Transaction Academy · Module 08
Stock Purchase Agreement.
A Stock Purchase Agreement is the primary legal agreement used when acquiring ownership of a corporation. Learn how the buyer acquires the corporation itself, what continues after closing, and how risk is allocated in a stock acquisition.
Overview
A Stock Purchase Agreement (SPA) is the primary legal agreement used when acquiring ownership of a corporation. Rather than purchasing selected assets, the buyer acquires the corporation itself by purchasing some or all of its outstanding shares.
Because the corporation continues to exist after closing, it generally retains ownership of its assets, remains party to its contracts, continues employing its workforce, and remains responsible for its existing obligations unless otherwise addressed in the transaction documents.
For this reason, stock acquisitions typically require comprehensive due diligence and careful negotiation of the purchase agreement.
Lesson 1
What Is a Stock Purchase Agreement?
A Stock Purchase Agreement is the definitive contract governing the purchase and sale of shares in a corporation.
Rather than purchasing individual assets, the buyer acquires ownership of the corporation itself.
After closing:
- The shares being sold
- The purchase price
- Closing procedures
- Representations and warranties
- Risk allocation
- Post-closing obligations
The transaction changes ownership—not the legal existence of the company.
Lesson 2
Why Choose a Stock Purchase?
A stock acquisition may be appropriate when maintaining continuity is important.
Examples include businesses with:
- Long-term customer contracts
- Valuable government licenses
- Existing permits
- Established vendor relationships
- Ongoing operations where disruption should be minimized
In some circumstances, acquiring the corporation may be more practical than transferring numerous individual assets. The appropriate structure depends upon the specific facts of the transaction and should be evaluated with legal and tax advisors.
Lesson 3
The Shares Being Purchased
The SPA identifies exactly what ownership interests are being transferred.
Typical provisions address:
- Number of shares
- Class of shares
- Selling shareholders
- Purchase price
- Percentage ownership acquired
- Outstanding options or warrants
- Capitalization of the corporation
If fewer than all outstanding shares are being purchased, the agreement should clearly describe the ownership structure after closing.
Lesson 4
Corporate Governance
Because the buyer acquires the corporation, understanding its governance documents is essential.
Buyers typically review:
- Articles of Incorporation
- Bylaws
- Shareholder Agreements
- Stock Ledger
- Meeting Minutes
- Board Resolutions
- Shareholder Consents
- Organizational Records
These documents help confirm ownership, authority, and compliance with corporate formalities.
Lesson 5
Purchase Price and Consideration
The SPA explains how the buyer will compensate the seller.
Consideration may include:
- Cash at closing
- Seller financing
- Promissory Notes
- Earnout payments
- Equity rollover
- Escrow funds
- Holdbacks
The agreement should also address any purchase price adjustments, if applicable.
Lesson 6
Representations and Warranties
Representations and warranties play a central role in a stock acquisition because the buyer acquires the corporation together with its history, obligations, and potential liabilities.
Seller representations commonly address:
- Ownership of the shares
- Authority to sell
- Organization and good standing
- Financial statements
- Taxes
- Litigation
- Material contracts
- Intellectual property
- Employment matters
- Regulatory compliance
- Environmental matters
Buyer representations commonly include:
- Authority to purchase
- Availability of funds
- Required approvals
These provisions help allocate risk and establish the framework for post-closing indemnification.
Lesson 7
Due Diligence
Stock purchases often require extensive due diligence because the buyer assumes ownership of the corporation as an ongoing legal entity.
Common areas of review include:
- Financial statements
- Tax returns
- Material contracts
- Employment matters
- Intellectual property
- Litigation
- Corporate governance
- Regulatory compliance
- Insurance
- Debt obligations
- Customer relationships
The objective is to identify existing liabilities and evaluate the overall condition of the business before closing.
Lesson 8
Consents and Approvals
Although the corporation itself generally continues unchanged, approvals may still be required before the transaction can close.
Examples include:
- Board approval
- Shareholder approval
- Lender consent
- Government approvals
- Change-of-control provisions in contracts
- Franchise approvals
- Industry-specific regulatory approvals
Failure to obtain required approvals may delay or prevent the closing.
Lesson 9
Indemnification
Because historical liabilities generally remain with the corporation, indemnification provisions are often heavily negotiated.
These provisions may address:
- Breaches of representations and warranties
- Tax liabilities
- Pending litigation
- Regulatory matters
- Environmental claims
- Employee-related claims
- Survival periods
- Monetary caps
- Baskets
- Claims procedures
Indemnification helps allocate responsibility for losses arising from pre-closing events.
Lesson 10
Closing the Transaction
Closing a stock acquisition generally involves transferring ownership of the shares rather than transferring individual assets.
Typical closing deliverables include:
- Stock Purchase Agreement
- Stock Powers
- Share Certificates (if applicable)
- Updated Stock Ledger
- Board Resolutions
- Shareholder Consents
- Officer Certificates
- Secretary's Certificate
- Payoff Letters
- Wire Instructions
- Closing Statement
Following closing, the buyer becomes the owner of the corporation in accordance with the terms of the agreement.
Lesson 11
Stock Purchase vs. Asset Purchase
Although both structures accomplish the acquisition of a business, they differ in several important respects.
| Topic | Asset Purchase | Stock Purchase |
|---|---|---|
| Buyer acquires | Selected assets | Corporate ownership |
| Existing corporation | Seller retains corporation | Buyer acquires corporation |
| Existing liabilities | Generally only assumed liabilities | Corporation generally retains historical liabilities |
| Contracts | May require assignment | Often remain with the corporation, subject to applicable agreements |
| Operational continuity | May require additional transfers | Often more seamless |
| Due diligence | Extensive | Typically even more extensive because the entity continues with its history |
The appropriate structure depends on the legal, tax, commercial, and strategic objectives of the parties.
Key Takeaways
What to remember from this module.
- A Stock Purchase Agreement governs the acquisition of ownership in a corporation.
- The buyer acquires the corporation itself rather than selected assets.
- The corporation generally continues operating after closing with its existing assets, contracts, employees, and obligations.
- Comprehensive due diligence is particularly important because the buyer acquires the corporation's legal history and potential liabilities.
- Carefully negotiated representations, warranties, and indemnification provisions help allocate post-closing risk between the parties.
What's Next
Module 9 — Merger Agreement
Learn how statutory mergers work, when they are commonly used, the legal process for combining two entities, and the unique considerations involved in merger transactions.
Educational Disclaimer
The information contained in this module is provided solely for educational and informational purposes. It is intended to provide a general overview of Stock Purchase Agreements in mergers and acquisitions and does not constitute legal, tax, accounting, investment, or financial advice. Reading this material or using the Transaction Academy does not create an attorney-client relationship with GV LAW PLLC. Every transaction is unique, and buyers and sellers should consult qualified professional advisors regarding their specific circumstances.