Last Updated on February 20, 2023 by lukesguide
During the early negotiations of an online business sale, there is sometimes confusion about the difference between an asset purchase and a stock (or company) purchase.
Much of the confusion arises when the parties are trying to work out whether they should be using an Asset Purchase Agreement or a Stock Purchase Agreement to complete the transaction.
You will come across a Stock Purchase Agreement if you are considering buying or selling the stock (or shares) of a company that operates an online business (rather than the assets).
Stock Purchase Agreements come in all shapes and sizes but after reading this article, you will have a good understanding of:
- What Stock Purchase Agreements are.
- When you would use a Stock Purchase Agreement.
- What the difference is between an asset purchase and a stock purchase.
- What terms should be included in a Stock Purchase Agreement.
- What the difference is between a Stockholders’ Agreement and a Stock Purchase Agreement.
- What happens to employees in a Stock Purchase Agreement.
A Stock Purchase Agreement is a legally binding contract between the seller(s) of a company (usually the common stockholders) and a buyer, that sets out the key terms and conditions under which the sale and purchase of the company stock will occur.
Under a Stock Purchase Agreement, the parties can agree to buy any number of company stocks or securities in the company. That is, it is possible to buy all of the stock in the company (i.e. 100% interest) or only a select number of common stock (i.e. this can be any percentage you choose).
For a seller, the consideration they receive and the transfer of title and risk to the buyer are the key areas of focus under a Stock Purchase Agreement. The Stock Purchase Agreement should include clear mechanisms for the timely payment of the purchase price and a clear line in the sand for when the seller is no longer liable for any claims made against the company.
For the buyer of the company stock under a Stock Purchase Agreement, the key thing they will want to achieve is obtaining ‘good title’ to the stock. That is, the stock that they purchase must be free of any encumbrances, liens, charges, or other such claims by a third party (e.g. a bank) over that stock.
Stock Purchase Agreements may also be known as a:
- Stock, Share, or Securities Transfer Agreement
- Stock, Share, or Securities Sale Agreement
A well-drafted Stock Purchase Agreement should include protections for buyers that help mitigate the risk of any misrepresentations by the seller about the company or stock (i.e. undisclosed liabilities of the company or encumbrances over the stock). A good lawyer or attorney from a reputable online law firm can help you get this right.
A Stock Purchase Agreement can be used by a buyer looking to purchase and a seller looking to sell, the stock in a company.
The stock being purchased under a Stock Purchase Agreement is the existing stock in the company and is bought from the company’s current stockholder(s).
The purchase of existing stock under a Stock Purchase Agreement should be distinguished from a Stock Subscription Agreement.
Under a Stock Subscription Agreement, an investor is entering into an agreement with the company itself to purchase newly issued stock in the company.
Whether you are selling stock in a company or purchasing it, Stock Purchase Agreements provide protections for both buyers and sellers.
The stakes are high for both buyers and sellers in any transaction involving stock so it is critical that you obtain professional advice from legal counsel before signing anything.
An asset purchase involves the sale and purchase of the assets of a business (i.e. physical assets such as plant and equipment, inventory, hardware, and intangible assets such as intellectual property, goodwill, etc). Whereas a stock purchase involves the sale and purchase of the stock in the company that holds the assets of the business.
The terms to be included in a Stock Purchase Agreement will depend on what is agreed between the parties during the initial negotiations. This is often documented in a Memorandum of Understanding (also known as a terms sheet or heads of agreement).
The key elements of a Stock Purchase Agreement include:
- sale and purchase clause;
- conditions precedent;
- pre-completion obligations;
- completion obligations;
- post-completion obligations;
- warranties and representations;
- confidentiality and announcements;
- taxes and expenses; and
We provide more detail on each of the key elements below.
The sale and purchase clause is the operative provision of the Stock Purchase Agreement.
This is where the seller agrees to sell, and the buyer agrees to purchase the stock (free from any encumbrances) for the purchase price on the completion date.
The sale and purchase clause will usually include other information such as:
- details relating to the purchase price (i.e. the upfront amount payable, how and when it is to be paid, and whether there are any deferred amounts or an earn-out payable); and
- when title and risk to the stock (and any rights attached to the stock) pass from the seller to the buyer.
The sale and transfer of stock from one person to another cannot always occur immediately. This is because there are certain events that must occur before the stock can be transferred.
For this reason, there is often a period of time between the signing of a Stock Purchase Agreement and the completion of the transaction.
To ensure that these events occur after signing and before completion of the transaction, a Stock Purchase Agreement will often include conditions precedent.
Every conditions precedent will be different but here are some examples of common conditions precedent:
- obtaining consent or approvals from a third party to a change of ownership and control in the stock (e.g. from a bank, customer, supplier, or any other third party the company has contracts with);
- obtaining regulatory approval to complete the transaction;
- certain internal restructuring of the company to occur before the sale completes;
- The buyer receives confirmation from the seller that no material adverse change to the company or business has occurred (known as a MAC clause). A MAC event may include anything that would materially and adversely affect the value of the company, such as:
- the loss of a key customer or client;
- resignation of a key executive or employee; or
- key licenses, approvals, or authorities required to operate the business being revoked.
In addition to any conditions precedent, a Stock Purchase Agreement will usually include certain obligations that the parties must meet prior to completion.
