A stock purchase agreement (SPA) is a definitive agreement finalizing all terms and conditions related to the sale and purchase of a company’s shares. Whereas an asset purchase agreement deals with a company’s assets, a SPA deals with shares.
Elements of A Stock Purchase Agreement Include:
- Interpretation section which lists the definitions for all major terms used in the overall body of the agreement;
- Terms of purchase and sale of the stock: lists the purchase price, purchase price adjustments, purchase price allocation (for tax purposes between buyer and seller), and mechanisms for dispute resolution
- Representations and warranties of parties: lists all of the statements that buyer and seller are representing and signing off to be true
- Employee matters: provides for employee benefits and provides terms on how accrued bonuses are to be handled once the transaction is finalized
- Indemnifications: Provides details of all indemnifications for costs that may arise once the transaction is finalized as a result of pre-existing conditions
- Tax matters: specification of special tax treatment entitles to the seller or buyer
Sellers involved in SPAs should pay particular attention to the Purchase and sale section and the Representations and Warranties section of the SPA. The Purchase and Sale section should match the terms stipulated on the letter of intent. Any differences likely resulted from the buyer’s due diligence, and should have been formally negotiated prior to the completion of the SPA. The Representations and Warranties section needs to be fully scrutinized as well to make sure there is no statement that is believed to be untrue. There is usually potential for legal action if it found that the representations and made were untrue. Even post-transaction, the purchase price may be adjusted and the buyer may be reimbursed for any misrepresentations.