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All About Stock Purchase Agreements

All About Stock Purchase AgreementsReading Time: 3 minutes

The Stock Purchase Agreement (SPA) is the contract that finalizes all terms and conditions for the purchase and sale of the shares of stock representing the ownership of a corporation. Generally, it is used in purchasing or selling shares in a private or closely held corporation, as opposed to a public company. The intention of the contract is to protect both parties involved in the transfer.

With this in mind, it is very important to understand the ins and outs of what a stock purchase agreement is, when it is necessary, and ensuring that all necessary information is included in the contract.

What Is a Stock Purchase Agreement?

Simply put, an SPA is a contract outlining the terms and conditions of involvement in the transfer of ownership of stock. Details such as the date of transaction, number of stock certificates and price per share are all included in the contract.

It is important to note that a SPA differs from an Asset Purchase Agreement (APA). While a SPA details the trade of shares, an APA is a contract for the puchase of assets, but not the corporation or company itself.

When is a Stock Purchase Agreement Necessary?

A SPA plays an important role in confirming the terms of a sale in writing for the agreement of both parties. Putting the agreement in writing prevents any legal issues arising due to a misunderstanding.

The legal binding of a SPA allows businesses to raise revenue for the organization, both parties to timeously reflect on the agreement and explicitly outline any details such as any tax implications of the deal.

As the legal jargon and agreement details can be complex, it is advised to use the services of a trusted legal advisor for guidance.

What Information is Included in a Stock Purchase Agreement?

A SPA can be broken down into the following sections:

  • Definitions
  • Details of the transaction – the purchase and sale of stock
  • Warranties and representations – on behalf of both the buyer and the seller
  • Covenants and closing conditions
  • Indemnification and termination conditions
  • General provisions

Definitions

This section of the SPA will interpret all terms used in the agreement for a better understanding of both parties. Major terms will be outlined and explained in detail to prevent any misunderstanding.

Details of the Transaction

The purchase and sale of the stock will be outlined by itemizing the purchase price, highlighting any pricing adjustments, specify tax considerations and covering dispute resolution mechanisms. 

Warranties and Representations

The warranty and representation section is important in confirming that all included statements are in fact true. Past and present facts relating to the business are shared in this section including operating results, liability, and assets.

Covenants and Closing Conditions

This section outlines activities that both parties are refrained from taking part while finalizing the agreement. This normally includes a list of actions that need to be completed or approved, as well as a list of prohibited activities.

Indemnifications and Termination Conditions

Here, all indemnification rights are outlined for the instance of one party breaching the contract. For example, if any costs arise post-transaction due to a condition that existed prior to the closing of the contract.

Also included in this section are the details specifying each party’s right to terminate the contract and the conditions where termination will be considered valid. This termination could be due to a mutual agreement, the event of expiration or failure of meeting a condition.

General Provisions

No contract would be complete without highlighting any miscellaneous provisions such as governing law, notice, expenses and dispute resolution.

While a SPA is not a requirement for the sale or purchase of shares of stocks, it is highly recommended to reduce financial risk.

As the legal requirements for a SPA differ according to state, it is important to contact an experienced lawyer to assist in drafting the agreement.

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