Stock Purchase Agreements
Contract Types
Stock Purchase Agreements
When a buyer acquires a company by purchasing its stock or membership interests, the transaction is documented in a stock purchase agreement. Unlike an asset purchase, the buyer in a stock transaction acquires the entire legal entity — including its history, its contracts, and its liabilities. Understanding what comes with the company is as important as understanding what the company is worth.
What This Contract Is
A stock purchase agreement (SPA) is a contract in which a buyer acquires the equity interests of a target company from its existing owners. In a corporation, this means purchasing shares of stock. In a limited liability company, this means purchasing membership interests. Because the buyer is acquiring the entity itself rather than selected assets, the buyer steps into the shoes of the prior owners — inheriting all of the company's assets, contracts, and liabilities, including those that may not be fully disclosed or even known at the time of closing. This is the fundamental distinction between a stock purchase and an asset purchase, and it is why representations, warranties, and indemnification provisions are so heavily negotiated in stock transactions.
When It's Commonly Used
- •A buyer wants to acquire an entire operating company and preserve its existing contracts, licenses, and relationships.
- •The target company holds licenses, permits, or government contracts that cannot be easily transferred in an asset purchase.
- •The transaction involves a company with a relatively clean liability profile and limited contingent risk.
- •The seller prefers a stock sale for tax reasons — long-term capital gains treatment is generally more favorable than ordinary income.
- •The transaction involves a private equity fund selling a portfolio company.
- •The buyer is acquiring a subsidiary from a parent company.
- •The parties want to avoid the complexity of identifying and transferring individual assets and obtaining third-party consents.
How the Agreement Is Generally Structured
Recitals and Definitions
Identifies the parties, describes the transaction, and defines key terms used throughout the agreement.
Purchase and Sale of Shares
Describes the equity interests being transferred, the purchase price, and any adjustments to the consideration at or after closing.
Representations and Warranties of the Seller
Factual statements about the company — its organization, capitalization, financial condition, contracts, intellectual property, employees, and legal compliance. These are the foundation of post-closing indemnification rights.
Representations and Warranties of the Buyer
Statements by the buyer about its authority to enter the transaction, its financial capacity, and its investment intent.
Covenants
Obligations of the parties between signing and closing, including operating the business in the ordinary course and cooperating on regulatory filings.
Closing Conditions
Conditions that must be satisfied before either party is obligated to close, such as regulatory approvals, third-party consents, and the accuracy of representations.
Indemnification
Allocates post-closing responsibility for losses arising from breaches of representations and pre-closing liabilities. Typically includes caps, baskets, and survival periods.
Post-Closing Obligations
Ongoing obligations after closing, such as earnout arrangements, transition services, non-competition provisions, and tax cooperation.
Disclosure Schedules
Exhibits that qualify or supplement the representations and warranties with specific factual disclosures about the company.
Clauses Commonly Found in This Contract
Representations and Warranties
The seller's representations about the company are the most heavily negotiated part of a stock purchase agreement. They typically cover organization, capitalization, financial statements, absence of undisclosed liabilities, material contracts, intellectual property, employees, and legal compliance.
Indemnification
Provides the buyer with recourse if representations prove inaccurate or if pre-closing liabilities emerge after closing. The scope, cap, basket, and survival period of indemnification obligations are central negotiating points.
Limitation of Liability
Caps the seller's total indemnification exposure, often as a percentage of the purchase price. Fundamental representations such as title and authority typically have higher or uncapped exposure.
Confidentiality
Governs the handling of non-public information about the company exchanged during due diligence and after signing.
Non-Disclosure Agreement
Typically executed at the outset of discussions to protect confidential business information shared during the evaluation process.
Assignment
Addresses whether the transaction triggers change-of-control provisions in the company's material contracts, and whether any consents are required.
Governing Law
Specifies which state's law governs the agreement and where disputes will be resolved.
Entire Agreement
Confirms that the written agreement represents the complete understanding of the parties and supersedes prior negotiations.
What Stewart Law Looks For
- ✓Whether the capitalization representations accurately reflect the company's ownership structure, including any options, warrants, or convertible instruments.
- ✓Whether the financial statement representations are accurate and whether the company's financial condition has materially changed since the most recent statements.
- ✓Whether the representations about undisclosed liabilities are adequate to protect the buyer from pre-closing obligations that do not appear on the balance sheet.
