How do you structure a stock purchase?

A stock purchase refers to a business acquisition by purchasing the company that owns the business.  If the company is a corporation, it’s a stock purchase.  If it’s a limited liability company, it’s a membership interest purchase.  If it’s a partnership, it’s partnership interest purchase.

In a stock purchase, the sellers are the equity owners of the company (shareholders, members, partners depending on the type of company).

All of the assets and all of the liabilities of the company are sold.  Because a buyer is buying liabilities as well as assets, it’s crucial to identify and quantify those liabilities through a thorough due diligence while in contract.  

Key provisions in the stock purchase agreement, such as representations, warranties, indemnities by the sellers are important protections for the buyer, who will try to shift certain risks to the seller even after the purchase has closed.  On the other hand, the seller will try to limit those same provisions, particularly if they continue to impose any liability or obligation on the seller after the company has been sold. 

Another issue that may come up on the seller side is shareholder ratification.  You may have a situation where not all shareholders are on board with the deal, and getting their consent may require renegotiating certain terms.  Of course, depending on the internal governance of the company, majority shareholders may be able to drag along a recalcitrant minority.