Updated July 2, 2020:

A share purchase agreement is defined as a legal contract between a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The specific number of shares are listed in the contract at the stated price. This agreement proves that the sale and the terms of it were agreed upon mutually.

Stock Purchase Agreement

The stock purchase agreement is an agreement in which all terms and conditions are finalized when it comes to the sales and the purchase of the shares of the company. This isn't the same as an asset purchase agreement, where the assets are bought and sold instead of the shares. The following items are listed in a stock purchase agreement:

  • Name of company.
  • Par value of shares.
  • Name of purchaser.
  • Warranties and representations made by the seller and purchaser.
  • Possible employee issues such as benefits and bonuses.
  • How many shares are being sold.
  • Where and when the transaction takes place.
  • Indemnification agreement over costs that are unforeseen.

A letter of intent is formed before the agreement is finalized to explain the proposed sale. A buyer needs to have due diligence and should make sure the purchase agreement and the letter of intent have the same terms. The seller should specifically look at the sale and purchase section and the warranties and representations section. The sale and purchase section should have the exact same terms that the letter of intent has. If any differences are found, this is probably due to buyer due diligence and needs to be negotiated before the share purchase agreement is complete.

The warranties and responsibilities need to be checked to make sure there is not any statement that's untrue. If this happens and is found later, there will be possible legal action and recourse. There may be a purchase price adjustment after the transaction where the seller has to reimburse the buyer if there are misrepresentations.

Who Needs a Share Purchase Agreement?

If a corporation or individual is purchasing or selling shares in the company with another business or person, they should use a share purchase agreement. As an example, if a business has two partners who have equal shares and one leaves the partnership, a share purchase agreement can be used to buy their stocks in the business. When all of the shares are purchased, a purchase of business agreement can be used instead.

What Information and Types of Shares are in a Share Purchase Agreement?

A share purchase agreement has information about the company that the shares are being transferred for, the seller and purchaser of shares, what law covers the agreement, the type of shares being sold, and how many shares are being sold and at what price. This agreement also has payment details, including if a deposit is necessary, when the complete payment is due, and the closing date of the agreement

There are usually two types of classes and shares that define shares. The main ones are voting and non-voting. Voting shares let the shareholder voice an opinion on the board of director's decisions and on corporate policy. Non-voting shareholders are not able to vote on board of director changes or on corporate policies.

What Does a Stock Purchase Agreement Cover?

Interpretation is covered in the stock purchase agreement, which gives the definitions for all terms used in the agreement. The sale and purchase of stock is also listed, which covers adjustments in purchase prices, itemizes the purchase price, and how to resolve disputes. The warranties and representations of the buyer and seller give all the statements that the buyer and seller sign and claim to be true. Anything related to employees is also covered, including what the terms of their benefits are and how accrued bonuses are handled.

The details on any indemnifications that will be provided by the buyer or seller will also be listed, which covers any costs that may happen after the transaction due to conditions that were present before the deal closed. Special tax treatment that the buyer or seller might be entitled to is also listed in the agreement.

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