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What is a Share Purchase Agreement (SPA)?
A Share Purchase Agreement is a legal contract between a buyer and a seller of company shares. This agreement transfers ownership of the corporation’s shares (also known as stock) and outlines the sale terms.
For investors, Share Purchase Agreements are important because they outline the details of a stock deal. For company owners, SPAs are a great way to generate revenue without taking their company public.
A Share Purchase Agreement is also known as a:
- Stock purchase agreement
- Stock purchase contract
- Share sale agreement
How does a Share Purchase Agreement work?
A Share Purchase Agreement transfers ownership of shares from a seller to a buyer. Crucially, this document is used whenever an individual or corporation sells or purchases existing shares in a company.
In this way, a Share Purchase Agreement differs from a Share Subscription Agreement, which is used when new shares are purchased from a corporation. It also differs from a Share Repurchase Agreement, which a corporation uses to repurchase shares from one of its shareholders.
A Share Purchase Agreement outlines the terms and conditions of the sale. It lists the shares held by the shareholder, which helps determine their ownership percentage in the company. This percentage also determines their dividend rights (i.e., the money that is paid to shareholders as a result of the company’s annual profits).
Types of Shares
Shares (or stock) are units of ownership in a company that are divided among shareholders (also called stockholders). In the United States, shares are regulated by several securities laws.
The type of shares purchased using a Share Purchase Agreement determines the rights, dividend yields, and percentage of ownership that the purchaser is entitled to. Typically, there are two types of shares:
- Common shares are the most popular types of shares. With common shares, shareholders own a portion of the company and are entitled to dividends depending on the corporation’s annual profits. Common shares also give shareholders voting rights, which they can use to elect the members of the corporation's board of directors.
- Preferred shares differ from common shares in two fundamental ways. Firstly, shareholders with preferred shares have priority in receiving dividends. Secondly, preferred shareholders typically do not have voting rights.
It is worth noting that the way a corporation's share classes operate may vary depending on the company's corporate structure. If you are unsure about the specifics of each share class, you can consult the Articles of Incorporation and company records for more information.
Representations and warranties
Share Purchase Agreements also acknowledge the representations and warranties of both the purchaser and the seller. Representations and warranties are a part of many different legal contracts. At their heart, representations and warranties are statements or promises of a fact.
Let’s lay it out. By signing the Share Purchase Agreement, the seller promises that:
- They are not breaking any applicable securities laws or regulations when entering this agreement.
- Unless indicated otherwise, the shares they are selling can be re-sold by the purchaser in the future.
- There are no debts, liens, mortgages, or any other financial claims on the shares that would prevent the sale to the purchaser.
- There are no legal or financial circumstances that would prevent this sale from going through.
Similarly, by signing the Share Purchase Agreement, the purchaser promises that:
- They are not breaking any applicable securities laws or regulations when entering this agreement.
- They are not involved in any other agreements that would stop the share purchase.
- They are not involved in any current legal action or lawsuit that would prevent the purchase.
Share Purchase Agreement versus Asset Purchase Agreement
Share Purchase Agreements and Asset Purchase Agreements (also known as Business Purchase Agreements) are the primary ways investors become financially involved in a corporation.
However, these documents have one key difference: an Asset Purchase Agreement is used to sell a company’s individual assets or liabilities. In other words, this document deals with a corporation’s tangible items or intangible resources, such as:
- Equipment
- Inventory
- Real estate
- Goodwill (i.e., a company’s positive reputation)
- Intellectual property (e.g., patents, business methods, etc.)
Benefits of a Share Purchase Agreement
1. Helps mitigate risk
The “representations and warranties” sections of Share Purchase Agreements are crucial to mitigating any financial or legal risks to the agreement.
By signing the document, both the buyer and the seller legally attest to the current financial and legal standing of their respective parties. If any of these facts are false, a Share Purchase Agreement outlines the framework for addressing and dealing with associated risks.
2. Increases clarity
It is always beneficial to have the terms and conditions of a business agreement in writing. By drafting, reviewing, and signing a Share Purchase Agreement, both parties can avoid misunderstandings.
What does a Share Purchase Agreement include?
Share Purchase Agreements typically include:
- Seller and purchaser details, including names and addresses
- Share details, including number and class
- Payment details, including purchase price
- Closing date
- Additional clauses, if necessary