What Is a Share Purchase Agreement?

A share purchase agreement regulates the sale or transfer of stocks from one holder to another. This mechanism is often used to organize the handling of a company's shares. If a shareholder dies, resigns, or declares bankruptcy, the agreement becomes a means of dealing with the remaining shares.

When a shareholder purchases stocks, he or she agrees to the rules set forth by the company. These rules often determine who is or is not allowed to buy any stocks put up for sale. Furthermore, the agreement can decide whether certain shareholders and parties have the first right of refusal.

Several elements are present in each share purchase agreement. These can be divided into administrative and financial elements. Administrative elements include the date, general provisions, certification of stocks, witnesses, representations, and warranties of the seller and purchaser. The financial elements, while also administrative, cover the number and price of the shares, the consideration amount, and when it should be paid.

The share purchase agreement opens with the document’s date and the names of the parties involved in the transaction. It then sets out the name of the company involved and the number of shares to be transferred, as well as their value. The company must prove it is able to issue the shares, and the seller must certify that the shares are legally owned and that the sale is allowable. These proofs are known as representations and warranties.

Most contracts, including share purchase agreements, contain what is known as an entire agreement clause. This is a legal clause designed to protect the parties involved in the contract. In this case, it refers to the sale or transfer of stocks. The inclusion of the clause means any spoken or written agreements not held in the current document are no longer valid.

To make the share purchase agreement legally binding, all parties involved must sign it. Witness signatures should also be provided. The parties must also decide on the consideration to be paid to the seller. The consideration is a kind of deposit or down payment in lieu of the final payment in full. The remainder is paid when the contract is complete and the transfer is made.

Share purchase agreements depend on market health. In a robust market with high levels of fluidity in sales and capital, the seller is able to exact a better price for the shares. The same cannot be said of a tough financial environment. In the latter, the purchaser gains the upper hand and is generally able to extract a better deal for themselves.