A stock purchase agreement is used when someone buys shares of a company. It allows them to finalize their purchase by signing a legally binding document.
When selling parts of an owned company, you may sign a stock and asset purchase agreement. Companies with investors wishing to become shareholders will need to know the elements of a stock purchase agreement.
Here are 11 things to include in a stock purchase agreement.
The stock purchase agreement opens with an introduction of the buyer and seller. Company names and legal first and last names are acceptable.
Whenever a business or individual buys or sells shares to another business or individual, they need a stock purchase agreement that illustrates the relationship between buyers and sellers.
The exact type of SPA and the legal language it includes will vary by company, scale, and industry.
If one or both parties are corporations, then the SPA must specify:
Here is an article that overviews a stock purchase agreement and provides an example contract for you to review.
The stock purchase agreement should include the effective date and time of the transaction. This date differs from the settlement date, which is generally two days after the agreement’s execution date.
Here is an article where you can learn more about the difference between trade and settlement dates.
Most notably, the value of the shares sold or acquired should be written in detail.
The value of the shares should reflect a cash amount the buyer will pay upon closing.
The current shareholders’ ownership of the company should be clear. You can also express how much ownership the investor will acquire after completing the purchase.
In cases of employers selling stocks to employees, there may be a restricted stock plan in place. This plan complies with the Securities and Exchange Commission (SEC). In addition, it helps protect the company against premature sales that could negatively impact its financial standing.
Here is an article that explains how to create a stock purchase agreement.
State the specific number of shares in the stock purchase agreement and their selling price.
The number of shares available to sell can only be determined by the company’s sole owners or shareholders. For example, restricted stock is unable to be sold without SEC permission. On the other hand, float stock can be freely sold and bought without public restrictions.
There are also authorized shares, the total amount of shares a company can issue to buyers.
Here is an article where you can learn more about the basics of different types of shares and stock.
Meet some lawyers on our platformRepresentations are statements made by sellers about the transaction. They may make statements on behalf of their companies in cases of corporations buying shares of another company.
The representations in a stock purchase agreement include:
The buyer can also make representations and warranties. These include the buyer’s standing, company capital structure, market value, and rights to enter into stock agreements.
Here is an article that explores the legal nature of stock representations and warranties.
Whether an employee stock purchase plan or transfer agreement between shareholders, the agreement must lay out payment terms and structure.
The payment terms outline the process that transfers stock ownership from the seller to the buyer.
Information such as the closing amount, deposit, and sum are held in escrow for breaches of contract.
You should also include information about how any assets will be transferred and when the investor can expect to receive dividends.
Here is an article to learn more about payments and stock dividends.
A due diligence investigation takes place before selling a company’s stock. The buyer reviews all relevant financial, operational, and performance forecasts to make an informed decision about their purchase.
The buyer agrees to commence due diligence upon the effective date of the contract, and they agree to complete their due diligence research before closing.
You should specify a deadline that the buyer must complete their due diligence review. If unsatisfied and wish to proceed no longer, they have the right to back out of the agreement and receive a deposit reimbursement.
Here is an article where you can review the steps of the due diligence process.
In SPAs, the hold harmless clauses allow one party to hold another accountable (indemnify) if they fail to act upon the agreed-upon terms and conditions of the contract.
This portion of your SPA can grant the seller the right to indemnify the buyer, their affiliates, and organizations accountable for damages or losses caused by negligence, omissions, or breaches of representation, warranty, or covenant.
If one or both parties default or want to end the contract, a termination clause outlines the processes for formally ending the agreement.
Termination clauses can also be a part of employment contracts. For example, in an SPA, employers may specify what will happen to an employee’s shares or stake in the company if terminated.
The termination clause can be as general or specific as parties see fit; during negotiation, the parties can discuss what circumstances and events they are willing to accept as reasonable cause for termination without dispute.
Here is an article that covers termination clauses.
The closing conditions portion of the stock purchase agreement covers what terms and conditions must be fulfilled to complete the transfer of shares or assets.
Closing conditions will range from company to company and even from company to individual buyer.
After closing conditions are met, the buyer and seller agree to sign on an official closing date. The closing date marks the completion of the transaction, as the seller transfers ownership of the shares/assets to the buyer in exchange for a monetary sum.
Here is an article that explores the details of closing conditions.
Formally close the stock purchase agreement with signatures from all parties. There should be clear signature lines and datelines at the bottom of the document’s last page.
Buyers and sellers should use their legal names, as well as their professional titles and organizations, e.g., “Chief Executive Officer of [Company Name].”
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I began my career at "big law" firms, worked in-house for 14 years, and now have my own practice, providing big law quality at small firm rates. My practice focuses on strategic and commercial transactions, including M&A, preferred stock and common stock offerings, asset purchases and sales, joint ventures and strategic partnerships, stock option plans, master services agreements and SOWs, software development and license agreements, SaaS agreements, NDAs, employment and consulting agreements. I also manage corporate governance, advise boards and executives, and act as outside general counsel. I represent clients across the country and around the world.
Jason has been providing legal insight and business expertise since 2001. He is admitted to both the Virginia Bar and the Texas State Bar, and also proud of his membership to the Fellowship of Ministers and Churches. Having served many people, companies and organizations with legal and business needs, his peers and clients know him to be a high-performing and skilled attorney who genuinely cares about his clients. In addition to being a trusted legal advisor, he is a keen business advisor for executive leadership and senior leadership teams on corporate legal and regulatory matters. His personal mission is to take a genuine interest in his clients, and serve as a primary resource to them.
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Attorney Steven Wax is ardent about helping his clients. Whether creating personalized estate plans, drafting and negotiating contracts or other legal matters. Steven’s goal is to assist and counsel his clients to protect them and their loved ones. Steven grew up on Long Island, New York. He attended the University of Massachusetts in Amherst earning a BS in Sport Management. He earned his paralegal certificate at Duke University and earned his Juris Doctorate from North Carolina Central University School of Law in Durham, NC. Steven has an extensive legal career in the life science sector, working for some of the world’s largest Contract Research Organizations since 2013. Steven has negotiated a broad range of contracts for both businesses and individuals. Steven participated in the NCCU Elder Law Project, where he prepared wills, durable powers of attorney, living wills, and health care powers of attorneys for low/fixed income clients in Durham and surrounding counties. Steven finds meaningful ways to share his skills and passion with his community. Steven volunteers his time to Wills for Heroes, which provides no-cost estate planning documents to first responders and their families, through the NC Bar Foundation.
