Stock Sales

In a stock sale, the corporation’s stockholders sell their shares of the corporation’s stock to a buyer in exchange for cash, property, other stock, the assumption of their debts, or something else of value. Any sale of stock should be done subject to a stock purchase agreement. There is no such thing as a “one-size-fits-all” stock purchase agreement, so the agreement should be tailored to reflect the unique issues in a given transaction.

The buyers’ lawyers must be careful to ensure that the buyer will truly own the corporation’s stock free and clear of unexpected encumbrances after the sale is concluded. At a minimum, a stock purchase agreement should contain representations, warranties, and indemnifications made by the selling stockholders to cover against significant potential problems. These representations, warranties, and indemnifications should address such things as:

  1. the capital structure and organization of the Seller;
  2. ownership of all outstanding equity interests in the Seller,
  3. the fact that no equity interests are encumbered by liens, claims, or other liabilities;
  4. the fact that issuance and transfer of equity and the terms of the transaction are duly authorized by the corporation’s stockholders;
  5. the fact that the transaction creates no conflicts with any of the corporation’s organic documents or contracts; and
  6. the fact that the corporation has unencumbered ownership interests in all of the assets it claims to own.

Depending on the transaction, sellers and buyers might address any number of other areas relating to the nature of the corporation’s business or its stock, including financial matters; real and personal property; environmental issues; contracts; employees; employee benefits; insurance; bank and credit agreements; indebtedness; compliance with laws; current or possible litigation; intellectual property; insider transactions; and competing businesses.

Because stock is a “security” under various state and federal laws, the selling stockholders should keep in mind that these laws may create obligations and potential liability with respect to their offers to sell their stock and the sales transactions. In some situations, these laws can create liabilities for the sellers even though the sellers have made no affirmative representations or warranties in their stock sales agreement. In addition, the selling stockholders and the buyer, if it is issuing its own stock as consideration for the purchase, must be exempt from the registration requirements under applicable federal and state securities laws. In most cases, these transactions fall within the private resale or private placement transaction exemptions from registration. However, the parties should always consult with their lawyers to perform a detailed analysis of whether registration is an issue.

Holdouts

A sale of stock is usually the simplest way to transfer a business because the stockholders selling their stock are the only people required to give their consent for the transaction. No director or other stockholder meeting or approval is usually required.

In some cases, a buyer must deal with multiple stockholders and some of them may refuse to sell their stock. If the prospective stockholders plan ahead, those that wish to sell their stock can prevent the holdout stockholders from delaying or preventing the sale by negotiating something called “drag-along” rights into an agreement between the stockholders. Drag-along rights generally provide that if a sale is approved by a certain group of stockholders, all of stockholders agree to be “dragged along” in the sale. The group might be comprised of a minimum percentage of stockholders or even the board of directors. In most cases, the existence of a stockholders’ agreement with drag-along rights increases the attractiveness of the stock to buyers.