Key Provisions of Stock Purchase Agreements

When drafting or negotiating a purchase agreement, make sure you include key points for an airtight contract.

When you buy the stock of a business, the definitive purchase agreement is generally known as a Stock Purchase Agreement. Below are the key points to keep in mind when drafting or negotiating a Stock Purchase Agreement.

• Number of Shares and Purchase Price: This provision sets forth the number of shares being sold and the purchase price of the stock.
• Representations and Warranties (of Seller): The seller of the stock of a business will typically make warranties that (1) the seller is a company in good standing, or a private individual; (2) the seller has the authority to enter into the agreement and perform his obligations under the agreement; (3) all financial statements of the business provided were prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the business; (4) the seller has provided a completely accurate list of all tangible and intangible assets of the business; (5) the business has good and marketable title to all tangible and intangible assets it purports to own; (6) there are no undisclosed liabilities; (7) there are no contracts outstanding except those that have been disclosed pursuant to the agreement; and (8) the business is not in violation of any federal, state, or local laws. The seller of stock will further warrant and represent that the shares being sold were validly issued, fully paid, and nonassessable, and that they have been issued in full compliance with all federal and state laws; and that the buyer will receive the shares free of any liens or encumbrances.
• Representations and Warranties (of Buyer): As with the purchase of the assets of a business, the buyer of the stock of a business will generally warrant that (1) the buyer is a company in good standing, or a private individual; and (2) the buyer has the authority to enter into the agreement and perform its obligations under the agreement. Additional warranties of the buyer of stock will depend upon whether the purchase is cash or non-cash. Purchases for cash generally do not require the buyer to make representations concerning its financial wherewithal or ability to pay the purchase price. But if the purchase of stock includes a promissory note or is to be paid in the future, then the buyer will typically make representations and warranties regarding its financial position.
• Tax Issues: The tax consequences of the purchase of the stock of a business are very different from the purchase of assets. The seller will typically be trying to get capital gains treatment for the sale. You should contact your attorney as to how tax matters should be addressed in the agreement.
• Consent of Shareholders: If the sale is structured as a merger, the consent of the shareholders and directors of the business being acquired will typically be required. If the sale is a direct stock sale by the shareholders, then all of the shareholders will need to sign the agreement. For more on the shareholder responsibilities, read The Shareholders of a Corporation.
• Employment-Related Issues: The agreement will also likely contain several employment-related provisions, including issues dealing with retaining employees; continuation or alteration of employee benefits; collective bargaining agreements (if any); and termination of employees.
• Closing Conditions: Conditions to the deal closing should also be addressed. As with Asset Purchase Agreements, closing conditions may include: that all representations and warranties are true and correct; that all consents have been obtained; that all covenants have been complied with; that all government consents or permits necessary have been obtained; and that various certificates, documents and legal opinions have been delivered.
• Special Concerns About Corporate Liabilities: Unlike the purchase of the assets of a business (assuming that related liabilities are not also assumed), the purchase of the stock of a business subjects the buyer to the effect of corporate liabilities. Thus, the Stock Purchase Agreement should carefully describe the liabilities of the company being acquired. The buyer should require that the seller warrant that there are no other liabilities not specifically listed. Then, even though the buyer (by purchasing stock) might inherit unknown liabilities, it may have recourse back to the seller for not disclosing such liabilities.
• Litigation: A provision stating the nature and extent of any litigation affecting the company is generally used to protect the buyer if unknown and unanticipated litigation or antitrust or other governmental regulatory problems arise in the future.
• The Closing: This provision sets forth the time and date of the closing of the deal, and may include conditions under which the closing date and time may be modified.

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