shareholders' agreement should be put down in writing, and signed privately by each party or third party.

What should I look for in a shareholders agreement? ›

You should identify the interests of each party before drafting your agreement. The most obvious reason is to benefit financially from the value of the company increasing, but there can be others that are equally or more important to different people. These might include: the value and timing of dividend payments.

What is the difference between rofo and Rofr? ›

Most of us are familiar with the right of first refusal (“ROFR”) but not with the right of first offer (“ROFO”). Generally, a ROFR is advantageous to the purchaser and the ROFO is advantageous to the seller.

What are some of the key terms that should be in a purchase and sale agreement? ›

Among the terms typically included in the agreement are the purchase price, the closing date, the amount of earnest money that the buyer must submit as a deposit, and the list of items that are and are not included in the sale.

Can you rescind a share purchase agreement? ›

To rescind a share purchase agreement, a person has to be induced to enter into a contract due to a fraudulent misinterpretation of another party. The buying party can rescind a share purchase agreement or clean damage. However, the intention to deceive has to be proved.

Should a share purchase agreement be executed as deed? ›

Execution as a deed will be necessary where the terms of the SPA creates a power of attorney (where the seller grants the buyer a power of attorney to exercise the rights relating to the sale shares for the period between exchange and completion).

Does a spa need to be signed as a deed? ›

Yes, SPAs are legally binding. Often the last document furnished as part of the purchase or sale of an asset, it is signed by authorized representatives from both parties when both sides are prepared to execute the deal.

What do I need to know before signing a purchase agreement? ›

The names of the parties, a description of the property, and the purchase price. The rights and obligations of the parties. The condition of the property, including what is - and is not - included in the sale. The amount of the earnest money deposit.

How binding is a purchase agreement? ›

A purchase agreement is a legal document that is signed by both the buyer and the seller. Once it is signed by both parties, it is a legally binding contract. The seller can only accept the offer by signing the document, not by just providing the goods.

What is a non tipping basket? ›

A “non-tipping” (or true “deductible”) basket (illustrated in italics in the sample language in paragraph (a) above) provides that once the $X basket amount is exceeded, the Seller is only liable for losses in excess of $X.

What is condition precedent in share purchase agreement? ›

Conditions precedent are all actions that are required to be carried out by both the parties before the actual transaction of sale of shares occurs. For the seller, these conditions culminate out of the due diligence carried out by the buyer.

What happens if a deal does not Materialise within an agreed period? ›

Post satisfactory completion of the due diligence phase, the share purchase agreement is executed by the parties; commonly referred to as 'signing'. However, the finalization of the transaction does not materialize as there is no effective transfer of shares or the ownership of shares in favour of the buyer.

What is share Sale Agreement? ›

A 'share sale' typically involves the sale of the shares of a company. The legal contracting parties to the share sale agreement will be the actual shareholder of the company (ie, as the seller) who is disposing of his shares in the company, and the buyer who will become the new shareholder of the target company.

Do agreements need to be witnessed? ›

Background. Witnessing of an agreement signed by an individual is prudent but not essential unless it is specifically required under law. However, witnessing (or some form of authentication) is recommended for evidentiary purposes.

Can the same person witness two signatures? ›

2.1.

The same witness may witness each individual signature, but each signature must be separately attested, unless it is absolutely clear by express wording on the face of the attestation that the witness is witnessing both or all signatures in the presence of the named signatories.

Who can be a witness to a signature? ›

Anyone 18 years and over can witness or sign a will, but importantly, a beneficiary can't witness a will, and neither can their spouse or civil partner. In many cases, people will ask a friend or work colleague to sign and witness the will.

Who drafts a share purchase agreement? ›

Either the buyer or the seller can draft the Share Purchase Agreement.

Is an spa legally binding? ›

A Sales and Purchase Agreement (SPA) is a legal contract between the buyer and seller of a property. This agreement is legally binding and outlines the terms and conditions of the transaction. The purpose of a SPA is to define the legal obligations and protect the rights of the parties to the transaction.

Is a wet signature necessary? ›

Wet signatures are still required for certain documents pertaining to wills, trusts, adoptions, divorce proceedings, court orders, evictions and insurance benefits. Electronic signatures require that the signer consent to using electronic signature technology.

Videos

1. The Stock Purchase Agreement | SPA Series
(A Simple Model)
2. Purchase and Sale Agreements: Everything You Need to Know
(Jacko Law Group, PC)
3. Buy/Sell Basics - Part III: Stock Purchase Agreements
(Gray Duffy)
4. Contract Conversations: Share purchase agreements and warranty claims
(Mills & Reeve)
5. Adjusting for Purchase Price in a Stock Sale Agreement
(Law Insider)
6. Revealed: 6 keys to negotiating buyer friendly purchase agreements
(Jason Paul Rogers)

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