What is the Stock Purchase Agreement?

The stock purchase agreement is the central contract between the parties where the business agrees to exchange as specific number of shares of the business venture for the agreed upon funding. The stock purchase agreement is made up of the following elements:

What is the Preamble? 

This provision identifies the parties to the agreement.

• Note: The preamble may be immediately followed by background recitals and a definitions section.

What is The Action Section? 

This section identifies the value being exchanged

• Note: In this case the value being exchange will be a class of preferred shares in exchange for a predetermined amount.
• Example: The purchase agreement will identify the company valuation, total number of shares, and the price paid per share. It will also outline this information in a capitalization table that may be included in the body or appended to the stock purchase agreement.

What are the Rights of the Parties?

This includes the rights with regard to their ownership interest.

• Note: See the Term Sheet Provisions Material for more information on the extent of shareholder rights that may be included in the agreement.
• Example: The agreement may outline the rights of shareholders to redeem their shares with the corporation upon the occurrence of defined circumstances or events.

What are the Representations and Warranties? 

The representations and warranties state the facts about the business venture that are true and will remain true at the time of closing.

• Note: Basically, all of the material aspects of business operations are capable of inclusion in the representations and warranties. Generally, however, these provisions will focus upon the aspects of the venture uncovered during due diligence that present some level of risk to business continuation or operations.
• Example: The company will represent that it is incorporated, in good standing, authorized to carry on its business, holds all relevant licenses and permits, is qualified to transact business in every relevant jurisdiction, the capitalization structure, pending or threatened litigation, data privacy, and ownership of intellectual property. Investors will generally represent their authority to enter the transaction and its status as an accredited investor.

What are the Covenants?

This section contains the duties that each party must undertake as part of the agreement.

• Note: In many situations, the funding will be contingent upon the current owners undertaking certain actions.
• Example: The company must file the securities regulation documents required to perfect an exemption from registration.

What are the Conditions?

These are generally tied to the covenants and outline factual elements that must be true prior to closing.

• Note: These are facts that must be true for the agreement to be enforceable.
• Example: For example, the agreement may be conditioned upon the completion of due diligence; acceptance of regulatory filings by the company; filing of an amended and restated certificate of incorporation; the transaction must qualify for a state-sponsored tax credit for the transaction to be consummated; the entrepreneurs enter into a continued employment agreement with the firm; the company counsel must deliver a legal opinion letter.

What are the Endgame Provisions?

These are the provisions that outline the rights and responsibilities in the event of failure of any representation, warranty, covenant, and condition.

• Note: The endgame provisions will generally allocate the burden of attorneys fees in the event of a successful transaction and otherwise.