A stock transfer agreement is also known as a share purchase agreement or a stock purchase agreement. It is an agreement that lays down the terms and conditions of the sale and purchase of the shares of a company. This agreement is used to transfer all rights in the shares from one person to another. The transaction also gives the transferee certain powers and control in the company as they would become shareholders in the company.
When Do You Need a Stock Transfer Agreement
A stock transfer agreement is needed when one needs to sell or transfer one’s shares in a company to another individual. Whenever a company or a person invests in shares of another company or purchases shares from another individual, a share purchase agreement is needed. The transferor may be done on the name of a company or an individual. Through the agreement, the transferor shows that he is the owner of certain shares in a particular company and he is transferring such shares to the transferee. The agreement helps the buyer to have proof of the transfer and the fact that he is now the owner of those shares.
The purpose of the stock transfer agreement is that it helps to make the transfer formal and legally binding. It protects the interests of both the transferor and the transferee.
At the end of the transfer, the transferor will transfer all certificates representative of the shares sold, and the transferee will make the payment specified in the agreement as consideration for the stocks being bought.
Inclusions in a Stock Transfer Agreement
The agreement must clearly state the names of the parties between whom the agreement is entered into. This will include a Seller (or Transferor) and a Buyer (or Transferee). The date on which the agreement is entered into must also be mentioned along with the territory in which the agreement is enforceable.
The agreement must state the number of shares being transferred and the value of these shares. The price at which these shares is to be transferred is also laid down along with the conditions which need to be fulfilled before the transfer is deemed complete.
Apart from this, the agreement must clearly mention under which law it will be governed and how the agreement shall be terminated. The manner in which the agreement is to be modified should also be described.
How to Draft a Stock Transfer Agreement
- Form a letter of intent to explain the proposed sale.
- The transferee should perform his due diligence and make sure the terms in the letter of intent and the agreement are the same.
- The warranties and representations should be cross-checked for any untrue statement.
- Both parties should thoroughly review the agreement to make sure their interests are protected.
- The agreement should be signed by both parties.
- Copies of the agreement should be made for both parties.
- After the transferee completes the payment for the stock, the share certificates should be handed over to him.
- The records of the company shall be modified to make a note of the new shareholder.
Benefits of a Stock Transfer Agreement
- A stock transfer agreement puts the terms and conditions of the transfer into writing. This makes the transaction crystal-clear and avoids any misunderstandings.
- Through this agreement the transferor shows how he is the owner of the stock. This gives faith to the transferee in the transaction.
- It creates a binding transfer.
- All the warranties and representations of the transferor and transferee are spelled out. This protects the other party from any misrepresentation.
Consequences of Not Having a Stock Transfer Agreement
- Without a stock purchase agreement in place, a dispute between the parties could end up in court and lead to a legal mess.
- Without this agreement, a shareholder may sell his shares to outsiders. Though this agreement, a “right of first refusal” clause can be created. This means other shareholders will have the option to purchase the shares before they’re sold to someone else.
Key Clauses in a Stock Transfer Agreement
The following are the key terms of a stock transfer agreement:
- Transfer of shares
- Transfer price
- Cost of transfer
- Mode of payment
- Completion of transfer
- Representations and warranties of the transferor
- Representations and warranties of the transferee
- Conditions precedent
- Pre-Closing Covenants
- Conditions subsequent
- Execution and delivery
- Indemnification and damages
- Modification of the agreement
- Termination of the agreement
- Governing law and jurisdiction
- Dispute resolution and arbitration
What Happens When You Violate a Stock Transfer Agreement
Generally, stock transfer agreements have a clause that talks about the actions to be taken when a party to the agreement breaches the clauses of the said agreement. An arbitration clause is present in most agreements and states that if a clause of the agreement is breached or if any dispute arises with respect to the terms of the agreement, the matter will be resolved by arbitration. The clause mentions where the arbitration proceedings will take place i.e. seat of arbitration, the language in which the proceedings shall be conducted and the manner in which the arbitrators shall be appointed.
Alternatively, any other form of dispute resolution such as mediation may also be mentioned in the agreement
The agreement can also mention that all disputes arising out of the agreement will be subject to the exclusive jurisdiction of a specified court.
Sample of a Stock Transfer Agreement
If you require a template of a stock transfer agreement, you can download a sample here.
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