A stock purchase agreement is a legal contract between two parties, usually between a company and an investor, where they both sign on to certify a sale or transfer of a stock or partial ownership of the company. Most of the time, it is the small corporations who sell their stocks to gain more funding as they strive to grow as a business. At times, large companies also sell theirs especially when they plan to expand even further. Nevertheless, more than certifying the receipt of money, stock purchase agreement samples are documents that signify the growth of a business.
Another important benefit of a stock purchase agreement is that it provides specific information on the transfer of stock. This means all of the terms of the transaction are put into writing to prevent misunderstandings that can end up in the courtroom. Aside from that, the agreement allows the seller to show and explain that they are the owner of the stock being sold, which gives the purchaser more faith in the transaction.
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Elements of a Stock Purchase Agreement
To cover the terms for the transaction, a stock purchase agreement must list the following elements:
1. Company Name: This is the name of the business entity that will be selling their stock. In the stock purchase agreement, the company is referred to as “SELLER.”
2. Purchaser Name: The entity that will be buying the stock can be an investor, another company, or a singular business persona that In the agreement, the party that will be buying the stock is referred to as “PURCHASER.”
3. Share Details: This lists the par value of shares and the number of shares being sold. This itemizes the price and any price adjustments of the stock.
4. Transaction Time and Place: The details of the transaction that states the particular date and venue where the stock purchase will be held.
5. Representations and Warranties: Representations are the statements regarding the stock that is being sold by the company while warranty provides security to the purchaser in case the claims are made to be not true. The company and the purchaser have a separate section for their respective representations and warranties.
6. Bonuses and Benefits: These provide terms on how employee benefits and any accumulated bonus pay are to be handled by the company after the transaction.
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Steps to Make a Great Stock Purchase Agreement
Start writing your stock purchase agreement with the staples in every legal agreement. These are your preamble and signature blocks. Aside from these, there exists a number of provisions that are unique for a stock purchase agreement. The following steps enumerate and discuss the making of these provisions.
1. Transaction Details: In this part, specify the terms of the sale of the stock, such as the mention of the seller transferring the stock to the purchaser, the price of the stock, the number of shares being sold, any price adjustments, and any assets that may be included in the transaction. Basically, this is the part where you provide a clear outline of the transaction before delving into more specific aspects in the succeeding sections.
2. Representations and Warranties: Declare the conditions of the stock that you are selling. You will have to indicate the exact outstanding capitalization of the company as well as state that you have no liabilities that are left undeclared in your latest balance sheet. Add in statements that describe the condition of your company financially and the assurance that the purchaser will have no problem with the stock. Wrap this section with a statement that all of the presented financial statements are true and correct and have been prepared through the generally accepted accounting methods.
3. Covenants: List down the required and prohibited activities during the time period where the negotiation of the stock purchase is still ongoing, as some dealers don’t fully close yet after the signing of an agreement. A covenant that requires a party to complete certain actions is called an affirmative covenant, and a covenant that prohibits a party from such activities is called a negative covenant.
4. Closing Conditions: Indicate the terms and conditions that both of the parties of the agreement must take care of or waive before closing the deal. This somehow connects to a previous covenant section where parties must perform the activities stated in the affirmative covenant and also complete the required regulatory approvals.
5. Termination: This part is where you will discuss the right of each party to terminate the contract and its termination conditions. Termination can happen for a variety of things, which include termination by mutual consent, termination by the agreement expiry, and termination by failing a covenant condition.
Tips for a Great Stock Purchase Agreement
- Draft a letter of intent: Before finalizing your stock purchase agreement, present your letter of intent first to your buyer explaining the proposed sale of stock. Discussing the terms with your buyer will yield you lesser revisions in the agreement proper and both parties will be ensured that everything is agreed on before anything goes on paper.
- Provide an indemnification clause: A legal agreement is always made foolproof with an indemnification clause added. This provision serves as a security to both the seller and buyer in case there will be a breach in warranty or any other issues that may arise after the transaction.
Types of Stock Purchase Agreements
The type of stock purchase agreement depends on the type of stock that is being bought. Commonly there are five types of stock, and these are:
- Common Stock: When a stock purchase agreement sells common stock, the buyer is given ownership to the company as well as a claim on the portion of the company’s profit. Aside from earning, the common stockholder is also entitled to a vote in electing the company’s board of directors that oversee the company’s management.
- Preferred Stock: It is the same with the common stock where the purchaser will have a degree of ownership in the company, but the purchaser will not have any voting rights in crucial company decisions. In exchange for this loss of right, preferred stockholders are guaranteed with a fixed dividend. Preferred stock has lower risk, sure, but it also translates to a lower return of investment.
- Income Stocks: In this type of stock, the purchasers are paid a regular, quarterly dividend. The stock purchase agreement that grants this type of stock are usually from well-established companies that has a steady stream of profit, like publicly-traded energy and utility companies.
- Value Stocks: This type of stock are under-priced stocks sold by companies facing financial distress. They have a low price-to-earnings ratio, price-to-book ratio, and price-to-dividend ratio. Still, investors become interested in purchasing value stocks when they see beyond financial factors that they evaluate the company’s leadership and other qualitative factors.
- Growth Stocks: These are stocks sold by companies that are seeing incredible growth in terms of profit for the past recent years. These companies are often startup businesses from the technology industry, where there is rapid growth in terms of their earnings. However, since competition is fierce in this industry, this growth can also take an unexpected quick downturn.
Stock Purchase Agreement Template Sizes
Stock purchase agreement templates are available at standard sizes of US Letter (8.5 inches by 11 inches), US Legal (8.5 inches by 14 inches), and A4 (8.27 inches and 11.69 inches).
Stock Purchase Agreement FAQs
Aside from the difference in voting rights, is there another advantage that a common stock has over preferred stock?
Common stock yields higher returns than any other stock investments, including preferred stocks. The problem, however, is that when a company gets bankrupt, common stockholders will not receive money until preferred stockholders and debt creditors do. To mitigate this kind of risk, it is wise to own other stocks from established companies through diversification.
What are representations and warranties I can provide in my stock purchase agreement?
You can create a warrant on your business operations, liabilities, properties, assets, and prospective ventures. In general, you can make any legal warranties you like, but make sure that they are correct. Putting in false representations will cause you a breach in your warranty and will call for expensive legal service.
In a stock purchasing transaction, it is not only the purchaser that is undergoing risk, it also includes you as part of the company. Selling stock means that you are letting an entity take a portion of ownership, and that in itself is a huge sacrifice. This is the reason why everything must be spelled out in your stock purchase agreement, as it will be a legal document where you and your buyer can meet halfway and safeguard your respective interests.