You’ve got a company and it looks like things are going well for you. Now you might be thinking about next steps for financing and growth. One of the most clear cut ways to do that is sell off parts of your ownership as stock. How does all that work exactly? We’ll cover all the details of Stock Purchase Agreements so you know all the ins and outs!
A stock purchase agreement (SPA) is the contract that two parties, the buyers and the company or shareholders, written consent is required by law when shares of the company are being bought or sold for any dollar amount.
In a stock deal, the buyer purchases shares directly from the shareholder. Stock acquisitions are the most common form of acquiring a private business. They are mostly used by small corporations selling stock, but not usually when the owner is the sole stockholder, or when the buyer is acquiring 100% of the stock.
It is important to note that in a stock deal the buyer also assumes title of all assets and liabilities. Contrast this with an asset deal, the other method of acquisition, in which the buyer purchases an agreed-upon set of assets and liabilities.
With a stock acquisition, it’s as if there was no change of ownership for the asset and liabilities - disclosed or undisclosed - and the target continues on as before. This potentially includes liability for past actions of the company.
SPAs can seem more straightforward than asset purchase agreements (APA), because SPAs does not need to itemize the assets and liabilities. However, they come with more opportunities for financial risk.
Whether buying or selling, it is helpful to have an attorney on hand to help you prepare or review the contract. They can also assist you if you need to file a claim.
The parties may set forth some terms in an informal letter of intent (LOI). If they’re interested in pursuing the deal, they’ll prepare the primary transaction agreement. This could be a Stock Purchase Agreement, Asset Purchase Agreement, or Merger Agreement. The buyer may do due diligence, and if so, this could account for a purchase price adjustment if they move forward with the SPA.
A witness whereof can also sign, but there must be a witness for the statement to be legally binding
An SPA is the contract containing the principle agreement between the parties in which the buyers purchase stocks from the shareholders. It is sometimes called a Securities Purchase Agreement, or just a share Purchase Agreement.
The key provisions detail the terms of the transaction:
It also has articles detailing the conditions of the sale. That way, the parties can refer to the SPA in case one needs to file a claim.
The major sections of the stock purchase agreement are as follows. Sellers should particularly pay attention to the purchase and sale of stock, and the representations and warranties section.
With a common stock acquisition, the buyer assumes all assets and liabilities, whether disclosed or not. With an asset purchase, the buyer is selecting specific assets and liabilities they want to buy.
An asset purchase agreement (APA) might benefit a buyer who wants to exclude liabilities or redundant assets. For example, a target may have uncollectible accounts receivable. All assets and liabilities being bought and sold must be itemized in the APA. This can include licenses, contracts, equipment, agreements, goodwill, customer lists, leases, or inventory.
Sometimes, contracts may have a specific clause that prevents licenses from being transferred over. This could include an exclusive distributorship, license, or right. It could be titles for a fleet of cars. A stock purchase agreement may be the best choice when the target has exclusive contracts or licenses that cannot be transferred over.
When is a Stock Purchase Agreement More Desirable Than an Asset Purchase Agreement?
Stock deals might be good in a situation where the buyer thinks that the liability is low or manageable, or who sees growth potential in the company. Or the buyer may be looking for a tax write-off.
Because the assets and liabilities don’t need to be itemized, it can seem less complicated to go with an SPA. But they can come with risk. It is important for a buyer to do their due diligence.
In a stock acquisition, it’s as if there was no change of business owner for the assets and liabilities. The tax attributes of the assets and the liabilities carry over as well. The buyer assumes the same tax responsibilities and the deprecation schedule of the assets. This includes the existing tax status of the corporation.
Stock acquisitions can also be less expensive because they are not subject to the Bulk Sales Act, often resulting in a lower selling price. The seller is considered to have disposed of equity, and instead is subject to a capital gains tax.
Also, in cases where both the buyer and seller are C corporations , the transaction may qualify for tax treatment as a tax-free reorganization. Stock purchase agreements can also be useful in cases where the buyer needs a tax write-off.
Two reasons not to use a SPA include:
There are various tax implications with a SPA. However, it can still be good to have a purchase agreement. It is best to speak with an accountant before filing. You can learn more about the differences between a SPA and an APA at CFI Education, Asset Purchase vs Stock Purchase - Pro/Cons Reasons for Each Type .
Do I Need a Lawyer to Help Me Fill Out a Stock Purchase Agreement?
It is important to conduct a stock acquisition properly. You should have legal advice, whether preparing or reviewing a claim. Typically, it is lawyers who prepare the SPA.
SPAs can be found to be invalid when they violate business or corporate governing law. This is common when they have securities violations, such as insider trading.
Because they have to do with the sale and purchase of stocks, SPAs are subject to applicable securities laws. This can lead to penalties, and even federal charges and costly court fees.
SPAs can also be found to be invalid if there is fraud, deceit or duress. For example, if there is a misrepresentation about the type of stocks, this can open up the seller to litigation.
A common mistake people make is trying to fill out a SPA template on their own. You are highly advised to consult a lawyer for legal counsel, whether drafting an SPA or reviewing one. They can help you throughout the process, and represent you if you ever need to file a claim.
