What Is Securities Purchase Agreement?
A securities purchase agreement is an agreement between a buyer and a seller for the transfer of shares in a company. It is also known as the stock purchase agreement. The buyers and sellers can either be corporations or individuals who hold shares in the company. It is a legally binding contract and lays down the terms of the purchase. It is governed by both federal and state securities laws, which are often difficult to understand. Therefore it is advisable that parties seek appropriate legal help.
The primary legislation dealing with securities in the USA is the Securities Act of 1933, and the regulatory body for securities is the Securities and Exchange Commission (SEC).
Purpose of Securities Purchase Agreement
The securities purchase agreement puts the conditions of purchasing securities down in writing. Dealing with securities can get complicated. For instance, some securities earn regular dividends. In the absence of this agreement, the purchaser may claim that they were promised dividends on the securities. This issue can be avoided by explaining the dividends in the agreement. It also has terms related to dispute resolution, which make the parties aware of how a dispute under the agreement will be handled.
This agreement saves time and cost spent running around different forums for a remedy. It allows the company to control its ownership. If a purchaser buys a large amount of stock that gives him ownership in the company, the latter can insert provisions in the stock issuance agreement that do not allow the purchaser to sell the stock directly to outsiders without first offering it to the company.
Key Terms of Securities Purchase Agreement
Some of the key terms to be included in the agreement are:
- Names and identification of the buyer and the seller
- Date when the agreement is entered into
- Definitions, in alphabetical order, of terms used in the agreement
- Description of the securities that are being sold- for example, their nature, number, the price per security, and the total price.
- Payment structure
- Representations and warranties by the parties
- Indemnification for any loss
- Grounds for termination
- Governing law
- Dispute resolution clause
- Signatures of the parties
How to Draft the Securities Purchase Agreement
The following points should be kept in mind while drafting the agreement:
- Identification of the parties: The seller and purchaser should be clearly identified. There should be no confusion with respect to their names.
- In the definitions clause, include all the terms that are used in the agreement that will have a specific meaning in its context. This avoids any confusion between the parties as to what a particular term stands for.
- Securities: Perhaps the most important clause in the agreement is the one that describes the securities. Apart from stating the total number of securities being purchased and their total value, their type should also be mentioned. For instance, if shares are being purchased, the clause must mention whether they are common or preference shares. These have different implications for purchasers in the shareholding of the company whose shares are being purchased.
- Payments: The payments clause must explain how and when the payments are to be made. It should include provisions such as a deposit to be made at the time of signing the agreement, price to be paid on closing the deal and if any amount is to be held in an escrow account to cover for breach of the agreement.
- Closing: The manner of closing, as well as the time and place where it will take place, must be explained. Closing is the final transaction between the seller and purchaser, where they finalise and sign all the agreements, pass board resolutions, and exchange documents. The title passes from the seller to the purchaser and seller receives the payment.
- Representations and warranties from both the seller and the purchaser should be clearly stated. These include all the information that is relevant to the transaction, and the parties represent that they are in a good state to carry out the transaction.
- Indemnification: A provision for indemnification should be included so that if a party breaches the agreement, the other party can recover any loss caused to it. This provision is usually very highly contested. Therefore, it becomes important to arrive at a consensus.
- The grounds on which the agreement can be terminated should be clearly stated. This informs the parties of the conduct that will terminate the agreement so that they can be aware of not breaching any provisions.
- It is advisable to include a confidentiality clause in such agreements as parties exchange sensitive business information with each other.
- Since laws tend to vary in different states in the USA, a clause stating the governing law should be mentioned to avoid jurisdictional issues.
- There must be a clause providing a dispute resolution mechanism. Most commercial transactions prefer arbitration. The entire process should be explained in the agreement so that there is no ambiguity regarding it.
Types of Securities Purchase Agreement
A securities purchase agreement is of the following types:
- Common stock purchase agreement: This agreement sets the conditions of purchase of common stock, which gives the purchaser ownership in the company. He gets all the rights associated with common stock, such as having a say in selecting the board of directors and voting rights in the meetings of the company.
- Restricted stock purchase agreement: This agreement puts certain restrictions on the rights of the stockholders. It is used by companies to protect their stock by putting restrictions on selling and transferring the stock and giving certain rights to the company to buy back the stock.
Sample for Securities Purchase Agreement
A sample of the Securities Purchase Agreement can be downloaded from below.
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