Part 2: Transfer Mechanics and Other Covenants

This is the second part in a three-part series that is a very basic, and lively, introduction to the typical structure of a stock purchase agreement in a transaction involving the sale of control of a private company. (For more information about the series, see the first post, Part 1.)

As a refresher, a stock purchase agreement for a privately-held target often includes the following parts in some variation on the following order:

• The transfer mechanics
• Reps and warranties (Part 1)
• Pre-closing covenants (Part 3)
• Post-closing covenants
• Conditions to closing (Part 3)
• Indemnification (Part 1)
• Termination (Part 3)
• Miscellaneous

The second post in this series will describe the provisions that require one of the parties to act (or refrain from acting) in a certain way. These are typically known as covenants. The third post (on separate signings and closings) will address those covenants that are applicable to the period between signing and closing.

Mechanics - Purchase Price and Closing

The mechanics of the deal are often near the front of the document. The mechanics describe when, how and what will be transferred, how much the purchase price will be and how the price will be paid. The closing (when the asset actually changes hands) may happen concurrently with the signing of the contract or it may happen weeks later, conditioned on certain events happening.

The purchase price may be a pre-determined number, or it may be adjusted for things like the amount of debt on the company at the closing or the amount of cash or working capital on the balance sheet. Those adjustments may be estimated at the closing and then confirmed 30-90 days later in a post-closing true-up (or not). If the purchase price is adjusted, the math and words are often fairly simple; however a lot of value can change hands based on which line items are included in the adjustment.

Certain amounts could be held in escrow (or scheduled to be paid later) pending the resolution of the post-closing true-up, the expiration of the indemnity period (described below) or other events.

Post-Closing Covenants – How the Parties Will Behave for the Next Few Years

The agreement may include promises to take certain actions following the closing. The seller may agree not to hire away the employees or start a similar business to compete with the target. The buyer may agree to maintain the same or better salary and benefits for the employees for a period of time or to provide certain access to the pre-closing books and records to the seller for a few years. A long section on taxes — notably which party will file taxes, amend filings, pay taxes and receive credits related to the pre-closing period — will be included in the Covenants or as a stand-alone section.

Miscellaneous – Don’t Forget the Boilerplate

The final section of the document is often the miscellaneous section (aka the boilerplate). This often includes what remedies a party can seek, including whether specific performance is available (i.e., the ability to get the court to make somebody do something, rather than simply collect money damages), governing law and other provisions related to interpretation of the agreement. While the miscellaneous section generally looks fairly dense, due to its role in interpretation, this section can materially impact a party's likelihood of success if a serious dispute emerges.

Coming Next

Stock purchase agreements can be structured so that the business is transferred and the purchase price is paid on the same day that the stock purchase agreement is signed. The agreements could alternatively be structured to have a period of several days or weeks after the agreement is signed before the business is transferred. The next post in this series will outline the sections that are typically included in a stock purchase agreement if there is an interim period between signing and closing.

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