Key Provisions of a Stock Purchase Agreement
When one entity sets about to take control of another business through the acquisition of stock, the transaction is governed by what is called a Stock Purchase Agreement (SPA), sometimes called a Securities Purchase Agreement or simply Stock Purchase.
These documents contain vital sale information, such as the number of shares, price, and closing date, though they are generally more involved and complex than that. The SPA also must take into account terms and conditions in sections of the document – often referred to as “Articles” – to protect both buyer and seller.
If you or your business is involved in an M&A (merger and acquisition) as either buyer or seller, and you’re located in or around Overland Park, Kansas, contact Coppaken Law Firm. Our team works with and advises closely-held family businesses as well as Fortune 500 companies on business legal and compliance issues.
In addition to Overland Park, we also proudly serve clients in Kansas City, Missouri, and throughout Jackson County and Johnson County.
Understanding Stock Purchase Agreements
Stock Purchase Agreements (SPAs) are contracts that transfer ownership of stock from the seller to the purchaser. SPAs are used in M&A activity. The basic terms of the deal are the seller’s and buyer’s legal names, the number of stocks being purchased and at what price, and the closing date. An SPA – much like a contract – should spell out all expectations, warranties, legal stipulations, and so on.
A typical SPA begins with a section called Preamble and Recitals. The Preamble spells forth the parties involved and also the date of the agreement. Recitals offer further details meant for outside parties to better understand what the contract is all about.
After the Preamble and Recitals, a typical SPA is broken down into sections called Articles, generally comprising:
Definitions: The definitions in this section are about legal terms used throughout the SPA. The section may define words and phrases such as “Acquired Shares,” “Encumbrance,” “Seller’s Knowledge,” and “Material Adverse Effect.”
The Transaction: This is the part that spells out the number of shares, price, and closing date. It also deals with other documents that must be transferred upon the close of the sale, such as employment agreements, escrow agreements, and other binding contracts.
Seller Representations and Warranties: Representations and warranties are statements of facts about the company being sold, such as assets and liabilities, properties held, financial statements, intellectual property, and much more. The section should provide a full disclosure of the company, its operations, and any outstanding issues that must be dealt with.
Buyer Representation and Warranties: If the buyer is paying in cash, this section will be more limited in scope. If the purchase is going to be done by issuing shares, in whole or in part, then the buyer must make similar warranties as the seller is required to do. The seller is also required to inform the buyer of any material development that could impact the transaction or give the buyer reason to change terms or even opt out.
Covenants: These are promises made by both buyer and seller to do or not to do certain things before the sale closes. For instance, the seller will usually be required to continue to operate the business in the same fashion as before the sale was agreed upon, so as not to dilute its value or create problems for the seller. The buyer should be provided an “Access and Investigation” covenant, allowing for access to all books and records. This opens the way for the buyer to carry out due diligence.
Closing Conditions: Before the deal closes, each party must be satisfied that the other has lived up to their covenants, warranties, and representations. The closing may also hinge on governmental regulatory review and approval.
Indemnification: This section provides for compensation for either buyer or seller for any losses created by the other party’s breach of their representations, warranties, and covenants. This section may also establish procedures for seeking compensation for a breach, along with any agreed-upon limits or caps.
Termination: In addition to indemnification, the parties have a right to terminate the transaction if conditions are violated. For instance, if the target company suffers a material adverse effect and its earnings turn south, the buyer would have the right to terminate the transaction.
General Provisions: This is a catchall that might cover dispute resolutions, expenses, governing laws, and more.
An SPA is not limited to these sections. Depending on the nature of the businesses involved, additional Articles may cover taxes, employment and labor issues, and environmental matters, among others.
How Skilled Business Advocacy Can Help
As you can see from the overview above, an SPA is not just a simple downloadable form that you can take home and fill out. A Stock Purchase Agreement is going to need the guiding hands of an attorney experienced and knowledgeable in such matters. Both parties want to be fully protected, and the provisions in each article are vital not only to provide peace of mind but also to make sure the transaction proceeds as envisioned.
If you’re considering or entering into a business sale or purchase involving the transfer of stock in or around Overland Park, Kansas, or Kansas City, Missouri, contact Coppaken Law Firm. Using our experience helping family businesses and Fortune 500 companies, we will guide and advise you on the Stock Purchase Agreement and help you craft one that reflects your best interests, whether as a buyer or seller.