For the seller, this will usually include:
- continuing to carry on the business in a way that is consistent with past practice;
- keeping the buyer informed of any issues involving the operation of the business;
- obligation on the seller for it to procure that the company does not:
- alter its constitution;
- declare or pay a dividend;
- issue additional stock;
- terminate any material contracts;
- acquire or dispose of any assets; and
- amend the terms of any key client or customer engagements.
For the buyer, this will usually include:
- obligation to not interfere with the company or business;
- maintain at all times any confidential information provided to it during the due diligence stage and comply with any covenants; and
- ensure reasonable notice is provided to the seller in circumstances where the buyer requires access to information, records, or premises of the company during the period prior to completion.
The completion of a stock purchase transaction can be complicated. This is why the parties will usually prepare a ‘completion checklist’ to help the buyer and seller understand what their obligations are at completion.
For completion to occur, each party will need to take certain actions. These actions will vary from transaction to transaction but will typically include:
For the buyer:
- pay the purchase price;
- execute and deliver any documents required under the agreement; and
- pay any tax or expenses it is responsible for.
For the seller:
- deliver to the buyer any instruments of transfer required to effect the sale;
- deliver to the buyer any certificates of registration and update any company documents to reflect the new ownership;
- pay any tax or expenses it is responsible for;
- cause the resignation of current directors or officeholders and facilitate the appointment of new officeholders; and
- deliver to the buyer any business records or other information required by the buyer to operate the company.
Even after the closing occurs, the parties may still have obligations under the stock purchase contract and any other related document.
This may include:
- the purchaser continuing to employ the staff of the company;
- the purchaser changing the name of the company or business;
- the purchaser providing access to records of the business (upon receiving reasonable notice) that the seller may require to satisfy any compliance obligations;
- the seller provides the purchaser with the completion accounts so that any adjustments to the purchase price can be made; and
- the purchaser paying any adjustment to the purchase price and/or deferred consideration or earn-out owed to the seller.
Each party will provide to the other certain representations and warranties.
For the seller, this will usually include representations and warranties that:
- the shareholders are the legal owners of the shares and the shareholders have the right to sell the shares;
- all relevant corporate and tax laws have been complied with;
- there are no encumbrances over the shares;
- Any accounts or financial statements provided to the buyer during the due diligence phase are accurate and up-to-date;
- the company’s assets are owned by the corporation and are in good working order;
- Any due diligence materials provided are not misleading in any way.
Where the seller breaches any of the above warranties, it will provide indemnification to the buyer against any breach. This indemnification allows the buyer to make a claim against the seller in the event of a breach.
The buyer will usually need to provide the following representations and warranties:
- it has the power and authority to buy the corporation from the seller;
- it is not under administration or liquidation; and
- it has the funds available to close the deal (including evidence that the funds are held in escrow).
Both parties will be required to keep each other’s confidential information safe, secure and confidential. In addition, there is usually an approval process that needs to be followed before either party discusses the transaction publicly or makes any public announcement about the transaction.
The confidentiality obligations may be included in the Stock Purchase Agreement or may be included in a separate non-disclosure agreement (i.e. NDA).
If a party breaches a term or condition of the Stock Purchase Agreement, the affected party may have the right to terminate the contract.
There may be a fee payable by the party who breaches the contract – this is call a contract break fee.
It is often the case that a non-compete clause is included in the contract. This type of clause prevents the seller from starting another business that competes with the company being sold and stops the seller from taking employees from the company.
The main purpose of the non-compete agreement is to protect the incoming buyer’s investment.
These restraints are sometimes included in stock purchase contracts or sometimes included in a separate Non-Compete Deed.
A Stockholders’ Agreement is different from a Stock Purchase Agreement because a Stockholders’ Agreement is a binding contract between the holders of common stock (i.e. the stockholders) and the company. Whereas, a Stock Purchase Agreement is a binding agreement between the sellers of stock (i.e. the stockholders) and a purchaser of that stock.
The purpose of a Stockholders’ Agreement is to:
- govern the relationship between the stockholders of the company;
- specify who controls the company and what voting rights each Stockholder will have;
- set out how the company will be owned and managed;
- include mechanisms to protect stockholders’ rights; and
- specify how stockholders can exit the company, including any first right of refusal rights applicable to other stockholders’.
In most cases, there is no impact on the employees of a company that is being sold via a Stock Purchase Agreement. Since the company employs these individuals and there is no change to the company itself as a result of the sale (other than the ownership), any employment agreements in place before the sale will still be valid and enforceable.
This means that the company will still have employees to continue with the business and the employees will still have a job after the company has been sold.
On the other hand, under a business or asset sale, employees are treated a bit differently. This is because the employees were most likely employed by the seller of the business and once the business changes hands, new employment agreements with the incoming buyer will need to be entered into. In many cases, a seller will include a condition of sale requiring the incoming purchaser to offer employment to any existing employees on the same terms as their previous role.
By now you should have a good understanding of how Stock Purchase Agreements differ from an Asset Purchase Agreement and now be able to identify which one would be required for the sale of your online business.
Given their complex nature, it is crucial that you have an experienced lawyer or attorney help you prepare your sale document so that it includes all of the required clauses to protect your interests (your broker may be able to introduce you to a good lawyer).
Have you sold your company via a Stock Purchase Agreement? Was the sale process an overall positive experience? Let us know in the comments.