Understanding The Stock Purchase Agreement
The Stock Purchase Agreement is generally used in business transactions where a buyer is purchasing a controlling interest in a company directly from the shareholders, rather than buying the company’s assets. In such circumstances, the buyer effectively steps into the shoes of the existing shareholders, assuming both the assets and the liabilities of the company. This is different from an Asset Purchase Agreement (APA), where the buyer has the flexibility to pick and choose the assets and liabilities they want to assume.
Typical provisions found in an stock purchase agreement include the agreement’s structure, such as the number of shares to be purchased, the purchase price, and the payment terms. It also contains comprehensive representations and warranties from both the buyer and the seller, covering a broad range of issues including the company’s financial condition, compliance with laws, and details of its operations and assets.
Another common provision in stock purchase agreements is the indemnification clause, which sets out the mechanism for one party to compensate the other in the event of financial loss arising from breaches of the agreement, including the representations and warranties. Furthermore, closing conditions stipulate the conditions that must be met for the transaction to be completed. These can include regulatory approvals, consents from third parties, and certain financial or operational conditions being met.
The covenants section outlines the actions that each party agrees to undertake between signing and closing the transaction, such as the seller continuing to operate the business in the ordinary course. Finally, termination provisions outline the circumstances under which either party can walk away from the agreement prior to closing.
In essence, the stock purchase agreement serves as a comprehensive roadmap for the transaction, setting out the rights, responsibilities, and obligations of each party, and how various risks and issues should be addressed and resolved.
Which Party Develops the SPA & Which Party Reviews the SPA?
In a merger and acquisition (M&A) transaction involving a Stock Purchase Agreement (SPA), the initial draft of the business agreement is usually prepared by the buyer’s legal team. This is largely because the buyer is the party initiating the acquisition and therefore has a vested interest in drafting the agreement to best suit their interests. The buyer’s team would typically put forth an initial draft that reflects their preferred terms, conditions, and the structure of the agreement.
However, the initial draft is merely the starting point of the negotiation process and does not imply that the buyer controls all the terms. In fact, the SPA is often a subject of extensive negotiation between the buyer and the seller, with both parties seeking to modify and refine the agreement to best protect their respective interests.
The role of reviewing and proposing revisions to the stock purchase agreement generally falls on the seller’s legal team. This involves a meticulous examination of the draft SPA to ensure it aligns with the seller’s interests and expectations, while also offering appropriate protection against potential risks and liabilities. The seller’s team would typically scrutinize every aspect of the agreement, ranging from the purchase price and payment terms to representations, warranties, indemnification clauses, and conditions to closing, and propose modifications to better protect the seller’s interests.
In essence, the drafting and negotiation of an stock purchase agreement is a collaborative process involving numerous iterations until both parties reach a mutually satisfactory agreement.
Typical Contract Provisions Included In The Stock Purchase Agreement
Several provisions within a Stock Purchase Agreement (SPA) often serve as focal points for intense negotiations between buyers and sellers during merger and acquisition (M&A) transactions. Among these, the purchase price and the payment terms are perhaps the most crucial. Buyers and sellers must agree not only on the total value of the shares being purchased but also on how and when the payment will be made.
Representations and warranties are also typically a source of considerable debate. These are statements made by both parties about various aspects of the company, ranging from its financial condition to its compliance with laws, and even details about its operations and assets. Buyers usually want expansive representations to mitigate risks, while sellers aim to limit these to decrease potential post-closing liabilities.
The indemnification provision, which stipulates how one party will compensate the other for financial losses resulting from breaches of the agreement (including representations and warranties), is another hotly contested area. While buyers generally seek broad indemnification provisions to guard against potential losses, sellers often strive to limit their indemnification obligations.
The conditions precedent to closing can also be contentious. These conditions, which must be fulfilled before the deal can close, can include items such as obtaining regulatory approvals, achieving certain financial metrics, or ensuring that no material adverse change has occurred in the business. Each party will want these conditions defined to provide them the greatest amount of protection and flexibility.
Lastly, post-closing adjustments and escrow arrangements often require careful negotiation. Post-closing adjustments may be required to account for changes in the business between signing and closing, while escrow arrangements can be used to provide a source of recovery for the buyer if the seller breaches the agreement.
Contact Our Chicago Business Attorneys
If you’re a business owner contemplating a stock purchase transaction, the complexities involved can be overwhelming. Whether you’re a buyer seeking a seamless acquisition process or a seller aiming to optimize your transaction outcome, we’re committed to providing personalized legal assistance that caters to your unique needs. We encourage you to reach out to us to discuss your stock purchase matter. Our Chicago business attorneys make every effort to respond to all inquires within one business day. Please feel free to give us a call or complete our online contact form.