Draft a Common Stock Purchase Agreement

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

A common stock purchase agreement is a crucial legal document for any business that seeks to raise money through the sale of equity, providing both the company and its investors with the necessary protections they need. Common stock is by far the most popular form of equity, offering investors ownership rights and potential dividend payments in return for their financial contribution. When drafting a stock purchase agreement, it’s vital to consider not only legal protection but also other benefits that it may provide, such as attracting potential investors or providing a structure for the company-investor relationship.

The Genie AI team understands the importance of having an accurate and up-to-date common stock purchase agreement in place – which is why we have developed our free community template library. Our millions of datapoints allow us to develop templates that are market-standard and address all key points and considerations for businesses venturing into this area. With Genie AI’s dataset and community library, anyone can draft and customize high quality legal documents without paying a lawyer.

Ultimately, your common stock purchase agreement should protect both parties involved in the transaction – outline their respective rights, restrictions and obligations - while also providing clarity on how many shares are being sold at what price. This will help ensure the company has sufficient funds to continue developing while protecting investor interests too. If you’re looking to create or review your own common stock purchase agreement, read on below for our step-by-step guidance or access our free template library today!

Definitions (feel free to skip)

Securities Laws: Laws that regulate the trading and issuance of stocks, bonds, and other investment instruments.
Regulations: Rules and guidelines imposed by a government or other authority.
Indemnification: A legal agreement in which one party agrees to compensate another party in the event of a loss or liability.
Representations and Warranties: Statements made by one party to another that are considered to be true and accurate.
Disputes: A disagreement between two parties over a particular issue.
Mediation: A process where a neutral third party assists two disputing parties in reaching a mutually acceptable resolution.
Arbitration: A process where a neutral third party hears evidence from both sides of a dispute and makes a decision on how to resolve it.
Transfer: The act of transferring ownership or rights from one party to another.
Voting Rights: The right of a person or entity to participate in the decision-making process of an organization by casting a vote.

Contents

• Overview of the common stock purchase agreement
• Review the purpose of the agreement
• Identify any applicable laws or regulations
• Defining the parties involved
• Identify all parties to the agreement
• Confirm the names and addresses of each party
• Determining the purchase price
• Confirm the purchase price of the common stock
• Agree on payment method and terms
• Determining the amount of common stock to be purchased
• Establish the number of shares being purchased
• Establish the voting rights of the shares
• Establishing the rights and responsibilities of each party
• Determine the obligations of each party
• Establish the rights of the parties to the agreement
• Establishing the terms and conditions of the agreement
• Set forth the duration of the agreement
• Outline any restrictions on transfer of the shares
• Discussing the representations and warranties of each party
• Confirm each party’s representations and warranties
• Agree on procedure for handling disputes
• Setting forth the indemnification provisions of the agreement
• Confirm indemnification clauses
• Agree on who is responsible for legal costs
• Including any additional provisions
• Identify any additional terms and conditions
• Outline any other specific requirements
• Finalizing the agreement
• Sign and date the agreement
• Confirm that all parties have agreed to the terms

Get started

Overview of the common stock purchase agreement

• Understand the purpose of a common stock purchase agreement
• Review the requirements of the agreement, including the purchase price, the number of shares to be purchased, the terms of the sale, and any other pertinent information
• Familiarize yourself with the language of the agreement, including any special terms and conditions
• Review the agreement with a lawyer or other financial adviser to ensure that it meets the standards of the jurisdiction in which it will be executed
• Check off this step when you have a thorough understanding of the agreement and are confident that it meets your needs and expectations.

Review the purpose of the agreement

• Analyze the purpose of the agreement and the scope of the parties involved in the transaction
• Understand the terms of the agreement and the terms of the common stock, such as the rights associated with common stock
• Make any necessary changes to the agreement to ensure that the purpose of the agreement is met
• Check for consistency between the agreement and all related documents
• Ensure that all parties involved in the transaction fully understand the agreement and its purpose
• When all changes to the agreement are made and all parties are in agreement, you can move on to the next step.

Identify any applicable laws or regulations

• Research and review any applicable state or federal laws that may need to be taken into consideration when drafting the agreement.
• Review any local regulations that may be in place that may affect the agreement.
• Double check to make sure all laws and regulations are up-to-date and accurate.
• Once you have identified any applicable laws or regulations, you can then move on to the next step.

