Shares(stocks) are referred to as units of ownership of a company and are divided among the company’s owners/ shareholders or stockholders. The number/amount of shares held by a shareholder dictates the percentage ownership and dividend payment they are eligible for in the company.
A SPA facilitates the transfer of the ownership of these shares in a company from the current holder to the buyer.
A share purchase agreement (SPA) is a document written when a buyer intends to buy a business/company ownership.
Ownership can be in terms of shares. A SPA outlines the number of shares being bought, price per share, and the date of the sale/purchase.
A Stock Purchase Agreement is also referred to by other names, including
- SPA (or SPA agreement)
- Stock Purchase Agreement
- Share Sale Agreement
Asset purchase VS Stock purchase
The disparity between an Asset Purchase and a Stock Purchase is that, for the latter, the buyer doesn’t obtain the seller’s liabilities. In a SPA, the purchase of shares means the buyer buys the liabilities of ownership of the company as well as its assets.
When buying private entities shares, the buyer is given a due diligence period, where else for public entities, the buyer enjoys the protection of the Securities Act of 1933, and the transfer can take place immediately.
Types of Shares
Stocks/shares are of different types. A company can have multiple types of shares which vary in value and have different voting rights. Meaning depending on the type of stock you choose to buy, will determine the amount of money you will spend and the extent of decisions you will be allowed to make within the company.
The classes of stock include;
- Class A Stock: Class A stock allows 3 votes per share
- Class B Stock: Class B stock allows 2 votes per share
- Class C Stock: Class C allows 1 vote per share. Shares are also of different types, i.e., Preferred, Common, voting, and non-voting shares.
These are shares ordinarily owned by shareholders. Most companies have common shares but not all companies have preferred shares. Companies with different types of shares will sell the shares at different monetary amounts. This is because each type of share will come with different authoritative powers, for example, different voting rights. To illustrate this, 150 Class B shares may not be worth the same amount as 150 Class C shares within the same company.
These shares are more valuable than common shares and could mean different things to a company, all dependent on what powers or value were assigned to them during the company’s incorporation. Often, preferred shares are non-voting. However, they usually mean holders will receive priority for profits if liquidation occurs over common shareholders.
Voting and non-voting
These shares ordinarily determine a shareholder’s eligibility to vote as well as authority during shareholder’s meetings.
Stocks can also be categorized as;
- General partnerships
- Limited Liability Companies (LLCs)
- Limited partnerships
Need of Share Purchase Agreement
A Stock Purchase Agreement should be used by individual shareholders or a corporation when selling or purchasing stocks in a corporation to or from another business entity. To illustrate this, when a shareholder in a company wishes to sell their shares to another party, a Share Purchase Agreement should be used. However, when buying a hundred percent of shares in a company, it is advisable to use a Purchase of Business Agreement instead.
When buying and selling stock ownership in a company, other than a Share Purchase Agreement, there are other documents necessary, depending on the situation. They include;
- Purchase of business agreement: This is a document used to outline the terms and conditions during the buying or selling of a business.
- Share repurchase agreement: It is a document used when a shareholder(s) wants to sell purchased shares back to the company they purchased them from.
- Shareholder loan agreement: A document outlining details of loans made between a business/company and a shareholder.
- Shareholder agreement: This is a document that outlines the ownership, rights, and responsibilities of shareholders in a corporation.
Components of Stock Purchase Agreement
For a Stock Purchase agreement to wholesome, several items must be presented in the document. This information includes;
- Buyer’s name: The first priority is to add the name of the interested purchaser of the shares.
- Seller’s name: It’s an essential requirement that shows a current holder of shares but with an intent to sell.
- Description of shares: The Company whose shares are to be transferred and the number of shares. Also, the type and class of shares (e.g., class A; common voting) can be included as applicable.
- Purchase price: The value of shares, that is, the per-share price and total amount is a must to be included.
- Closing date: Ensure to include the date when the transfer is projected to be completed.
- Due diligence period (if any): The laws governing the agreement and other transaction details like payment details etc.
Making a Stock Purchase Agreement
A stock Purchase agreement can be prepared by following a few steps we are going to look into below. It is expected that the contents will vary from one purchase to the other, but if the steps below are followed, your SPA will have captured all the relevant information.
Specific date of the agreement
The first step is to declare the date from which the agreement is to be set in motion. The data supplied should be specific and in the format of Month/date/ year.
For example, March 25th, 2021.
After stating the date, the buyer of the shares should be identified. This is done by providing their official names and address. The name should be as it appears on official documents. The address is given in the street address/ city/ state format.
For example, 23rd Marcy Street, City of Brooklyn, State of New York.
After the buyer has been declared, the seller can then be declared. Their information should be given in the same format as that of the purchaser. That is, beginning with the name then the address. The information should be as it officially appears in the company documents.
Description of shares
The next step is to identify the company or business whose shares are being purchased. This section should be titled ‘description of shares.’ The entity is declared using its official business name as registered with authorities and by providing its address. The address is given in the same format as the buyer’s and the seller’s address- street/city/state where the entity was incorporated.
