What Is a Stock Purchase Agreement?
Stock purchase agreements (SPAs) are legally binding contracts between shareholders and companies. Also known as share purchase agreements, these contracts establish all of the terms and conditions related to the sale of a company’s stocks. They differ from asset purchase agreements (APAs), which outline how a company’s assets are being sold.
SPAs play an important role in the business world, particularly in the transfer of business ownership. Read on to learn more about stock purchase agreements and how you can write them. At the end of this article, you’ll also learn how you can use contract management tools like Ironclad to draft and manage stock purchase agreements.
What is a stock purchase agreement?
Stock purchase agreements or SPAs are transaction contracts for stock sale and acquisition. Their primary purpose is to establish the price of the stock being sold. SPAs achieve this by:
- Listing out the prices of the stock being sold
- Providing a roadmap for the transaction to prevent and mitigate risk.
Since risk prevention and mitigation is one of the primary goals of writing an SPA, SPAs spend a lot of time covering potential situations and variables that could put the investment at risk.
SPAs are required whenever an individual or corporation sells or purchases stocks in another business or corporation. For example, let’s say you work at a small corporation with two C-suite executives. If one of the C-suite executives wants to quit the business and sell their shares to the other partner, they can do this through an SPA.
Like most other agreements, SPAs don’t have a standard format. The clauses and language contained within each SPA differ greatly depending on the needs, industry, and size of your company. However, every SPA should have some essential features to ensure that the transaction goes smoothly.
Clauses often included in a stock purchase agreement
Here’s what you should include in your SPA:
List out the full legal names of the parties in the agreement. The names provided must match the parties’ official documentation. If one or both of the parties are corporations, you’ll need to include:
- The full legal name of the signing officers
- The corporations’ legal and operating names.
Identify who is the buyer and who is the seller. You should also establish the objective of the transaction.
Include detailed definitions of the terms you’ll be using in your SPA. Here are some definitions that most SPAs use:
- Affiliate: Any person or company that directly or indirectly controls, is controlled, or is under common control by one of the parties.
- Average trading price: The volume-weighted average of the trading prices of common stock as reported on financial news company such as Bloomberg or Dow Jones for 30 consecutive full trading days.
- Business: Refers to the business of selling, marketing, and providing your company’s industry services in a particular geographic area, such as the United States.>
- Business day: Any day other than a Saturday, Sunday, a state or federal holiday, or a day which the banks in either of the parties’ jurisdictions are obligated by law to close.
- Business marks: Refers to the trademarks licensed or owned to the seller, its affiliates, and its subsidiaries.
Consideration—the value that’s being exchanged between the parties—is one of the six essential elements of a contract. In this section, you need to establish the payment needs and how the buyer will pay the seller. Include the following information:
- Sum payable on closing (include a pricing formula if needed)
- Deposit required at time of execution
- Amount payable in case a security is registered against either party
- Sum held in escrow for breaches of warranties and representations and indemnities.
Seller’s representations and warranties
These are a series of statements made by sellers about the company and its assets, status, and liabilities. Buyers will rely on these statements to determine whether they should proceed with the purchase. As such, you need to be as transparent as possible when writing this section.
Include the following in this section
- Your standing as the seller
- Your company’s market reputation, capital structure, and directors
- Your rights over the shares
- The number of shares you currently own
Buyers’ representations and warranties
Buyers also have to make representations and warranties. However, this section doesn’t have to be as detailed as the seller’s representations and warranties.
- All of the buyers’ rights
- How buyers can enter into subsequent stock purchase agreements
- If the buyer is a corporation, information about the corporation. This includes the corporation’s market reputation, directors, and capital structure.
This is one of the most highlynegotiated clauses in the SPA. Also known as a “hold harmless” clause, the purpose of an indemnification clause is to compensate a party for loss or harm arising from the other party’s failure to act.
For example, let’s say you’re the in-house counsel of a software development company that wants to sell its shares to a buyer. You would want to include an indemnification clause in the SPA so you can indemnify the buyer for any intellectual property or copyright infringement claims.
Here’s what the clause could look like:
Indemnification. [Your company] agrees to indemnify and defend Buyer and its Affiliates and their officers, directors, and employees from and against all costs, losses, expenses, damages, and liabilities that may be incurred or suffered by Buyer and its Affiliates as a result of or arising out of a claim relating to:
- Any omission or negligent act of [your company], its Affiliates, and its personnel
- [Your company]’s breach of any warranty, representation, or covenant covered in this Agreement
Force majeure clauses relieve a party from performing a contract if performance is highly impractical or impossible due to an event that the parties couldn’t have reasonably anticipated or controlled.
Many companies rely on this clause to remove liability for unexpected and unavoidable events such as lockdowns, economic catastrophes, and sudden financial crises. To cover your bases, remember to include:
- A list of potential force majeure events, such as earthquakes, tornados, and strikes
- A catch-all like “and other causes reasonably beyond either party’s control.”
All the rest
Like other business agreements, SPAs require the following clauses:
- Dispute resolution.
Managing stock purchase agreements
SPAs can be difficult to write and manage since they contain so many clauses and details. If you don’t have premier contract management software to help you locate, organize, and execute contracts, you would have to spend a lot of time and energy finding, emailing, and editing contracts. This is doubly true if your company is still storing contracts in USBs, hard drives, and physical cabinets.
That’s why you should consider getting Ironclad. A top-notch contract management platform, Ironclad arms you with powerful tools that will transform the way you write, manage, and execute contracts.
Our Data Repository enables you to find, draft, and manage SPAs. Codeless and zero-training-required, Data Repository lets you bring in SPAs from all over your company. By putting all of your SPAs in one place, you can rest assured that all of your information is secure. Plus, you’ll be able to find answers to questions within seconds. For example, if you want to know the renewal date of the SPA you signed last month, you just have to use Data Repository’s filters to locate the agreement.
You can also give other users as much (or as little) access to your SPAs as needed. This will help break down your company’s contract silos and give Legal the support they need to draft and manage SPAs that interest more than one department.
Ironclad also has a Workflow Designer that empowers you to create and approve automated workflows for SPAs. User-friendly and sleek, Workflow Designer works straight out of the box, without the need for technical expertise or long implementation times. Anyone can use its simple drag-and-drop user interface to build and launch SPA generation and approval processes in minutes. All they have to do is:
- Upload an SPA template
- Tag fields as needed
- Add approvers and signers.
All of our templates are up-to-date and contain guardrails to ensure 100% contract compliance<, which means that all of your SPAs will comply with relevant legislation.
Stay on top of stock purchase agreements
A stock purchase agreement or SPA is a contract that establishes all of the terms related to the sale of a company’s shares. SPAs are ubiquitous in the business world and are often used by companies and individuals to buy and sell company ownership.
SPAs can be difficult to write since they contain many details and clauses, particularly if you have to deal with hundreds or thousands of active contracts at once. To simplify the contract management lifecycle, consider getting Ironclad. A powerful digital contracting software, Ironclad will make creating, managing, and executing SPAs easier than ever. Our Data Repository, Workflow Designer, Editor, and other tools will help you keep track of deadlines, answer contract questions within seconds, break down contract silos, and draft complex SPAs with just a few clicks of your mouse.
Interested? Try our free sandbox demo today.