Stock Purchase Agreement

Written by CS Shirish Bhootra

SR Ventures Limited is an entity having its business operations in India and operates in event management. The company is financially sound, but now it wants to expand its business line, sell off parts of ownership as stock, and mitigate risks associated with selling rights. To have a proper and effective transfer of ownership, the company executed a Stock Purchase Agreement wherein all the terms and conditions related to the sale of the company's stock are outlined.

Introduction

Stock Purchase Agreements [SPA] are for the acquisition and sale of stock. It outlines the price of the stock being sold, which is said to be the primary purpose of SPA. SPA's primary goal is achieved through the following:

1. Disclosure of prices of stock being sold.

2. Guidelines regarding transactions to prevent and mitigate risk.

To prevent and mitigate risks, SPA execution requires time to analyze and include all possible situations and variables subject to investment risk.

SPAs cover the situation in case an individual or corporation acquires or disposes of stocks in another business or corporation. SPA's don't have a prescribed format. They are customized as per parties to an agreement considering the entity's requisites, industry, and size. However, every agreement comprises of few essential clauses to ensure that the transaction is carried out effectively.

Stock Purchase Agreement: Meaning

A stock purchase agreement is an agreement between two parties (the entity or shareholders and buyers) signed when shares of an entity are being bought or sold. Small entities that dispose of their stock execute these agreements. Stock is sold by the entity or shareholders of the entity to buyers. A stock purchase agreement acts as a firewall to protect all parties, whether the party is a buyer or seller.

A stock purchase agreement is different from Asset Purchase Agreement. In the case of SPA, it outlines the disposal of shares of an entity to raise funds or transfer ownership. However, Asset Purchase Agreement discloses the finalization of the removal of assets of an entity. Before the execution of an agreement, a Letter of Intent is executed outlining the proposed or prospective sale. The acquirer of stock should exercise due diligence and ensure that the purchase agreement outlines the same terms and conditions as disclosed in LOI.

Stock Purchase Agreement: Anatomy

Stock purchase agreements do not have a fixed format and are customized as per the parties to the contract. SPA's are further broken up into sections to define what certain concepts mean and explain the mechanism of how the transaction process works. When SPA is subdivided or broken down into parts, the anatomy of a stock purchase agreement is as follows:

• Preamble

• Part 1: Definitions

• Part 2: Details regarding Transaction

• Part 3: Seller's Representations and Warranties

• Part 4: Buyer's Warranties and Representations

• Part 5: Covenants

• Part 6: Closing Conditions

• Part 7: Indemnification

• Part 8: Termination

• Part 9: Miscellaneous Provisions

Preamble

The first and foremost part of the stock purchase agreement is the preamble. In this section, disclosure regarding the name of the agreement, the parties identified, and the date of the contract is mentioned. Parties are named BUYER and SELLER.

After the preamble, the next section is Recitals, wherein disclosure of a series of statements starts with the term "whereas." At the same time, these statements outline the parties' intentions for the agreement and are binding.

Part 1: Definitions

This part is meant to define various terms mentioned in the agreement, which are listed in alphabetical order.

Part 2: Details Regarding Transaction

This part clearly outlines the specific terms of the sale of the stock. All details regarding the price of a stock, adjustments, if any, and other related aspects are mentioned. It also comprises items shared among parties to the agreement, the list of which is as follows :

• Certificates related to shares

• Purchase price

• Legal opinions

• Employment agreement

• Escrow agreements

• Other ancillary documents

Part 3: Seller's Representations and Warranties

This part defines and states the warranties from the seller. It may furthermore comprise statements regarding both past and present facts that are associated with business, a few of which are as follows :

• Condition

• Operating results

• Liability

• Property

• Assets

• Operations and prospects.

Part 4: Buyer's Warranties and Representations

This part defines and states representations and warranties on the seller's part. T Acquirer or buyer mostly pays cash for the acquisition of stock, so their terms and warranties are limited compared to sellers.

Part 5: Covenants

There is a time gap between the time the parties sign and the closing. A covenants section defines activities that parties to the agreement refrain from performing during this time gap.

Part 6: Closing Conditions

This part will be comprised of conditions that either need to be taken care of or waived before closing occurs. This includes both parties performing their pre-closing covenants and completing all regulatory approvals.

Part 7: Indemnification

This part defines indemnification rights, highlighting the terms subject to which one party would compensate the other party if there is a contract breach. The compensation is paid by the party who breaches the contract. The part also comprises of following :

• The period during which claims against representations and warranties cannot be entertained.

• Indemnification time limits.

• For indemnification, if applicable, use escrow funds.

• Computation of losses for recovery.

Part 8: Termination

This part states the right to terminate the contract, which is available to parties to the agreement. This part includes events that may lead to the termination of the contract.

Part 9: Miscellaneous Provisions

Every agreement will close out with a section that covers general or miscellaneous provisions. These may comprise various aspects few of which are as follows :

• Expenses

• Governing law

• Notice

• Dispute resolution

• Severability

• Counterparts

• Assignment

Conclusion

SPA plays a vital role when there is a stock sale or transfer of ownership. It outlines all aspects related to the transaction of the sale so that there are fewer chances of disputes among parties to agreement. It also outlines the role and responsibilities of parties to the contract. To effectively execute the transfer of ownership or sale of stock, SPA must be drafted carefully, covering all aspects so that no dispute arises and the sale of stock benefits all parties to the agreement.

References

• Upcounsel, Stock Purchase Agreement: Everything You Need to Know (Upcounsel)

• Ironclad, What Is a Stock Purchase Agreement? (Ironcladapp)

• BizCounsel, Stock Purchase Agreements - Everything You Need to Know (bizcounsel)

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