Total number and value of shares
This next step represents the second part of the ‘description of shares.’ The value of each share is given ($/share) is given, then the total number of shares up for sale, followed by the class/series of the shares.
Shares proposed price
The next step is to state the total amount of money the buyer has to part with to acquire the shares. This number is the product of the value of one share ($/share) multiplied by the number of shares being sold. It is given in words and numerically.
After the asking price has been stated, the closing date should then be provided. This is the last date when the buyer can purchase the said shares for the set terms and conditions. This is given in the format of month/date/year.
Methods of payment
The next step is to state the preferred mode of payment. This will vary depending on one’s preferences. The common modes of payment include; bank wire, cash, check, PayPal, etc. A provision should be made for any other modes of payment.
In some instances, a deposit would be required. If this is the case, it should be stated at this point in the agreement. The amount of deposit expected should be stated in figures and then after a due date, which should be a couple of days after the agreement is effective but before the closing date. If a deposit is not necessary, this should also be stated.
The due diligence period
Ordinarily, a due diligence period is necessary for the purchaser to inspect the health of the shares to avoid potential litigation. The date when this period is expected to end should be provided in the format month/date/year. The purchaser should accept or terminate the agreement by this date. If a due diligence period is not necessary, this should also come out in the SPA.
The next step is to outline the state whose laws are to govern the implementation of the Stock Purchase Agreement. This is done by simply writing the name of the state.
Terms, conditions and provisions
Sometimes there may be additional terms, provisions, limitations, or considerations important to the transaction but have not been addressed in the agreement. This necessitates the provision of this section. Declare if there are or if they are non-existent.
The last step of the agreement will be as:
- Purchaser’s signature: As with all legal documents, a Shares Purchase Agreement must be signed. The purchaser should sign first in the format signature, date of signing, then their name.
- Seller’s signature: The last step is having the seller sign. They should do so in the same format as the purchaser, that is, signature, date of signing, and name. Once signed, the agreement is legally binding to both parties.
Stock Purchase Agreement Template
STOCK (SHARES) PURCHASE AGREEMENT
This Stock Purchase Agreement (SPA) is dated as of [month date], _ [year] and made and entered by;
_ [Name] of ____ [address] (the “seller”)
_ [Name] of ____ [address] (the “purchaser”)
The mentioned parties agree to the following terms;
A: Description of shares
The seller is the custodian of _ [number] shares of _____ [Name] (the “corporation”). The purchaser wishes to buy the indicated shares from the Seller.
Each share is valued at [Amount] dollars per share _ [$/share]. The shares are of class ___ [A/B/C or as applicable], and the seller agrees to transfer all associated voting rights and ownership to the purchaser.
B: Purchase price
Unless otherwise stated, all monies in this agreement are in USD (US Dollars).
The seller offered, and the purchaser was willing to buy the number of shares, together with all the rights, interest, and assets that come with, at an agreed amount of $_______ Amount] (the “purchase price”).
C: Closing date
The closing of this purchase is expected to occur on or before [month/date], [year] at _ [location] in the attendance of both the Seller and the Purchaser or their representatives.
All and any payments are to be made through (mark as applicable);
• Bank wire
A deposit of $[amount] shall be expected as agreed on, [Number] calendar days from the date of signing of this Agreement.
E: Due diligence period
The purchaser is expected to accept or terminate the Agreement on or before [month/date], [year]. No response shall be interpreted as acceptance, and legal obligations as per this Agreement shall be applicable.
F: Governing law
The sale and purchase of the mentioned shares per this agreement are governed by all applicable laws in the State of [Name of Sate].
G: Additional terms and conditions
[include any other terms and conditions applicable by law]
Concerned parties (the “seller” and the “purchaser”) affixed their signatures on [month, date], [year].
Here are free customizable stock purchase agreement templates that can be modified as per tour need.
Process of Purchasing Stock Privately
Stock purchasing of private-owned companies is different from public companies. It usually involves a transfer of a physical stock certificate from the seller to the buyer for private companies. This entire process occurs in the following steps;
The first step is to sign a stock purchase letter of intent or place a bid on a per-share basis. This way, negotiation can begin, and the seller can state whether they would like to proceed with the sale.
Obtain company documents
After the seller agrees to proceed with the sale, the buyer can then request all pertinent documents such as contracts and the company’s financial reports. This period is known as the ‘due diligence period.’ It allows the buyer to ascertain that the seller is not misrepresenting any information about the company.
Sign an agreement
After confirming that the given information is true, the Stock Purchase Agreement is written up and signed by the involved parties. Upon signing, closing should occur together with the exchange of funds for stock certificates. Furthermore, the buyer becomes the new official owner of the stock/shares.
Frequently Asked Questions
The purchaser signs the purchase and sale agreement first as an acceptance of the terms of sale. After purchaser signs, the seller can then sign on the agreement.
The sale and purchase will usually be valid up until the closing date. The purchaser can terminate the agreement before or if they do not accept the terms set out. Either party can request an extension or allow it to expire.