You have a business, and it appears things are going great for you. You may be considering the next steps for finance and expansion. One of the most apparent methods is to sell portions of your ownership as stocks.
The number of firms with publicly listed stocks changed dramatically between 1996 and 2017. The almost 50% decrease in the number of publicly traded corporations in the United States over this era shows that many stock exchanges were taking place away from Wall Street. This brings us to stock purchase agreements.
You can sell shares of your firm directly to purchasers outside the stock market via stock purchase agreements.
You may fund new business activities with the proceeds from these stock transactions without becoming public. And, because you and your purchasers sign legally enforceable contracts, you can protect your assets – and your company – as you raise capital.
How exactly does all of this work? We’ll go through the specifics of SPA, so you’ll learn everything about it.
A SPA is a contract that requires written authorization from two parties, the purchasers and the firm or shareholders when company shares are acquired or sold for any amount.
In the transaction, the buyer purchases shares from the owner directly. Stock purchases are the most popular way to acquire a private company. They are commonly employed by small businesses selling stock, but not when the proprietor is the only holder or even when the buyer purchases 100% of the shares.
Understanding that the buyer also acquires ownership of all liabilities and assets in a stock transaction is vital. In contrast, the second kind of acquisition is an asset deal, where the buyer buys an agreed-upon group of assets and responsibilities.
With a stock purchase, there is no change in ownership of the liabilities and assets – concealed or disclosed – and the target continues to operate as before. This might involve accountability for the company’s previous activities.
Because SPAs do not have to specify assets and obligations, they appear to be simpler than asset purchase agreements (APAs). They do, however, present greater chances for financial danger.
List the complete legal names of the agreement’s parties. The names supplied must correspond to the names on the parties’ official papers. If one or both parties are companies, you must include the following:
Most SPAs include an alphabetical list of definitions of key (typically capitalized) phrases used throughout the agreement in Article 1. These definitions are not stand-alone terms and conditions but are integrated into other operational clauses throughout the contract. Article I, for example, can define the phrases “Acquired Shares,” “Encumbrance,” and “Environmental Law.”
Although you may be inclined to dismiss these definitions as irrelevant boilerplate or challenging to understand in isolation, they are vital and can significantly influence the effect of the provisions in which they are employed. Some terms, like “Material Adverse Effect,” “Liabilities,” or “Seller’s Knowledge” (or its equivalents), appear throughout the contract and may be the topic of lengthy talks.
In addition, this article will typically include cross-references to words described elsewhere in the Stock Purchase Agreement and a section devoted to contract construction principles.
One of the six essential aspects of a contract is the value exchanged between the parties. In this part, you must specify the payment requirements and how the customer will pay the vendor. Include the following details:
Sellers make statements concerning the company’s assets, status, and obligations. Buyers will base their decision on these remarks to decide whether to proceed with the purchase. As a result, when writing this part, you must be as straightforward as possible.
Incorporate the following into this section:
Buyer Warranties and Representations often include mutual representations and guarantees from the buyer to the seller. (These are often included with the seller’s representations and warranties.) If the buyer issues shares as all or part of the acquisition price, its representations and guarantees will be similar to the sellers. However, because cash is more commonly used, the buyer’s representations and warranties are substantially more limited in scope. After all, money is money.
Buyer representations and guarantees usually include any or all of the following:
This is among the most contentious clauses of the SPA. An indemnity provision, often known as a “keep harmless” clause, compensates one party for damage or loss caused by the other party’s failure to act.
Assume you’re the in-house counsel for a software development business looking to sell its shares to a buyer. You should add an indemnity clause in the SPA to protect yourself from any intellectual property or copyright infringement allegations made by the buyer.
Assuming the transaction involves a time between signing and closure, the Stock Purchase Agreement will also include prior conditions that must be met or waived before each side is compelled to complete the transaction.
These will typically demand that the other party’s representations and warranties be valid when given and continue true at closing, as well as that the other party has fulfilled its pre-closing covenants. As you might anticipate, the necessary regulatory permits and third-party consents must also be obtained.
A buyer will frequently seek as a condition precedent that the acquired firm has not seen a significant unfavorable change, a negative shift in the target’s business that impacts the company’s long-term earnings power. Sometimes, a buyer might be able to negotiate a requirement that it, too, has appropriately completed its due diligence investigation of the target.
SPAs, like other commercial contracts, must have the following clauses:
When purchasing common stock, the buyer assumes all liabilities and assets, either disclosed or not. The buyer selects specific assets and liabilities to buy with asset acquisition.
A purchaser that wants to avoid liabilities or unnecessary assets may profit from an asset purchase agreement (APA). For example, a target may have accounts receivable that can’t be paid. The APA must detail all assets and liabilities purchased and traded. Examples are permits, contracts, hardware, agreements, goodwill, client lists, leases, or inventories.
Contracts may have a particular clause that bans licenses from being transferred. This might be a sole distributorship, right, or license. It might be titles for an automobile fleet. The best choice might be a stock purchase agreement when the target has agreements and licenses that only they can use and can’t be given to anyone else.
Stock purchase agreements can be used by businesses to buy, sell, and transfer ownership of stocks and shares. Even though stocks are financial assets, asset acquisition agreements do not adequately address the legal difficulties associated with a stock purchase. When you have legal questions, always get legal guidance from an attorney.