Drafting and negotiation of stock and membership interest purchase agreements.
Buying the company, not just its assets
In a stock or membership interest purchase, the buyer acquires ownership of the entity itself, stepping into its existing contracts, licenses and history: including its liabilities, known and unknown, except as addressed in the purchase agreement. This makes the representations, warranties and indemnification framework the central protective mechanism.
Representations and warranties
Sellers typically represent to matters such as corporate authority, financial statement accuracy, tax compliance, litigation history, material contracts and employee matters. These statements are qualified by disclosure schedules and give the buyer a contractual basis to seek recovery if they prove false.
Indemnification structure
- Survival periods: how long after closing a party can bring an indemnification claim.
- Baskets and deductibles: a threshold of losses before indemnification obligations begin.
- Caps: the maximum amount recoverable, often excluding certain fundamental representations.
- Escrow or holdback: funds set aside to secure indemnification claims.
Why buyers sometimes prefer a stock purchase
Where the target holds licenses, permits, government contracts, or key customer agreements that are difficult or costly to reassign, acquiring the entity itself can preserve continuity that an asset purchase would disrupt.
Process
- 1
Diligence
Investigate the target entity's full corporate, financial, tax and litigation history.
- 2
Negotiate protections
Draft reps, warranties, indemnification caps, baskets and survival periods.
- 3
Closing deliverables
Prepare stock or membership interest transfer documents, resignations and corporate approvals.
- 4
Post-closing
Address any escrow release, working capital true-up and transition matters.
Answers
Frequently asked questions
- Why would a buyer choose a stock purchase over an asset purchase?
- A stock purchase can preserve contracts, licenses and permits that would otherwise require third-party consent to assign and it may simplify a transaction where the business's value is closely tied to its existing corporate identity.
- How long do a seller's representations and warranties last after closing?
- Survival periods are negotiated, commonly ranging from twelve to twenty-four months for general representations, with longer or indefinite periods for fundamental matters like title, authority and taxes.
- What is an indemnification basket?
- A basket is a threshold amount of losses that must accumulate before a party can make an indemnification claim, intended to filter out minor, immaterial discrepancies from triggering disputes.
- Does the buyer inherit the company's existing debts in a stock purchase?
- Generally yes, since the buyer acquires the entity as a whole, including its liabilities. Indemnification provisions, escrow and price adjustments are the primary tools for allocating risk for liabilities discovered after closing.
- What closing documents are typically required for a stock sale?
- Common deliverables include the stock or membership interest transfer instruments, updated corporate records, officer and director resignations or appointments and any required third-party consents.
Official sources
Consult the official sources above for current rules and procedures.