Last Updated April 12, 2024
What is a Share Purchase Agreement?
Shareholders in a company use a Share Purchase Agreement, also known as a stock transfer form, to transfer their ownership of shares to someone new. When executed properly, this document becomes a legally binding agreement. The buyer then gains the rights and responsibilities associated with being a company shareholder, and the seller withdraws from the company.
The amount of shares you own determines your stake in a company and your eligibility for dividend payments. For example, if a company issues 10,000 shares and a shareholder owns 1,000 shares, the shareholder legally owns 10% of the company. Typically, this means they are entitled to 10% of the company's profits and 10% of the votes in corporate resolutions.
Who drafts the Share Purchase Agreement?
Either the buyer or the seller can draft the Share Purchase Agreement. However, it’s common for the buyer to draft the agreement so that it matches the terms they proposed in their Letter of Intent. Often, buyers propose a share purchase with a Letter of Intent first.
LawDepot’s Share Purchase Agreement is intended for transactions facilitated without the aid of an investment banker or broker (which means finder’s fees are not included). The third-party who discovers the share sale may demand compensation in the form of finder’s fees because it’s likely the buyer wouldn’t have made the deal without them.
In some cases, a seller may need a board resolution for approval of the share transaction. This resolution may pass with or without the company’s directors' meeting, depending on the company’s policies.
If your company cannot issue shares (e.g., you’re a sole proprietor or in a partnership), or if you plan to sell all the shares of your company, consider using a Purchase of Business Agreement.
LawDepot’s Share Purchase Agreement template asks for the following information:
- Details about the seller
- Details about the purchaser
- Share details, including the number and class of shares being sold
- Payment details, including an option for a deposit
- The ability to add extra clauses as needed
Our template also addresses the warranties and representations of the buyer and seller. These terms specify the relationship of the parties to the company, as well as how they’re bound (or not) to the agreement.
What is the difference between preferred shares and common shares?
Generally, there are two types of shares that a company distributes to its shareholders: preferred and common shares. The type of share determines the buyer's voting rights, dividend yields, and percentage of ownership in the company.
In most cases, preferred shares have the most potential for short-term gains because of the following reasons:
- No voter rights
- Dividends are issued to preferred shareholders first
- Share value is calculated on par (i.e. at face value) and is affected by interest rates
- Shares are callable (i.e. the share issuer has the right to redeem shares from the market after a time)
On the other hand, common shares often have the most potential for long-term gains because of the following reasons:
- Voting rights
- Dividends are issued to shareholders last
- Share value is regulated by market demand and supply
- Shares are not typically callable
In addition to preferred and common shares, a company may refer to its shares with a specific class structure. There are generally three classes (Class A, B, and C) that describe shares with distinct characteristics. For instance, a Class A share may have more voting rights per share than a Class B or C share.
To learn more about a company's share structure, you may consult the company's Articles of Incorporation or the public listing in which the shares are advertised.
Does this agreement include asset purchases?
No, LawDepot’s Share Purchase Agreement template does not include asset purchases.
A share purchase is the sale of someone's ownership in a company. In contrast, an asset purchase is the sale of a company's individual assets or liabilities. For example, a company asset is a tangible item or intangible resource such as:
- Intellectual property (e.g. patents, business methods, etc.)
- Goodwill (i.e. a company's positive reputation)
- Equipment
- Inventory
- Real estate
The main difference between these kinds of purchases is that the seller retains ownership in a company with an asset purchase and forfeits ownership with a share purchase.
What happens to liabilities in a Share Purchase Agreement?
When a seller transfers their shares, all assets and liabilities also transfer to the buyer at carrying value. Any contracts (such as lease agreements) that the seller is in also transfer to the buyer. As such, buyers should be sure to conduct their due diligence of the company they’re planning to invest in. If the company establishes itself as a separate legal entity from its shareholders, the buyer likely won’t assume any liabilities.