Defining the parties involved

• Identify the company issuing the stock and the individual or entity purchasing the stock.
• List each party’s full legal name, address, and contact information.
• Verify that the parties are legally capable of entering into a contract.
• Confirm that each party is aware of the other’s rights and responsibilities.
• Determine which state’s laws will govern the contract.

You can check this off your list and move on to the next step once you have identified all parties involved and verified that they are legally capable of entering into a contract.

Identify all parties to the agreement

• List out the names and roles of all parties involved in the agreement
• Make sure you have the legal name and any other relevant names associated with each party
• Once you have identified the roles and names of all parties involved, you can move on to confirming their addresses in the next step.

Confirm the names and addresses of each party

• Confirm the legal name, address, and contact information of the buyer and seller.
• Ask each party to provide evidence of their legal name and address, such as a copy of a valid driver’s license or other government-issued identification.
• Make sure to include both the physical address and mailing address in the agreement.
• Once you have confirmed the buyer and seller’s names and addresses, you can move on to determining the purchase price.

Determining the purchase price

• Consult the parties’ respective financial advisors to determine the purchase price of the common stock.
• Negotiate the purchase price, if necessary.
• When the parties can agree on the purchase price, they can move on to the next step.

Confirm the purchase price of the common stock

• Negotiate the purchase price of the common stock with the company or other party selling the stock
• Reach an agreement on the purchase price
• Obtain the terms of the agreement in writing
• Both parties sign and date the agreement to confirm the purchase price
• You will know you have completed this step when a signed and dated written agreement has been established for the purchase price of the common stock.

Agree on payment method and terms

• Negotiate and agree on the payment method and payment terms between the buyer and the seller.
• Discuss and agree on the timing of payment and if any payment installments are necessary.
• Consider the interests of both parties and agree on a payment method and payment terms that are mutually beneficial.
• Establish which party will be responsible for any taxes, fees, and other costs associated with the transaction.
• Make sure all payment methods and terms are clearly documented in the purchase agreement.

Once the payment method and terms are agreed upon by both parties, you can check this off your list and move on to the next step.

Determining the amount of common stock to be purchased

• Calculate the total value of common stock to be purchased.
• Estimate the number of shares which will be purchased, based upon the total value of stock.
• Negotiate the final number of shares to be purchased with the other party.
• Agree on the number of shares to be purchased and document the agreement in writing.
• When the number of shares to be purchased is agreed upon and documented in writing, this step is complete and you can move on to the next step.

Establish the number of shares being purchased

• Identify the number of shares being purchased and the price per share of the common stock
• Calculate the total purchase price for the common stock
• Add the number of shares and the total purchase price to the common stock purchase agreement
• Have both parties sign the agreement to complete the purchase
• You will have completed this step when the agreement is signed by both parties and the number of shares and total purchase price have been added to the agreement.

Establish the voting rights of the shares

• Determine whether the stock purchased is voting or non-voting stock
• Specify the percentage of shares that will entitle the holder to vote
• Clearly state the company’s rights and responsibilities regarding voting
• Indicate if the holder is allowed to vote in person or by proxy
• Include any other specifics regarding voting rights

When you have established the voting rights of the shares, you can move on to the next step.

Establishing the rights and responsibilities of each party

• Identify the roles and responsibilities of each party as they relate to the common stock purchase agreement
• Outline the rights and duties of the buyer and the seller in the agreement
• Ensure that the agreement includes details regarding the payment of dividends, restrictions on the transfer of shares, and any rights to inspect the books of the company
• Include details on the reporting and disclosure requirements of each party
• Specify the procedures for resolving disputes and for amending the agreement

Once all the rights and responsibilities of each party have been established, you can check this off your list and move on to the next step.

Determine the obligations of each party

• Identify the obligations of the buyer and seller in the agreement
• Determine the amount of the purchase price and payment terms
• Include other obligations of each party, such as warranties, representations, and covenants
• Confirm that all obligations are reasonable and legal
• Verify that all parties agree with the list of obligations
• When all obligations are agreed upon, document them in the agreement

How you’ll know when you can check this off your list and move on to the next step:

• When all parties agree to the obligations in the agreement, and the agreement is correctly documented.

