A stock purchase agreement is a contract that allows businesses to record the sale and purchase of company stock between a buyer and a seller.
What is a Stock Purchase Agreement?
A stock purchase agreement (SPA), also known as a share purchase agreement, is a contract signed by both the company (or shareholders of a company) and the buyers of the stock. This agreement protects both the company and the buyers. The agreement itself 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 some 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 itself lays out the price per share and the amount of shares being purchased.
Restricted stock purchase agreements
Restricted stock purchase agreements offer a way for the company to better protect its ownership. When stock options are offered to attract talented employees, this type of agreement gives an extra incentive for employee loyalty. With this agreement, there is a vesting schedule attached to the transfer of the ownership of stock. A standard vesting schedule might be four years, which means that you don’t own the stock prior to the fulfillment of the vesting schedule.
For instance: a company has a vesting schedule of four years. One employee decides to resign after two years of employment. The company has the right to repurchase the stock back from the employee. This encourages employees to stay for a set tenure of time and it also gives them a vested interest in the success of the company. The more successful the company, the higher its shares soar.
This can be an excellent tool for companies that offer stock options, guaranteeing that shares can be repurchased by the company if an employee doesn’t stay with the company.
Stock Purchase Agreement Sample (PDF)
The sample stock purchase agreement below details an agreement between the seller, ‘John J Pelfrey’, and the purchaser, ‘Laura K Gragg.’ John J Pelfrey agrees to sell shares of stock to Laura K Gragg under the terms specified.
Reasons to Use a Stock Purchase Agreement
You need a stock purchase agreement if you plan on selling shares of your company.
If you’re the only employee of your company, this might be a step you skip. Although, if your plans are 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 a higher pay at another company.
The benefits of having a stock purchase agreement
The reality is that if you’re selling shares of your company, there is no scenario where it’s a good idea NOT to create a share purchase agreement.
The reasons for creating an agreement are numerous:
- This contract lays out all of the warranties and provisions of the sale.
- It guarantees the ownership of the stock by the seller to the buyer.
- The price per share is stipulated.
- The number of shares are documented.
- The right of first refusal section protects the company in case a shareholder wants to sell his/her shares. What this means is that the company will be given the option of buying back the shares rather than allowing the shareholder to sell shares to an outsider.
- Stipulates resolution of disputes for the protection of the company and the buyer.
What Happens Without a Stock Purchase Agreement
Not having a well-drafted stock purchase agreement will put your company at financial risk.
Without a written contract, the terms of the sale and ownership would not be governed by any legally binding agreement. This might put you at risk of having shares of your company bought up by outsiders. It might also open you up to litigation because there’s not set resolution clause.
There isn’t a scenario where selling shares of stock without this agreement would be prudent.
What to Include in a Stock Purchase Agreement?
Stocks are highly regulated by the federal and local governments. It’s important that the share purchase agreement adheres to all of the regulations and laws applicable to the sale of shares. If any portion of the agreement violates state or federal laws, it can invalidate the agreement. It’s also important that all sections are factual. If the representation of the company or stock worth is deemed false or fraudulent, that would invalidate the agreement, as well.
Information that should be included:
- The company name and location. The legal, registered name of the company and its address must be included.
- The purchaser’s name and information. The purchaser’s name and information must be included.
- Value of stock per share.
- The number of shares being sold.
- Date and time of the transaction.
- The location of the sale.
- Warranties made by the purchaser and seller. This section guarantees that the company is in good standing and owns the shares of the company in question.
- Representations made by the purchaser and seller. This guarantees that all pertinent information has been disclosed.
- Purchase and Sale. This portion of the contract stipulates that the certificates will be endorsed and lays out responsibility for the transfer tax.
- General Provisions. This section lays out and guarantees that the sale is conducted in accordance with the laws governing the area.
- Total Price of Purchase and Financial Stipulations. This section will discuss the total price of the purchase and may layout a percentage to be paid at the signing with the balance paid at a later date. It may also stipulate how the payment will be made.
- Witnesses. This section allows for witnesses to sign the agreement and for notarization, making it legally binding.
- Termination. The termination clause will layout circumstances in which the seller or purchaser might terminate the agreement.
