Stock Purchase Agreement: What Is It?

A stock purchase agreement is the agreement that two parties sign when shares of a company are being bought or sold. These agreements are often used by small corporations who sell stock. Either the company or shareholders in the organization can sell stock to buyers. A stock purchase agreement is meant to protect you whether you're the purchaser or the seller.

A stock purchase agreement is separate from an asset purchase agreement. Stock purchase agreements merely sell shares of the company to raise money or transfer ownership of shares. An asset purchase agreement is finalizes the sale of the company's assets. The stock purchase agreement lists several things:

  • Name of company.

  • Purchaser's name.

  • Par value of shares.

  • Number of shares being sold.

  • When/where transaction takes place.

  • Representations and warranties made by purchaser and seller.

  • Potential employee issues such as bonuses and benefits.

  • Indemnification agreement over unforeseen costs.

Before an agreement is finalized, a letter of intent (LOI) is created explaining the proposed sale. A buyer should have due diligence and ensure the purchase agreement has the same terms as the LOI.

Why Is a Stock Purchase Agreement Important?

Stock purchase agreements are important because they put the terms of a sale into writing. This can prevent misunderstandings that may end up in the courtroom. The agreement also allows the seller to show and explain that they are the owner of the stock being sold. This gives the purchaser more faith in the transaction.

Another important benefit of a stock purchase agreement is that it provides specific information on the transfer of stock. This means all of the warranties from the seller are spelled out. It can also list dispute resolution measures. You can even document that the seller or purchaser will cover certain costs if an unknown preexisting issue causes loss.

Reasons to Consider Not Using Stock Purchase Agreements

Stock purchase agreements are meant to protect everyone involved. Because of this, there are very few instances when you should consider not using one.

  • You are the only shareholder in the organization.

  • You're offering a limited capacity offering that qualifies for Regulation D exemption.

Keep in mind that it's still safer to create a stock purchase agreement. These are only possible reasons for not creating an agreement. This doesn't mean not doing so is the best decision.

Reasons to Consider Using Stock Purchase Agreements

  • Creates a binding agreement that the sale will take place.

  • Allows businesses to raise revenue for the organization.

  • The purchaser and seller have time to review the agreement before anything is finalized.

  • Explains special tax treatments the signers may receive for the transfer.

Examples

  • The purchaser may expect to receive dividends on their investment. They could later claim that they were promised certain dividends if there's no stock purchase agreement in place. Dividends can be fully explained when an agreement is in place.

  • A dispute over unforeseen costs or other issues could cause a disagreement between the purchaser and seller. Without a stock purchase agreement, there is no method of dispute resolution explained. This could result in court costs. If an agreement is in place, there are at least guidelines on how to handle the disagreement.

  • If someone with a large stake in the company decides to leave, they may want to sell their shares. Without a stock purchase agreement, they can sell these to company outsiders without asking other shareholders. With an agreement, a “right of first refusal” clause can be created. This means other shareholders will have the option to purchase the shares before they're sold to someone else.

Frequently Asked Questions

  • Do I have to use a stock purchase agreement?

No, but this could create financial risk for you.

  • What type of warranties can I provide?

You can make any legal warranty you would like, but make sure they are true. Making inaccurate representations or warranties can land you in court. You'll have to reimburse the purchaser for any loss.

  • Can I create my own stock purchase agreement?

This is an option and there are templates online to download, but it's not the best decision. Federal law is complex, and laws are different in every state. It's better to have a legal professional craft your document.

Common Mistakes

  • Using a stock purchase agreement template downloaded online and filling it out yourself.

  • Failure to create an agreement because you know the purchaser. This affects your company, so it's important not to take chances.

  • Failing to consider the tax implications. Speak with your accountant before signing.

Steps to File

1. Fully review the stock purchase agreement with the purchaser. UpCounsel offers a Stock Purchase Agreement Template here.

2. Sign the agreement. Both the purchaser and seller must sign. A witness can sign too if you don't know the purchaser well or have reason to think they may pull out of the agreement.

3. Make copies of the signed document for the purchaser and company.

4. After the purchaser pays for stock, give them certificates that represent the company's stock.

5. The stock purchase agreement doesn't need to be filed with local or federal government. You may still need to register the transfer with the SEC if you meet certain criteria.

If you're ready to get a stock purchase agreement, post your request in UpCounsel's marketplace. These attorneys graduated from respected law schools like Yale and Harvard, and 95 percent of lawyers are screened out so you only get the best legal help. UpCounsel lawyers have an average of 14 years experience, so your company and shareholders are in good hands.