Stock Purchase Agreements

Because of the inherent risk of fraudulent activity, the sale of stock is a highly regulated transaction by both state and federal authorities. Unfortunately, many corporate shareholders erroneously believe that privately held corporations do not have to worry about securities regulations because of the limited number of people involved and the relatively limited share worth. They often sell shares of stock either via oral contracts or hastily thrown together written agreements without consulting a corporate attorney. While it is true that smaller privately held corporations benefit from a number of exemptions to securities registrations, the directors, officers and shareholders of these corporations must still comply with numerous state and federal regulations when it comes to selling shares of stock. In fact, it can be argued that in the smaller more intimate setting of a closely held private corporation, the risk of fraudulent activity is particularly troubling. For more on exemptions to registration requirements, see “Exemptions to Registering Federal Securities with the SEC“. Given the inherent risk and associated governmental requirements, it is important that corporate officers consult with an experienced corporate attorney before issuing shares of stock.

the-other-one-1241639.jpgA well drafted stock purchase agreement not only protects both the seller and purchaser of stock, it ensures that the corporation is in compliance with securities regulations. It should evidence a transparent transaction. Full disclosure (offering complete access to corporate transactional and financial records) is the key to complying with securities regulations. The idea of course is to ensure that the purchaser is fully informed as to the risk associated with the investment. The stock purchase agreement will also set forth the price per share, the number of shares, whose shares are being sold, the class of shares being sold, the effective date of the transfer and other terms and conditions governing the sale. The stock purchase agreement should clearly define each party’s rights and obligations going forward.

The key provisions in a Stock Purchase Agreement include: definitions (defining key terms in the agreement); the number, class and price of shares; the identity of the seller (whether the corporation selling existing stock or issuing new stock or a specific shareholder or shareholders); payment terms; representations and warranties; terms relating to the actual transfer of stock (closing date, transfer of certificates and transfer tax issues); indemnification (for breach of the representations and warranties) and other general contract provisions.  
Representations and warranties are particularly important in any Stock Purchase Agreement. Sellers warrant that the corporation or shareholder is legally able to issue or sell stock and that the corporation is in good standing.  The seller and purchaser further warrant that they have each fully disclosed their respective positions and have not omitted any material information to the transaction.  Indemnification clauses in turn add teeth to the parties’ representations and warranties.  Stock purchase provisions are even more complex when the stock purchase is for a controlling interest in a corporation or for 100% of a corporation’s stock.  
A complete analysis of all key terms in a stock purchase agreement of any type is beyond the scope of this article.  Whether you are a seller or purchaser, it is best to consult with an experienced San Diego corporate attorney before finalizing the sale of any stock to ensure that you are protected and the corporation complies with state and federal securities regulations.
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