Stock Purchase Agreement

When one business purchases stock from another company, a stock purchase agreement legally documents the sale. This agreement is essentially a contract between the two parties that records the number of shares and the agreed upon price. If you intend on purchasing stocks from another corporation, you may be interested in our stock purchase agreement PDF template. On this page, we also go into more depth about share purchase agreements, when you may need one, and how these transactions differ from asset purchases.

A stock purchase agreement is also known as a share purchase agreement, a share sale agreement, or an SPA for short. Regardless of what you choose to call it, an SPA refers to a legal document required to transfer shares from a business to a new buyer. Shares (interchangeable with the word “stocks”) are divisions of the parent company that are owned by different shareholders. The parent company will pay out dividends to shareholders based on the number of shares (i.e. stocks) that they own. These shares can be bought and sold, and individuals or businesses may do so for multiple reasons, for example, to raise money for the company or as an incentive for employees. Whenever such a transaction occurs, a stock purchase agreement is required.

An SPA is a contract between the buyer and seller put in place to protect both parties. It provides information on the buyer, seller, and parent company, along with the number of shares being sold and their value at the time of the sale. Without such a written contract, the sale of stock would not be legally binding. If the sale is not legally binding, this could put the business at substantial financial risk as it opens up the possibility of outside buyers purchasing shares and potential litigation.

Purchasing stock from a private company needs to be done correctly so that the sale is legally binding. For anyone interested in doing so, here is a step-by-step guide.

The first step in all purchases of shares is to make a bid on a per-share basis. This is done by signing a stock purchase letter of intent and providing it to the seller. Having received the bid, negotiations will then begin between the two parties until a sale price is agreed upon. In some cases, the seller of the stock may not wish to sell their shares for any price, and this is their opportunity to inform an interested buyer of this scenario.

If and when the seller agrees upon a price following negotiations, the seller will need to gather the appropriate company documents. This includes information on their current financial status and current contracts they have with other businesses. This information needs to be presented to the buyer for them to look over, known as the “due diligence period”. This process guarantees that the purchasing company is fully aware of all aspects of the business they are about to buy into.

Once the due diligence period has finished and the buyer has reviewed all pertinent information, both parties need to complete a stock purchase agreement. Both parties must sign this document alongside witnesses for the transaction to be legally binding. At this point, the buyer is the new legal owner of the shares.

Many people confuse asset purchases with stock purchases as both involve purchasing part of a company. However, there are important differences between the two. Purchasing stock and shares means that the buyer is taking over a portion of the entire company. By purchasing these shares, they are taking on all of the assets and obligations of the company, including all their liabilities and history. On the other hand, an asset purchase refers to when a purchaser buys a specific asset of the company and only takes on the liabilities of the asset they have purchased.

In general, due to tax advantages, asset purchases are often preferred over stock purchases. Moreover, buyers of asset purchases have greater control over the precise liabilities they are taking on and increased flexibility, but this precise control can make the transactions much more complex. On the other hand, share purchase agreements are much more straightforward transactions. By buying shares, the buyer is simply purchasing portions of the parent company, so the terms are much easier to agree upon. Once a price is agreed upon and the share purchase agreement is signed, the stock can be transferred over to the new buyer.

A share purchase agreement contains all major details for the transfer of stock from one owner to the other. Therefore, you will find all of the following information clearly detailed in the template SPA document: