Understanding Stock Purchase Agreements

A stock purchase agreement is a contract to transfer ownership of stocks from the seller to the purchaser. The key provisions of a stock purchase agreement have to do with the transaction itself, such as the date of the transaction, the number of stock certificates,

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A stock purchase agreement also contains certain terms and conditions that outline the nature of the contractual agreement. At the close of the transaction, the seller will transfer and deliver all certificates representative of the stocks sold and the purchaser will pay the price specified in the agreement as consideration for the stocks being bought.

The key provisions that make up a stock purchase agreement are:

• Date. The opening recital gives the date of the agreement as well as the name of the parties, the seller and purchaser, who are entering into the agreement.

• Number and price of shares. This provision states the name of the corporation that issued the stock, the number of shares involved in the transaction, and the dollar value of each share of common stock.

• Purchase and sale. At the end of the transaction, the seller conveys ownership of the certificates of stock to the purchaser. All certificates will be endorsed as needed for transfer and the seller will pay any transfer taxes.

• Representations and warranties of the seller. Warrants the corporation as being legally able to issue the stock, and that the corporation is in good standing. This provision also validates that the seller owns the stock and, as such, is able to sell the stock to the purchaser.

• Representations and warranties of seller and purchaser. All parties stipulate that there have been no omissions by the corporation, seller, or purchaser. Everything has been disclosed.

• General provisions. These provisions include the entire agreement clause and a statement that the agreement complies with the governing laws of the location where the contract is being executed.

• Witnesses. This is the section where witnesses sign the document. You must have witnesses for the agreement to be legally binding.

• Amount and payment of purchase price. Sets the exact terms of when the purchaser will pay the consideration to the seller for the purchase of the stocks. This is often a percentage paid upon signing with the remainder paid when the contract is executed.