A Stock Purchase Agreement (SPA) is a contract that allows businesses to record the sale and purchase of company shares between a buyer and a seller.
What is a Stock Purchase Agreement?
A Stock Purchase Agreement, also known as a share purchase agreement, is a contract signed by both the company (or shareholders of a company) and the stock buyers. This agreement protects both the company and the buyers.
The agreement lays out the sale of shares in a company and what is being obtained.
Shares of stock in a company are often sold to raise money or for other agreed-upon compensation. Small companies and startups may also offer stock in the company as an employee benefit, or founders of the company may hold shares of stock.
The agreement lays out the price per share and the amount of shares being purchased.
Reasons to Use a Stock Purchase Agreement
You need a stock purchase agreement if you plan on selling shares of your company (use a business purchase agreement if you need to record the sale of a business).
If you’re the only employee of your company, this might be a step you skip. Although, if you plan to grow the company, creating shares and an agreement can help you when the time comes to expand.
There are a few reasons to create a share purchase agreement:
- To obtain funds for a company to expand and thrive.
- As an incentive for highly skilled talent. This makes your company more attractive to talent that may be able to command higher pay at another company.
The Benefits of Having a Stock Purchase Agreement
If you’re selling company shares, there is no scenario where it’s a good idea NOT to create a share purchase agreement.
What to Include in a Stock Purchase Agreement?
The federal and local governments highly regulate stocks. The share purchase agreement must adhere to all the regulations and laws applicable to the sale of shares. If any portion of the contract violates state or federal laws, it can invalidate the agreement.
It’s also essential that all sections are factual. If the representation of the company or stock worth is deemed false or fraudulent, that would also invalidate the agreement.
Information that should be included:
Section 1: Definitions
You must ensure all terms used in the agreement have been appropriately defined. For example, you need to specify any affiliates included in the transaction, the nature of the business being purchased and sold, the average trading price of the shares, and any trademarks or licenses involved.
Section 2: Transaction Details
You should include all details related to the transaction. This consists of the seller, the purchaser, the shares being sold, the price per share, the total price of the transaction, and when the transaction will be carried out.
Section 3: Seller’s Warranties and Representations
You need to include basic information about the seller. This includes information confirming that the seller is the owner of the stock, that the stock does not contain any liens or charges, and that there are no restrictions related to the stock.
The section should also specify whether the seller requires approval from the corporation to sell the stock or indicate that the seller has already received that approval.
Section 4: Buyer’s Representations and Warranties
The agreement also needs to specify all of the rights held by the buyer, how the buyer can purchase more stock down the road, and information about the buyer’s market reputation, board of directors, and the buyer’s capital structure if the buyer is a corporation.
Section 5: Covenants
This section will cover any agreements put in place to preserve the value of the business that the purchaser is acquiring.
The seller is required to make reasonable efforts to complete the transaction, and the seller also has to make reasonable efforts to ensure that the value of the stock remains reasonable between the date the agreement is executed and the date the buyer takes control of those shares.
Section 6: Closing Conditions
The closing conditions will specify the amounts of money that need to be executed at different times for the agreement to be carried out. For example, there might be a specific amount of money due at closing, a deposit that must be in place at the time of the execution of the agreement, and an amount that is held in escrow and secured for possible breaches of representations or indemnities.
Section 7: Indemnification
This section is also known as a “hold harmless” clause. This section aims to compensate one party if the other party does not act accordingly. This section might also review examples of damages that could be pursued if one party is found in breach of contract.
Section 8: Termination
This section will discuss situations where the buyer or seller may be able to terminate the agreement. This section should specify what termination rights can be exercised by which party.
Section 9: General Provisions
This section will specify which state’s laws will govern the transaction as it moves forward.
A share purchase agreement is essential if your company sells shares to raise funds, entice employees, or grow the business. If you’re in the beginning stages of writing your business plan for a new venture or have a fledgling company needing investors, a stock purchase agreement is mandatory to move forward with the sale of shares.
Stock Purchase Agreement vs. Asset Purchase Agreement
Understanding the difference between an Asset Purchase Agreement and a stock purchase agreement is critical.
The difference between an asset purchase and a stock purchase agreement is that an asset purchase agreement focuses on the assets of the business (property, equipment, contracts, etc.), and a stock purchase agreement focuses on the shares of the business, whether a controlling stake or the entire business.
With an asset purchase, the assets are usually adjusted to fair market value, but that is not the case with a stock purchase agreement. Furthermore, with an asset purchase agreement, any business liabilities do not transfer to the buyer, but with a stock purchase, those liabilities do transfer to the buyer.
Finally, capital assets are taxed as capital gains in an asset purchase, but not all assets are. Therefore, other assets are taxed as ordinary income. A stock purchase is generally taxed at capital gains in its entirety.
How to Write a Stock Purchase Agreement
There are several steps involved in writing a stock purchase agreement if one corporation wants to purchase shares of stock from another corporation. The steps include:
- Corporation A wants to sell shares of stock to raise capital.
- Corporation B wants to purchase 2,000 shares of stock from Corporation A.
- Corporation A draws up a stock purchase agreement to formalize the transaction before it moves forward.
- The stock purchase agreement specifies that Corporation B will buy 2000 shares of stock from Corporation A.
- Corporation B agrees to take 60 days to carry out due diligence to ensure the board of directors is happy with the transaction.
- After 60 days, there are no issues, so both parties decide to sign the agreement.
- After the agreement is executed, Corporation A transfers 2,000 shares of stock to Corporation B.
- Corporation B audits the transaction and does not find any issues. The board of directors notifies Corporation A that there are no issues and that the transaction has been completed.
Ideally, with a well-formulated stock purchase agreement, the transaction should proceed smoothly.
Stock Purchase Agreement Sample
Below you can find an example of what a typical SPA looks like. You can also download our template in PDF or MS Word format and fill it out on your own.
When is a Stock Purchase preferred over Asset Purchase Agreement?
Writing up a stock order is slightly different from an asset purchase agreement. Remember that an asset purchase agreement transfers no liabilities to the new owner. That is not the case with a stock purchase agreement.
When there is a stock purchase agreement that takes place, the tax attributes of the assets and liabilities transition owners. Therefore, the buyer is responsible for assuming all tax responsibilities and the depreciation schedule of the transferred shares. The buyer is also responsible for the tax status of the corporation.
Therefore, a stock purchase agreement is typically desirable if the liability is low or manageable or if the buyer wants to claim a new tax deduction.
A stock purchase agreement is also less expensive than an asset purchase agreement because shares of stock are not subject to the Bulk Sales Act. As a result, the seller is considered to have written off equity and should be subject to capital gains tax instead of ordinary income tax.
Finally, if the owner is considered the only shareholder in the organization, a stock purchase agreement might not be the best decision.