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Stock Purchase Agreement (SPA)

Definition - What does Stock Purchase Agreement (SPA) mean?

The Stock Purchase Agreement ("SPA") is the definitive agreement that finalizes all terms and conditions related to the purchase and sale of the shares of a company. It is different from an Asset Purchase Agreement ("APA") where the assets (not the shares) of a company are being bought/sold.

The stock purchase agreement covers the following sections:

  • Interpretation - provides the definitions for all the major terms used in the overall body of the agreement;
  • Purchase and sale of stock - itemizes the purchase price, any purchase price adjustments, the purchase price allocation for tax purposes between the seller and the buyer, and dispute resolution mechanisms;
  • Representations and warranties of the seller and buyer - provides all the statements that the seller and buyer are signing off to be true;
  • Matters related to employees - provides terms on how employee benefits and any accrued bonuses are to be handled post transaction;
  • Indemnifications - provides details on all indemnifications to be provided by either the seller or buyer to each other for any costs that may arise post transaction resulting from conditions that existed prior to the deal closing;
  • and Tax matters - specifies any special tax treatment that either the seller or the buyer may be entitled to.

Divestopedia explains Stock Purchase Agreement (SPA)

While the entire SPA should be reviewed, a seller should focus specifically on two sections: the purchase and sale section and the representations and warranties.

The purchase/sale section should match exactly to the the terms stipulated on the letter of intent (LOI). If there are any differences, they likely resulted from the buyer due diligence, and should have been formally negotiated prior to the completion of the SPA.

The representations and warranties need to be fully scrutinized to ensure there is no statement that is believed to be untrue. There is usually recourse and potential legal action if it is later found out that the representations and warranties provided were untrue. Even post-transaction, this may result in a purchase price adjustment where the seller is required by the legal courts to reimburse the buyer for any misrepresentations.

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