When an individual or company elects to buy or sell shares in a public company, a share purchase agreement is the legal document governing the transaction. A share purchase agreement is a document outlining the terms and conditions of the sale as well as any rights and responsibilities assigned to either party.
Note that share purchase agreements are not drawn up to facilitate transactions between individual investors and licensed brokers. When you work with a broker, you are assigning rights to that broker to buy and sell shares on your behalf. The agreement you reach with that broker upon establishing your relationship constitutes the entirety of your agreement to buy and sell.
When Share Purchase Agreements Are Appropriate
The share purchase agreement is appropriate whenever shares are bought and sold among individuals or companies. Note that certain types of businesses do not have legal authority to sell shares – think sole proprietors and LLCs – so they would have no reason to draft share purchase agreements. If such businesses wanted to sell part ownership to a third-party, a different type of document would be used.
Shares Are Not the Same as Assets
Stock purchase agreements also do not pertain to business assets. In a legal sense, a share represents an ownership interest. If a company has issued 1,000 shares and you own 10 of them, you own 1% of that business. With that ownership comes certain rights and responsibilities.
By contrast, business assets refer to property owned by the business in question. Assets can include, but are not limited to, things like equipment, inventory, intellectual property, real property, etc. Assets remain the property of the company even when shares are sold.
Structure of a Share Purchase Agreement
Though share purchase agreements are binding contracts, there is no specific format that must be followed when writing one up. Such an agreement is structured in whatever way is necessary to cover all the legal points of the sale. Below are some of the most common components found in share purchase agreements.
A share purchase agreement normally begins by identifying the parties to the sale. The personal or business names of both buyer and seller are listed along with titles designating their individual roles. From that point forward, proper names will not be used. Rather, the document will refer to the ‘seller’ and ‘buyer’.
Statement of Ownership
Often referred to as the background, this portion of the agreement is essentially a statement of ownership. It stipulates that the seller currently owns the shares in question and is agreeing to sell them to the buyer. The statement generally mentions the name of the company that issued the shares. It also states that the buyer is willingly choosing to purchase the shares.
This section of the stock purchase agreement constitutes the terms of the sale itself. This section lists and describes whatever terms are appropriate to the sale, including:
- purchase price
- means of payment (wire transfer, certified cheque, bank draft, etc.)
- when payment is due (i.e., payable upon closing).
Share Purchase Agreement Template
If you’re looking for pre-made template of a share purchase agreement or a stock purchase agreement, you can visit Law Depot. They offer an easy-to-use service to create your own agreement. It combines a do-it-yourself agreement with the guidance of their service.
Representations and Warranties
It is a good idea to include representations and warranties for both seller and buyer. Representations and warranties stipulate any limitations imposed on either party as a result of the sale. An example of a purchaser warranty might stipulate that the purchaser is not party to any legal action that would materially affect the purchase agreement in any way.
An example of a seller’s warranty and representation might state that the seller is the legal owner of the shares in question, and that the shares are not bound by any encumbrance such as a lien, mortgage, charge, or security interest held by another.
Finally, a purchase share agreement will typically include miscellaneous points covering everything from governing law to the payment of fees and dividends. The agreement will typically include signature lines for both parties and any witnesses to the sale.