A common way to buy another company is to simply become a majority or total shareholder through a stock purchase agreement. In M&A transactions, stock purchase agreements are a complex, yet much-used tool to allow companies to acquire other companies. If you are considering any merger or acquisition, especially through a notoriously complex contract such as a stock purchase agreement, it is important to speak with an M&A lawyer.
Defining Stock Purchase Agreements
A stock purchase agreement (SPA) is a common M&A contract used to take control of another company by buying all or a majority of another company’s shares. The legal entity of the company remains intact, as do any contracts, assets, partnerships, supply agreements, and major elements of the business. Control simply changes over to the buyer. A SPA specifies how many shares will be purchased and (in cases where not all shares are transferred in the sale) what kind of control the buyer gains after the transaction is complete.
Key Provisions of SPAs
A stock purchase agreement is in many ways similar to other contracts the complete mergers and acquisitions or purchases, but there are some distinctions. The following are some of the key terms and provisions found in SPAs.
- Execution. These provisions detail how the transfer of shares will take place and the number of shares being transferred, including any rights that come with them.
- Assumed Liabilities. Under these provisions, the buyer establishes which liabilities will be assumed through the purchase. In a SPA, this is usually a very long, detailed section, as risk is a major factor in the transaction that must be allocated and established. In some cases, the buyer will not take on certain liabilities, making them instead something that the seller must deal with before the transaction can be completed.
- Purchase Price. The stock purchase price must be specified, as well as any price adjustments, escrow requirements or other factors that could change the purchase price.
- Representations and Warranties. All representations and warranties are a vital part of a SPA. This is how assurances as to the company's state and performance are made. Generally, these will address the accuracy of financial statements, taxes, existence and state of significant contracts and physical and material property, potential legal claims or regulatory liabilities, sufficiency of intangible assets, such as intellectual property, accounts receivable, and employee contracts and benefits.
- Access and Investigation Covenant. A major part of any SPA is due diligence. The access and investigation covenant allows the buyer a chance to carry this out before closing—and terminate the transaction if major undisclosed liabilities or discrepancies in descriptions of assets are discovered.
- MAC Clause. A material adverse change clause allows both parties terminate a transaction in the event of certain, specified types of major adverse changes to the state of the company before closing.
- Closing Conditions. Usually, there are conditions that must be satisfied or waived before the SPA can be closed. This section details exactly what they are.
- Indemnification. These provisions allow the buyer to be compensated by the seller (and vice versa) for any misrepresentations or breaches.
- Termination. These describe the situations in which a seller or buyer has the right to terminate the deal before a designated drop-dead date (after which the deal can no longer be terminated).
- Break-Up Fees. In the event that a party decides to back out of the deal, they are usually required to pay the other party break-up fees as a penalty. This is intended to commit both parties.
Stock Purchase Agreement vs. Asset Purchase Agreement
Another common way to acquire another company is through an asset purchase agreement (APA). Deciding which option is better for your company will depend on many factors. The following are the major differences in how stock purchase agreements vs. asset purchase agreements work in M&A transactions:
- Logistics. The basic structure of SPAs and APAs differs greatly. A SPA transfers full ownership of the company through a purchase of stock. An APA transfers operations of the company through purchases of major assets, including equipment, property, leaseholds, licenses, client lists, trade secrets, trade names, and inventory. Usually such deals include no cash and no debt.
- Liabilities. A SPA inherently transfers more liabilities of the company and risk, because the legal entity that acquired such liabilities remains intact. An APA can exclude such liabilities, leaving out an unfavorable contract or avoiding a pending lawsuit.
- Taxes. SPAs generally lead to higher taxes for the buyer in the long run, while the seller can take advantage of the lower capital gains tax rate. In an APA, buyers can "step-up" the company's depreciable basis in its assets, thereby getting a beneficial tax position. The seller, on the other hand, will pay ordinary taxes (not capital gains taxes) on proceeds related to tangible assets sold for a higher overall tax burden.
- Transfers. In a SPA, nothing needs to be transferred over. All contracts, titles, permits, leases, and other elements of the company remain in place, since the legal entity and its ties remain intact. Only control is transferred over to the buyer. In an APA, however, all assets being purchased must be transferred. This can cause legal issues, especially in cases where issues of assignability, legal ownership, and third-party consents come into play.
You can download a free template of a Stock Purchase Agreement from Priori's Document & Form Learning Center.
When is a stock purchase agreement more desirable than an asset purchase agreement?
It depends. Generally, buyers prefer asset purchase agreements, while sellers prefer stock purchase agreements, but the specific circumstances of a company can change this calculation. If you are not sure which will be preferable for your acquisition, it may help to speak with an M&A lawyer.