How to Draft a Stock Subscription Agreement

BizGuide How to Draft a Stock Subscription Agreement

A stock subscription agreement is a legal document in the form of a contract. It is also known as a “share purchase agreement”.

This is between two (2) parties for the transfer of ownership or sale of stock in a company. Oftentimes, companies issue shares to sell to a buyer and the agreement provides details that include the number of shares and the price for each unit of stock sold.

In a previous article about How to Issue stock, a “share” refers to a single unit of company stock, which represents the money invested by the “shareholders” or the people who invested their money in a business with the hope of earning profits by receiving their “share” of dividends.

How to draft a stock subscription agreement? Here are the steps:

Drafting a Stock Subscription Agreement

    1
    BEGINNING THE AGREEMENT

    • Using a word processing application in a standard format of writing legal papers, entitle the document as “Stock Purchase Agreement”.
    • Your first paragraph should indicate the date, your name, and identity as the seller and the name of the buyer as well as the statement of facts in the recitals section to summarize the purpose of the agreement, which often starts with “whereas”.
    • You may click the link HERE for an example.
  1. 2
    EXPLAIN THE TERMS OF THE SALE

    • The Agreement should state that you are granting the shares to the buyer as well as the list of price per share, including the total amount that was paid for the aggregate amount of shares.
    • The document should also include a provision stating that the buyer agrees to deliver the purchase price. As a legal document, it should contain the signature of the purchaser along with the spouse consent form as necessary and it is advisable to consult with a lawyer regarding other documents that should include signatures.
    • As the Seller, it is your responsibility to send the shares to the purchaser which should be provisioned in the stock purchase agreement.
  2. 3
    INCLUDE WARRANTIES

  3. Warranties provide a guarantee as an assurance and protection for parties entering an agreement which warrants the possibility of the erring party to be liable for the legal implications of a breach of contract.

    Warranties in a stock subscription agreement should be

    • A statement that you are authorized to sell the shares of stock, a provision stating that the buyer warrants that they can purchase the shares,
    • A provision stating that the stock is free and clear without any liens clouding the title of a good stock,
    • A provision that warrants both the buyer and the seller that either party have not taken any steps that would result in a legal claim against each other
    • A provision to protect yourself by comparing the buyer to warrant that they understand the risks involved in their investment.
  4. 4
    FINALIZING THE DOCUMENT

    • Adding important clauses in finalizing the stock purchase agreement between you and the buyer won’t be complete without a merger clause detailing the points that both parties have agreed to prevent one party from claiming that prior oral agreements should overrule the written purchase agreement.
    • Adding a severability clause to protect your contract from being voided in case some provision of your stock purchase agreement is illegal would also be a good idea. Identifying the governing law of your agreement, in cases concerning disputes is another thing to keep in mind. In general, companies choose the law fo the state where it is incorporated.
    • You might also find a need to change the agreement, in this case, it is important to require all amendments to be in writing and have both parties sign the document to prevent issues similar to the scenario where a buyer would claim an oral side agreement in changing the written stock purchase agreement.
    • Lastly, the inclusion of signature blocks for the buyer and the seller must be included before showing the draft to a lawyer for review in making sure that nothing is missing in having a more expansive stock purchase agreement by adding restrictions on stock transfers, the right to repurchase the stock, and provisions in case you are selling physical assets with the stock.
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