Share Purchase Agreement FAQ - United States


A Share Purchase Agreement (also called a "Stock Purchase Agreement") is a sales agreement to be used to transfer and assign ownership (shares of stock) in a corporation.
What is a Share Purchase Agreement?
What is a Share Purchase Agreement?

A Share Purchase Agreement is a sales agreement to be used to transfer and assign ownership (shares of stock) in a corporation.

Who are the parties to the Share Purchase Agreement?

The parties to a Share Purchase Agreement are the Purchaser and the Seller.

Share Transactions
What is the difference between a Share Purchase Agreement and Share Repurchase Agreement?

A corporation can redeem shares by repurchasing them from existing shareholders (Share Repurchase Agreement) and placing the shares back in the Corporation's name. This is done mostly by established Corporations. It is usually only done where the Corporation has enough cash to make the purchase while still covering operating expenses. Redeeming shares transfers equity back into the Corporation, increasing the value of remaining shares.

A Share Purchase Agreement transfers shares between individual persons. In the case of a Share Purchase Agreement, the corporation would not be party to the agreement.

What is the difference between a Shareholder Loan and purchase of shares?

When a shareholder purchases shares, the shareholder increases their equity in the company. When a shareholder makes a Shareholder Loan to the company, it is a personal debt owed to the shareholder by the company, as though both were private individuals. The debt must be repaid, but it does not increase the shareholder's equity in the company.

What is a right of first refusal?

A right of first refusal requires that when an existing shareholder wants to sell his shares, all shares must first be offered to existing shareholders on a pro rata basis, which enables the existing shareholders to retain their percentage stake in the Corporation, before being sold to an outside third party. It also protects existing shareholders from unwelcome new shareholders. However, if the existing shareholders cannot afford to buy the shares, the shares may still be sold to the third party and existing shareholders may end up with a new co-owner. One shortcoming of the right of first refusal is that it may cause long delays in the sale of shares.

Why would I need a professional valuator?

Shares that are not publicly traded on a stock market are hard to valuate because they are not easily convertible to cash. Valuating the shares yourself may lead to a large over- or under-valuation of the share price. Both mistakes can be detrimental to the company and to all affected shareholders. A professional will give a more accurate valuation that is fair to all shareholders. However, the valuation may be expensive so you must carefully consider whether or not to use a professional valuator.

Miscellaneous
What is a dividend?

A dividend is a share of the Corporation's profits received by a shareholder at specific intervals during the year. Dividends are paid on a per share basis (e.g. $0.10 per share) and are used to give shareholders a positive return for holding onto shares. A corporation can pay out any percentage of its profits as dividends, but most pay out less than 100%, so the corporation has assets for capital expenditures, business growth, unexpected expenses, or business losses in subsequent years.

Signing, witnesses and notaries
Who needs to sign the Share Purchase Agreement?

The Purchaser and Seller must sign the Share Purchase Agreement.

Do the purchase and seller signatures need to be witnessed?

This depends on whether the parties know and trust each other. If you suspect that one or more parties may deny ever having seen or signed the Share Purchase Agreement then maybe all signatures should be witnessed.

Do the purchaser and seller signatures need to be notarized?

Again, this depends on whether the parties know and trust each other. If there was ever a conflict in the future concerning the Agreement and you suspect that one or more parties may deny ever having seen or signed the Share Purchase Agreement, then maybe all signatures should be notarized.

 

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