Definition, key provisions, how to structure, and resources for attorneys
Legal terms • agreement • stock purchase agreement
Highlights:
|
Jump to ↓
How to structure a stock purchase agreement
A stock purchase agreement (SPA), also known as a share purchase agreement or equity purchase agreement, is a document outlining the terms and conditions for the acquisition of shares of stock. Stock purchase agreements detail the number of shares, the value of the shares in question, and the obligations and liabilities of all parties involved.
In a stock purchase transaction, a buyer purchases all or a majority of a company’s outstanding shares. Stock purchase agreements are used to transfer ownership of a business from one entity to another, which may be a corporation, partner, shareholder, or limited liability company member.
Key provisions in a stock purchase agreement
Stock purchase agreements are comprised of several elements, the most significant of which are representations and warranties, covenants, and indemnification provisions. These sections help ensure transparency and protect both the buyer and seller throughout the transaction.
Representations and warranties
Representations and warranties ensure that both sides are sharing factual, truthful information.
Pre-closing covenants
Pre-closing covenants protect the business and operations of the target company while limiting the amount of additional liabilities the company may take on between signing the agreement and closing.
Covenants
Covenants may require the seller to continue doing business as usual and inform the buyer of any material adverse changes in the company’s business or financial condition.
Indemnification
Indemnification provides for compensation should any breach of representations, warranties, or covenants occur. In some cases, Representation and Warranty Insurance (R&W insurance) may be used to enhance, or even replace, the indemnification section.
Closing conditions
Any conditions that must be satisfied before the completion of the transaction are also included. Conditions are largely determined by what consents and approvals are needed. For instance, the release of any pledges on the stock being purchased may be a required condition.
A stock purchase agreement’s complexity can vary based on several factors, including:
- Relationship between the parties
- Whether signing and closing are simultaneous or separate
- The size and scope of the deal
How to structure a stock purchase agreement
A typical stock purchase agreement spans multiple key sections:
Introduction
A stock purchase agreement begins with an introductory paragraph that identifies the parties involved and specifies the execution date for the transaction. This section is sometimes called a preamble.
Recitals
This section offers a high-level overview of the transaction details. Recitals provide background information about the deal and are not legally binding statements.
Definitions
The definitions section explains the legal terms in the document. For example, you might see terms like “Acquired Shares” or “Material Adverse Effect”. Definitions provide context for the transaction.
Transaction details
This section outlines the agreement to purchase and sell shares, including:
- Purchase price
- Escrow provisions
- Tax-related provisions
- Closing mechanics and related deliverables to effect the transfer of the shares
Representations and warranties
Representations and warranties are factual statements made by the buyer and the seller regarding any issues that might affect the outcome of the sale, including disclosures of assets and liabilities, intellectual property holdings, and pending legal issues.
Covenants
These are provisions that a buyer or seller agrees to perform (affirmative covenant) or abstain from performing (negative covenant). The agreement may also include restrictive covenants in a separate section that pertains to the non-solicitation of customers and employees and non-compete clauses.
Conditions
As mentioned, this section lists the conditions that must occur before the parties are obligated to complete the transaction. Both conditions may be waived if both parties agree.
- Conduct of the target company’s business between signing and closing
- Obtaining regulatory clearances, such as antitrust, foreign investment and other similar regulatory approvals, and causing the closing conditions to be satisfied
- No solicitation of other bids
- Non-compete or non-solicit of employees (and sometimes customers)
- Employee matters
- Tax matters
- Confidentiality
- Public announcements
- Further assurances
- Other bespoke covenants depending upon the particular facts and circumstances of the deal
Dispute resolution
The parties often negotiate whether to include a provision for alternative dispute resolution (ADR).
Other considerations
This is a general outline of a typical stock purchase agreement. The final document will reflect the specific circumstances and requirements of the transaction.
For instance, you might need to include additional provisions if the transaction is cross-border. You may also consider additional provisions related to termination rights and other miscellaneous rights, which can include provisions relating to expenses, notices, amendments, governing law, specific performance, etc.
Templates and other resources
Stock purchase agreements are integral when facilitating business transfers of ownership. All parties involved should have a thorough understanding of the scope of the agreement, as well as the rights and responsibilities it conveys.
Drafting stock purchase agreements can prove time-consuming but utilizing Standard Documents can increase efficiency while helping ensure your clients are protected during the process. Explore additional resources below.
Stock purchase agreement templates
Practice Notes
Checklists
Disclaimer
The content appearing on this website is not intended as, and shall not be relied upon as, legal advice. Although this content was created to provide you with accurate and authoritative information, it was not necessarily prepared by attorneys licensed to practice law in a particular jurisdiction. It is general in nature and may not reflect all recent legal developments. Thomson Reuters is not a law firm and an attorney-client relationship is not formed through your use of this website. You should consult with qualified legal counsel before acting on any content found on this website.