What Are Stock Purchase Agreements?

Stock purchase agreements are legal documents that lay out the terms and conditions for the sale of a corporation’s stock. A stock purchase agreement is a legally binding contract that creates obligations for performance of what is promised in and the right to expect performance on the part of those to whom it is promised. for all the parties involved. Stock purchase agreements may be created towards the end of the negotiation process and they serve to finalize the terms to which they agreed orally in a binding written contract.

There are two types of stock purchase agreements. In one kind, all of the stock of a company is being sold. In the other, only some of the stock of a company is being sold. A stock purchase agreement may take place as part of the sale of a business from one owner or a group of owners to another.

The sale of stocks is highly regulated by state and federal laws, and the transactions must conform to the laws that govern them. Stock purchase contracts help ensure that stock sales proceed as agreed by the parties and that they are transparent. They provide records of the parties’ intentions and the terms and conditions to which they agreed.

What Is Contained in a Stock Purchase Agreement?

Stock purchase agreements should contain certain vital pieces of information such as:

• Identifying Information: The names of the seller and purchaser as well as identifying information about them;
• Type: The type of stock to be issued, e.g., preferred, etc.;
• Quantity: The quantity of stock sold;
• Warranties and Indemnities: Warranties and indemnities in a share sale agreement address a variety of issues, including:
  • Title: The seller must warrant that they own the shares and have the right to sell them;
  • Share Capital: The seller must warrant that the company’s share capital is as promised by the seller;
  • Business Warranties: A business warranty effectively states that there is nothing that has not been disclosed to the buyer that could materially affect the value of the shares being sold.These business warranties could deal with a variety of aspects of the business. For example, there may often be warranties about the company’s bank accounts, its tax status, its assets, its key contracts. The seller may warrant that the business is not involved in any pending litigation and that none is expected. The seller may also warrant that the sale of shares will not breach any contracts, and so on.Although it is standard practice and advisable for a buyer to seek warranties and indemnities from the seller. Of course, the seller may believe that it is in their interest to qualify these warranties. This is part of the negotiating process;
  • The Selling Price: Needless to say, this is a critical piece of information;
  • Other Information: Other information such as closing dates, method and timing of delivery may be included.
  • Another two items would appear in a purchase agreement in which all of the shares of a company are being sold:
    • Restraints and Non-compete Clauses: In some cases, a stock purchase agreement is as part of the sale of a business. In these cases, where all of the shares in the company are being sold, the agreement will normally contain provisions designed to prevent the seller from
      competing with the business; trying to take employees away from the business and attempting to divert customers away from the business.As a general rule, in some states, restraints and non-compete clauses may not be enforceable, if they are more extensive than is necessary to protect the value of the shares being sold. The most relevant features of non-compete clauses are the nature of the conduct being restrained, the duration of the restraint and the geographic coverage of the restraint;
    • Completion Arrangements: Sometimes completion of the sale, i.e. actual transfer of the shares, will occur at the same time as the share sale agreement is signed, and sometimes it will occur later. Sometimes the seller is required to do certain things before the sale can be completed, so completion often takes place at some time after the agreement is signed.Regardless of when completion is planned, the agreement will normally explain when completion will occur and what the parties are expected to do at completion.For example, the seller would normally be required to provide a signed transfer form and any actual share certificates. Or, they would have to declare that share certificates do not exist. The buyer would be required to pay most or all of the purchase price per the agreement. The completion would be something like the closing of a real estate transaction..

If only a portion of the company’s shares are being sold, and not all of them, the buyer would normally be required to enter into a shareholder agreement with the existing shareholder or shareholders. This is usually achieved through a deed of accession. In a deed of accession , the buyer agrees to be bound by an existing shareholder agreement. Or, the buyer may agree to create a new shareholders agreement with existing shareholders. The shareholders agreement explains how the relationship among shareholders should work after the sale has occurred.

Most of the time, a stock purchase agreement is not the document that effects the transfer of the shares from the seller to the buyer. That is usually accomplished through a separate document, the share transfer form. This transfer form is the document that serves as evidence of the transfer and which the company uses to register the change in ownership.

When Are Stock Purchase Agreements Invalid?

Stock purchase agreements may be invalid if they violate any law pertaining to business operations or corporations. A common example of this is where a stock purchase agreement is found to involve insider trading or other violations of federal securities laws and regulations. In such cases, if a party sues to enforce the agreement, a court may refuse to enforce it and invalidate it as a contract with illegal subject matter. Any contract with an illegal subject matter is not enforceable.

A court might also refuse to enforce a stock purchase agreement if it was entered into by a party who was subject to duress, deceit, or fraud. For example, if the seller makes false representations regarding the stock, it could result in legal liability for fraud. An example of this is where the agreement lists the sale of preferred stocks, but instead common stocks or other lower grade stocks are delivered to the purchaser.

Do I Need a Lawyer for Help with Stock Purchase Agreements?

Stock purchase agreements are important for ensuring that transactions in stock are conducted properly and that the interests of the parties are negotiated in an above-board manner. Violations of securities law and regulations can lead to serious penalties. In truly egregious cases, they might result in federal charges for criminal violations of securities laws.

You may wish to consult a financial attorney if you need help negotiating, drafting or reviewing a stock purchase agreement. Your attorney can provide you with invaluable advice during the process, especially if the sale and purchase of a business is the context for the agreement. Or, if you entered into a stock purchase agreement that has not been performed as agreed, a business attorney can also represent you in filing a lawsuit if necessary..