7 Step Checklist for Structuring a Stock Purchase Agreement

A stock purchase agreement is more than just an agreement; it represents the framework of the deal, indicating ownership and liability involved in the process. The buyer doesn't only buy any assets but buys the legal entity together with all its liabilities.

Why Every Stock Purchase Agreement Should Have a Checklist-Based Approach

A stock purchase agreement becomes the key control tool for lawyers as they turn intention into obligation while providing protection against risks of an unexpected nature. If the transaction does not have a systematic basis, even a very well-negotiated deal may collapse once closed.

Therefore, the checklist-based approach is crucial for a deal. Every clause should perform a certain function, eliminate doubts, and create clear expectations. The following seven elements become the cornerstone of a well-structured stock purchase agreement.

Key Takeaways

• A stock purchase agreement passes ownership, along with liabilities, whether they are known or not.
• Structures of purchase prices frequently involve conditions for adjustments to be made in case of certain financial situations at closing.
• Representations and warranties offer buyers protection against any potential hidden risks or incorrect statements.
• Due diligence reveals risks prior to signing the agreement.
• Closing conditions serve as protections prior to closing the transaction.
• Indemnifications establish responsibilities in case of problems occurring after the closing of a deal.
• Dispute resolution terms set out how parties will manage disputes.

Identification of the Parties and the Shares

It always begins with the identification of the parties in each stock purchase agreement. Even a simple thing such as the identification of parties to an agreement could lead to problems in the future.

This involves making clear who the buyer and seller are, in terms of their full names. The identification of the target company would also be required.

In addition to identifying the parties, the agreement should provide details about the stock being purchased. This entails providing detailed information concerning the quantity of the shares to be sold, the class of stocks involved, and their accompanying rights.

Common or preferred classes of stocks have various implications on voting powers and financial gains.

This forms the basis for ownership transfers. Failure to get this part right could cause a great deal of trouble for the buyers.

Purchase Price and Payment Structure

As expected, the key aspect of any stock purchase agreement revolves around its payment terms. Despite looking like a figure, the truth is far from that.

Most of all purchases require an adjustment of the purchase price depending on the current financial standing of the company at the time of acquisition. This helps the purchaser to pay a reasonable price for the company in light of its true financial status.

The Locked Box and Net Asset Value models are some of the methods that are frequently used by businesses in this regard. Payments can also be made using different schemes such as pure cash, shares, and earn-outs.

However, such measures do align interests, but also complicate things. Improperly drafted pricing provisions can result in disagreements even after years of closing a deal.

Well-drafted pricing provision creates openness and ensures fairness. Such a provision will protect both parties, while at the same time aligning their interests during the entire transaction.

Representations and Warranties

Representations and warranties are critical provisions in any stock purchase agreement. These provisions constitute an important way of risk allocation.

Representations are factual statements that describe the condition of a business at a particular point in time. Usually, representations concern such aspects as accounting practices, tax issues, and legality of actions by all concerned parties.

Thus, sellers usually make such statements that there are no claims pending from third parties and no undisclosed debts. Sellers can state that they possess rights to intellectual property assets and do not face any obstacles.

These statements are more than just informative. In case one representation turns out to be false, it may result in certain actions on the part of the buyer.

At the same time, sellers must qualify their representations to minimize risks of unwarranted liabilities. Finding the optimal solution for such purposes is crucial.

Covenants: "Dos" and "Don'ts"

Covenants outline the terms of conduct by both parties prior to and after the closing. They help maintain the stability of the business operations throughout the process.

Within the period from the signing to the closing of the deal, the seller is usually obliged to operate the business as usual. Thus, the seller must not undertake actions affecting business value negatively.

As an example, restrictions are imposed upon the seller to refrain from acquiring more debts or selling certain assets without permission of the buyer.

After closing, non-compete and non-solicitation clauses are normally introduced as means to avoid undermining the value of the business through the seller's conduct.

Covenants play a key role in ensuring continuity of business operations. In this regard, covenants cover the period until expectations are met through actual performance of obligations.

Due Diligence Period

The due diligence process is all about testing of assumptions. This stage becomes crucial in any stock purchase agreement.

In this phase, the potential buyer reviews every facet of the company, such as its finances, legal matters, employment policies, and regulatory compliance.

The purpose of this review is to uncover any risks that are hidden from the naked eye. Examples of risks include disputes, compliance issues, or inefficiencies.

In many cases, due diligence uncovers weaknesses, whether in terms of documentation or lack of monitoring and evaluation. These may affect the valuation or even the completion of the transaction.

Through due diligence, there will be fewer uncertainties during the transaction process. The buyer will have better grounds on which to base their decision and negotiate from.

Closing Conditions

A stock purchase agreement can only be concluded after all closing conditions are met. They help ensure that both parties live up to their respective responsibilities in making the transaction possible.

Some common closing conditions include regulatory approval and third-party consents. They might prove necessary when it comes to contract transfers.

The transfer of stock certificates and other legal documents is also mandatory.

The absence of a material adverse change is also critical since it is a condition precedent. In case there are any changes that significantly affect the business before closing, the purchaser can withdraw from the deal.

This enables an ordered approach to ensuring that all the conditions necessary for a successful acquisition are fulfilled.

Indemnities and Dispute Resolution

It is impossible to draft a stock purchase agreement in such a way that all risks would be fully mitigated. Indemnities become necessary. An indemnity provision deals with the issue of who should pay for any losses incurred due to breaches.

A good way of managing risk is including both a basket and a cap. A basket is a floor on claims, whereas a cap is a ceiling on losses.

In other words, if the issue is small enough, the problem gets solved. Moreover, this makes the scope of liability very clear. However, there must also be ways of handling disputes in the best possible manner.

Together, these clauses act as a safety net, which ensures that there will be a way out for both parties should difficulties occur.

Contract Lifecycle Management with Microsoft 365

Preparing a strong stock purchase agreement does not end with drafting it. Instead, managing the lifecycle becomes an asset creation process.

For those lawyers who already work with Microsoft 365, contract management becomes easier and more available than one might think. For example, SharePoint may be utilized to create a central location for due diligence information, Teams may help with collaborative negotiating and monitoring the process, and Excel may be used for adjusting pricing models and other aspects.

Dock 365, an advanced Contract Lifecycle Management platform based on Microsoft 365, takes this ability even further. It allows users to have all of their contracts managed, tracked, and ensured to be compliant.

With Dock 365, it will become possible to go above and beyond just handling administrative processes by concentrating more on the value-added side of managing agreements. This stock purchase agreement will turn into an asset rather than just a contract.

Now that you know about the benefits of managing agreements using CLM, the next step is to schedule a demo with Dock 365.

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