- ✓Whether material contracts are in good standing and whether the transaction triggers any change-of-control provisions.
- ✓Whether intellectual property ownership is clearly established and whether there are any third-party claims or encumbrances.
- ✓Whether employee matters — including compensation, benefits, and any pending claims — are accurately disclosed.
- ✓Whether the indemnification cap, basket, and survival period are appropriate given the size and risk profile of the transaction.
- ✓Whether tax representations are accurate and whether there are any pending audits or unresolved tax liabilities.
- ✓Whether the disclosure schedules are complete and accurate — incomplete schedules are a common source of post-closing disputes.
Areas That May Deserve Closer Attention
- ⚑Representations about undisclosed liabilities that are heavily qualified or that exclude categories of potential claims.
- ⚑Disclosure schedules that are incomplete, vague, or that use broad catch-all language.
- ⚑Change-of-control provisions in material contracts that have not been identified or addressed.
- ⚑Intellectual property that was developed by employees or contractors without proper assignment agreements.
- ⚑Pending or threatened litigation that is not adequately disclosed or reserved for.
- ⚑Tax liabilities that are not reflected in the financial statements or that are subject to ongoing audit.
- ⚑Employee compensation arrangements — including equity plans, deferred compensation, or change-of-control bonuses — that are triggered by the transaction.
- ⚑An indemnification structure that provides the buyer with limited practical recourse, such as a very low cap or a very short survival period.
Party Perspectives
Buyer
- •Wants comprehensive representations about the company's financial condition, liabilities, contracts, and intellectual property.
- •Seeks a meaningful indemnification structure with an adequate cap and survival period.
- •Wants complete and accurate disclosure schedules to understand what it is acquiring.
- •May seek representation and warranty insurance to backstop seller indemnification.
- •Wants restrictions on how the business is operated between signing and closing.
Seller
- •Wants to limit representations to matters within actual knowledge and to qualify them with materiality thresholds.
- •Prefers a higher indemnification basket, lower cap, and shorter survival period.
- •Seeks a clean break at closing with limited post-closing obligations.
- •Prefers stock sale treatment for tax purposes — long-term capital gains rather than ordinary income.
- •May resist earnout provisions that leave a portion of the purchase price subject to post-closing performance.
Related Contract University Terms
When to Have an Attorney Review It
Stock purchase agreements involve significant legal and financial complexity. Because the buyer is acquiring the entire entity — including its history and liabilities — thorough due diligence and careful review of representations and warranties are essential. Attorney review is particularly important when the company has material contracts with change-of-control provisions, significant intellectual property, pending litigation, or complex tax issues. The agreement should be reviewed before signing, not just before closing.
Frequently Asked Questions
What is the main difference between buying stock and buying assets?
In a stock purchase, the buyer acquires the legal entity and inherits all of its assets and liabilities — including unknown or contingent liabilities. In an asset purchase, the buyer selects which assets to acquire and which liabilities to assume. Stock purchases are simpler from a contract-transfer perspective but expose the buyer to more pre-closing risk.
Why do sellers often prefer a stock sale?
Sellers typically prefer stock sales because the proceeds are generally taxed as long-term capital gains rather than ordinary income. A stock sale also provides a cleaner exit — the seller transfers the entire entity and is no longer responsible for its ongoing operations or liabilities, subject to indemnification obligations.
What are disclosure schedules, and why are they important?
Disclosure schedules are exhibits attached to the agreement that qualify or supplement the representations and warranties with specific factual disclosures. For example, a representation that the company has no pending litigation would be qualified by a schedule listing any known claims. Incomplete or inaccurate schedules are a common source of post-closing disputes.
What is a working capital adjustment?
A working capital adjustment is a mechanism that adjusts the purchase price based on the actual working capital of the business at closing compared to a target amount. It is designed to ensure that the buyer receives the business with an agreed level of net current assets and that the seller does not drain the business of cash or other working capital before closing.
What happens to the company's existing contracts in a stock purchase?
Because the buyer is acquiring the entity itself, the company's existing contracts generally remain in place. However, some contracts contain change-of-control provisions that are triggered when ownership of the company changes hands. These provisions may require the counterparty's consent or may give the counterparty the right to terminate the contract. Identifying and addressing these provisions is an important part of pre-closing due diligence.
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