To sell shares of a company to a buyer, one usually needs an equity purchase agreement. Read on to know why!
An Equity Purchase Agreement is a legal document that specifies the conditions of the sale of a company’s equity holdings, stocks, etc. Membership interests, a company’s reputation, intellectual property, and other assets are all included in equity transactions.
An Equity Purchase Agreement is also known as a stock purchase agreement, is a contract that transfers shares of a firm from a seller to a buyer. Equity purchases can be used to acquire a company in its entirety or in part.
All assets and liabilities of the company will be included in the transaction when a buyer purchases all of the stocks or membership interests owned by the company’s founding shareholders. As a result, the company’s assets do not require a separate asset purchase agreement.
Common Sections in Equity Purchase Agreements
The common sections found in equity purchase agreements are listed below.
- Parties names
- The agreement’s terms (i.e., how many shares are being sold and at what price)
- Statements and warranties made by the buyer, seller, and business
- The laws that apply to the agreement
- Indemnification
- Pre- and post-closing covenants
- Payment details, such as the day on which payments are due and the deal’s completion date
- Non disclosure and confidentiality agreements
- Requirements, indemnity, costs, and other clauses, such as how to manage employee concerns following the transaction and any ongoing consulting or transition services.
- Dated signatures
A contract called an equity purchase agreement, often called a share purchase agreement or stock purchase agreement, is used to sell shares of a company to a buyer.
Why Is An Equity Purchase Agreement Preferred?
The sellers prefer an Share Purchase Agreement Draft since it transfers all business liabilities to the buyer. Because of this, buyers may avoid equity purchases unless the target business has a clean operating history. According to the Corporate Finance Institute (CFI), buying stocks is easier and more frequent than buying assets. In the form of stock purchases, hedge funds frequently engage in mergers and acquisitions.
It is well known that large corporations usually acquire the assets of smaller ones. Contrarily, agreements between equal companies are often equity purchases. An Equity Purchase Agreement is generally simpler than an asset acquisition.
Difference Between Equity Agreement & Asset Agreement
Asset and equity purchase agreements are the result of a buyer and seller coming to an agreement on a deal in which all or parts of a business are sold. Asset and equity purchase agreements that are thorough and well-written are beneficial to both parties and offer much-needed peace of mind.
Make sure you get the best price when purchasing or selling assets, which might include real estate, vehicles, office supplies, and goodwill. The clear difference between an asset sale and an equity purchase is that, in an asset sale, only assets are sold.
The buyer has the option to include or exclude particular assets from the sale. Also, it limits any liabilities you may take on from the previous business. Because they are a part of the same corporate entity, any liabilities in a stock or equity sale are passed on to you. Knowing the differences as well as the agreement’s terms is important. Choosing whether the agreement will be an asset purchase or an equity purchase is an essential first step. Organisations can then specify which assets and liabilities are included. However, there are various advantages and disadvantages to equity purchase agreements.
Advantages & Disadvantages of Equity Purchase Agreements
- Equity purchase agreements have both advantages and disadvantages in terms of taxes. Although the buyer might be able to avoid paying transfer taxes, they lose the step-up tax benefit that may have an impact on future capital gains
- If current shareholders are not able to come to an agreement to sell, it may be difficult for the buyer to buy the stock. The equity purchase process may also be delayed by applicable securities laws. This is especially true if there are many shareholders in the target company
- When purchasing assets, bidders may make a high offer to the seller. A stock sale also provides tax advantages to the seller and can free them from obligations and contracts
- Purchasing a business completely is less complicated but also more dangerous than negotiating which particular assets and liabilities to buy and which to exclude
- Due to the lack of revaluation and retitling of assets, it is simpler. Contracts with suppliers and consumers, as well as agreements relating to employment, do not require renegotiation
- Due to the possibility that the buyer could acquire unintended liabilities, it is riskier. This could be an undisclosed lease or lawsuit.
Uses of Equity Purchase Agreement
A corporation adds new shareholders when it sells stock to raise capital. Be careful, though, that no ownership of the company entity is transferred as a result of the transaction. Even if a new stakeholder gains the majority of the shares, this remains true. When the shareholders sell all of the company’s stock to a buyer, ownership of the business is transferred. The person who buys the stock, or equity, becomes the new business owner.
The firm is unaffected aside from the change in ownership. The company’s assets and liabilities are the same as before. Buying a company’s assets rather than its shares is another approach to taking over control of it in reality. In this case, the company’s assets do change hands, but its owner does not.
On paper, the ownership of the business is still the same. Similar to selling stock in a corporation, asset sales can be a focused strategy to raise money. It need not mean that the company’s course will be drastically altered. Sellers generally prefer a business sale that is organised like a stock sale. Buyers, meanwhile, tend to favour asset sales. This is due to the deals’ structural variations and implications, among other things.
As stated earlier, the ownership of a business does not change as a result of an asset purchase transaction. The bidder buys specific company assets. These could include things like tools, permits, supplies, and customer lists. Specific liabilities may also be left out of the agreement. An equity purchase can be compared to this. In this scenario, the buyer takes over ownership of the target company and buys the target company’s stock in addition to all of its assets and liabilities.
Conclusion
An Equity Purchase Agreement should be used for all equity transactions, whether you are selling stock in your company or buying equity in a company. This is because an equity purchase agreement is much simpler than an asset agreement and because it reflects the specifics of the parties’ contractual relationship. If you need help with an equity purchase agreement, our experienced legal experts at Vakilsearch can help you draft a legally and factually accurate document just within a few clicks!
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