Establish the rights of the parties to the agreement

• Identify which party is the seller and which is the buyer
• Specify the number of shares to be purchased and their purchase price
• Outline the rights of the buyer and seller, including such matters as the right to inspect financial records of the company, management of the company, voting rights, and dividend payments
• Address any restrictions on the sale or transfer of the shares
• Describe the warranties and representations of the seller
• Include a clause stating that the shares are not being purchased for the purpose of resale
• Establish the closing date and any conditions for closing
• When you’ve completed all of the above, you can check this step off your list and move on to the next one.

Establishing the terms and conditions of the agreement

• Identify the buyer and seller as well as the company whose stock is being purchased
• Describe the purchase price and the number of shares being purchased
• Include a clause indicating that the buyer will receive the shares free of any liens or encumbrances
• List any warranties or representations made by the seller
• Specify the closing date of the transaction and the conditions that must be met for the closing to take place
• Outline any restrictions on the transfer of the shares
• Include a governing law clause to dictate the applicable law for the agreement

Once all of the terms and conditions have been established, you can move on to the next step.

Set forth the duration of the agreement

• Determine how long the agreement will remain in effect
• Set a specific timeframe for the agreement, such as a date of expiration or number of years
• Ensure that the timeframe is reasonable
• Include a clause stating that the agreement will automatically renew unless either party terminates it
• When you have determined the duration of the agreement, make sure to include it in the document
• You can check off this step when you have determined the duration of the agreement and included it in the document.

Outline any restrictions on transfer of the shares

• Identify who will be able to transfer the stock (e.g. the shareholders or the company)
• Specify any restrictions on the transfer of the shares (e.g. transfer must be done in compliance with applicable laws and regulations, or the company must approve of the transfer)
• Note any exceptions to the restrictions (e.g. the company may not reject a transfer for a shareholder who is deceased)
• Include any other relevant details regarding restrictions on transfer of the shares

You’ll know you are able to move on to the next step once you have outlined the restrictions on transfer of the shares in the agreement.

Discussing the representations and warranties of each party

• Think through each party’s liabilities in the transaction and identify what each party will be responsible for
• Identify any representations and warranties made by each party and include these in the agreement
• Ensure that the representations and warranties are accurate and up-to-date
• Clearly state the scope of each party’s warranties
• Include provisions that allow for any disputes to be resolved quickly and fairly
• When done, make sure to review the representations and warranties and ensure that they are accurate and up-to-date

You can check this step off your list when both parties have agreed on the representations and warranties in the agreement.

Confirm each party’s representations and warranties

• Have each party review and sign off on the representations and warranties in the agreement
• Ensure that each party agrees to the representations and warranties and that they are accurate
• Make sure that each party is aware of the risks associated with the representations and warranties
• Make sure that each party is aware of their obligations and liabilities in case of a breach of the representations and warranties
• When both parties have signed off and agreed to the representations and warranties, the step is complete
• You can check this off your list and move on to the next step - agreeing on procedure for handling disputes.

Agree on procedure for handling disputes

• Identify the types of disputes that may arise during the purchase or sale of the common stock
• Determine how each dispute will be resolved, including applicable legal remedies
• Have the parties agree on a dispute resolution process, such as arbitration or mediation
• Consider the use of a neutral third-party to help resolve the dispute
• Create a dispute resolution clause in the agreement that outlines the process and remedies
• When both parties have agreed to the dispute resolution process, you can check this step off your list and move on to the next step.

Setting forth the indemnification provisions of the agreement

• Draft the provisions of the agreement which set forth the indemnification of the purchaser and seller, including outlining the liability of each party with respect to any claims brought against either party.
• Address any additional provisions related to indemnification that the parties may have agreed to.
• When the indemnification provisions are drafted, reviewed, and agreed upon by both parties, you can check this off your list and move on to the next step.

Confirm indemnification clauses

• Read through the indemnification provisions of the agreement and discuss any questions or changes with the other parties involved
• Have the parties reach an agreement on the indemnification provisions of the agreement
• Confirm that all parties are in agreement with the indemnification provisions
• Once all parties agree on the indemnification clauses, record the agreement in writing in the final document
• Check off this step when all parties are in agreement and the indemnification provisions are recorded in writing in the purchase agreement

Agree on who is responsible for legal costs

• Discuss and agree on who will be responsible for covering the legal costs associated with the stock purchase agreement.
• This should include the cost for both the buyer and seller’s lawyers.
• If needed, you can use a clause that states that each party will pay for their own legal costs, unless otherwise agreed upon.
• Once you have agreed on who will cover the legal costs associated with the stock purchase agreement, you can move on to the next step.