- Articles. There can be a section of articles pertinent to this specific transaction. This section can include stipulations about employees/employee benefits, taxes, and other aspects essential to the finances of the business and transaction.
If your company is selling shares to raise funds, entice employees, or grow the business, a share purchase agreement is essential. If you’re in the beginning stages of writing your business plan for a new venture or you have a fledgling company in need of investors, a stock purchase agreement is mandatory to move forward with the sale of share.
Stock Purchase Agreement Template (PDF & Word Download)
Stock Purchase Agreement
|State of ______________|
This Stock Purchase Agreement (this “Agreement”) is made this ______ day of _______________, 20______, between:
Seller: ________________________, located at ________________________________________ (the “Seller”) and
Purchaser: ________________________, located at ________________________________________ (the “Purchaser”). The parties agree to the following:
- Shares. The Seller is the owner of _____________ [Number] shares of ( ☐ Class __________) Stock (the “Stock”) of _____________________________ [Company] (the “Company”), a _________________ [State] Corporation.
- Purchase and Sale. Seller agrees to sell _____________ [Number] shares to Purchaser for $______________ per share for a total price of $______________ dollars. Seller shall deliver to Purchaser stock certificates representing this stock.
III. Delivery. Purchaser and Seller agree to exchange the total price for the stock certificates simultaneously on ____________________, 20______.
- Seller’s Representations. Seller represents that:
- The Company is in good standing under the laws of the State of _________________.
- The Seller is the record owner of the stock.
- The stock is free and clear of all security interests, liens, encumbrances, equities, or other charges.
- There are no other claims or restrictions on the Stock.
- There is no act or omission that would give rise to any claim for commission, fees, or other payment in relation to the transaction.
- Approval (Check one)
☐ Seller has received approval from ________________________ [Officer], an officer at the Company, to sell the shares of stock. The officer’s signature is below.
☐ Seller does NOT need approval from any officer of the corporation to sell the shares.
- Expenses. The parties are responsible for their own fees, including legal counsel, accountants, and other agents incurred pursuant to this Agreement regardless of whether this Agreement is executed.
- Indemnification. The Purchaser and Seller agree to indemnify and hold harmless the other from any claim, damage, liability, loss, expense, arising out their failure to perform the obligations set forth in this agreement.
- Dispute Resolution. Any dispute arising out of or related to this Agreement that the Purchaser and Seller are unable to resolve by themselves shall be settled by arbitration in the State of _________________ in accordance with the rules of the American Arbitration Association. The written decision of the arbitrator(s), as applicable, shall be final and binding. Judgment on a monetary award or enforcement of injunctive or specific performance relief granted by the arbitrator(s) may be entered in any court having jurisdiction over the matter.
- Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Purchaser and Seller and their respective legal representatives, heirs, administrators, executors, successors and permitted assigns.
- If any provision of this Agreement is held to be invalid, illegal or unenforceable in whole or in part, the remaining provisions shall not be affected and shall continue to be valid, legal and enforceable as though the invalid, illegal or unenforceable parts had not been included in this Agreement.
- Governing Law. The terms of this Agreement shall be governed by and construed in accordance with the laws of the State of _________________, not including its conflicts of law provisions.
- The section headings herein are for reference purposes only and shall not otherwise affect the meaning, construction or interpretation of any provision in this Agreement.
- Entire Agreement. This Agreement contains the entire understanding between the parties and supersedes and cancels all prior agreements, whether oral or written, with respect to such subject matter.
- This Agreement may be amended or modified only by a written agreement signed by both parties.
- Any notice or other communication given or made to any party under this Agreement shall be in writing and delivered by hand, sent by overnight courier service or sent by certified or registered mail, return receipt requested, to the address in Exhibit 1 or to another address as that party may subsequently designate by notice and shall be deemed given on the date of delivery.
- No party shall be deemed to have waived any provision of this Agreement or the exercise of any rights held under this Agreement unless such waiver is made expressly and in writing. Waiver of a breach or violation of any provision of this Agreement shall not constitute a waiver of any other subsequent breach or violation.
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first written above.
|Purchaser Signature||Purchaser Full Name|
|Seller Signature||Seller Full Name|
|Officer Signature||Officer Full Name|