Including any additional provisions

• Review any additional terms and conditions that may be required by the Purchaser and Seller, such as anti-dilution protection, tag-along or drag-along provisions, registration rights, etc.
• Consider any additional representations and warranties that should be included, such as financial statements, compliance with laws and regulations, etc.
• Draft a provision addressing the allocation of tax liability between the Purchaser and Seller.
• Draft any other provisions that may be necessary, such as indemnification and dispute resolution.
• Be sure to clearly define any terms used in the document.
• Once all additional provisions have been included, review the document as a whole to ensure that it accurately reflects the agreement that has been reached between the Purchaser and Seller.

Once all additional provisions have been completed and the document has been reviewed, this step can be checked off the list and the next step (### Identify any additional terms and conditions) can be completed.

Identify any additional terms and conditions

• Review the specific terms of the agreement and identify any additional terms and conditions that should be included
• Consider any special provisions for the purchase or sale of the stock, such as restrictions on transfer, or other financial arrangements
• Make sure all additional terms and conditions are in line with applicable laws and regulations
• Make a list of all the additional terms and conditions to be included in the agreement
• When all additional terms and conditions have been identified and added to the agreement, the step is complete.

Outline any other specific requirements

• Review any other documents relevant to the transaction, such as the charter and bylaws
• Consider any additional parties involved in the transaction and include them in the agreement
• Identify any additional terms and conditions, such as voting rights or indemnity
• Include any specific representations and warranties the parties are making
• Include any specific remedies for breach of the agreement
• Include any other terms and conditions that address the specific needs of the transaction
• Review state and federal laws that affect corporate transactions
• When all of the specific requirements have been outlined, you can move on to finalizing the agreement.

Finalizing the agreement

• Review the agreement for accuracy and make any necessary changes to reflect the parties’ agreement.
• Ensure the agreement complies with all applicable state and federal laws.
• Have all parties sign and date the agreement.
• Make a copy of the agreement for each party.
• File a copy of the agreement with the appropriate state/federal agencies, if required.

Once all changes have been made to the agreement, all parties have signed, and any required filings have been made, you can check this step off your list.

Sign and date the agreement

• Get all parties involved to sign the agreement
• Obtain the signatures from all necessary parties
• Make sure all signatures are done in the presence of a witness
• Once all parties have signed, the agreement will be legally binding
• You’ll know you can check this off your list and move on to the next step when all parties have signed the agreement.

Confirm that all parties have agreed to the terms

• Obtain written consent from each party confirming that they have read and agreed to the terms of the agreement
• Ensure that each party has provided written consent for all of the terms and conditions of the agreement
• Confirm that all parties have agreed to the terms and conditions of the agreement
• Check that each party has signed and dated the agreement
• Once all parties have confirmed their agreement, you can check this step off your list and move on to the next step.

FAQ:

Q: Is there a difference between a Common Stock Purchase Agreement in the US and in the UK?

Asked by Isabella on June 15th, 2022.
A: Yes, there is an important difference between a Common Stock Purchase Agreement in the US and in the UK. Generally speaking, the US version has more stringent regulations and requirements, such as for disclosures, that are not found in the UK version. In addition, the US version is subject to more scrutiny from securities regulators and may require more paperwork and formalities. The UK version is generally less restrictive, allowing for more flexibility when it comes to structuring the agreement. It is important to be aware of these differences when crafting your agreement and to ensure that you are compliant with all applicable laws.

Example dispute

Suing a Company for Breach of a Common Stock Purchase Agreement

• Plaintiff must prove that the company breached the common stock purchase agreement by providing evidence of the agreement, and demonstrating that the company failed to meet their obligations as outlined in the agreement.
• Evidence must be provided to demonstrate that the company was negligent in their duties or failed to follow through on the terms of the agreement.
• Potential damages should be calculated, such as the amount of money that was lost as a result of the breach.
• Settlement should be discussed, such as potential compensation for damages, or a return of the stocks that were purchased.
• Relevant legal documents, such as the Uniform Commercial Code (UCC), state and federal laws, and other civil law should be referenced to ensure that the plaintiff has a strong case.

Templates available (free to use)

Helpful? Want to know more? Message me on Linkedin