Chapter 48 - § 48.3 • STOCK SALES

• Jurisdiction: Colorado

§ 48.3 • STOCK SALES

In a stock sale, the seller shareholders sell their ownership interests in the seller to the acquirer in exchange for cash, equity, debt assumption, or other consideration. This should be done subject to a stock purchase agreement containing customary representations, warranties, indemnifications, and covenants. Regardless of the idiosyncrasies of a transaction, counsel should be aware of some considerations common to the majority of stock deals.

Counsel for the acquirer should be diligent to ensure that once the transaction is consummated, the acquirer will truly own the seller free and clear of unexpected encumbrances. At a minimum, the stock purchase agreement should contain representations, warranties, and indemnifications made by the seller's shareholders regarding significant potential problems associated with the seller's equity interests. These should include representations and warranties addressing:

1) The capital structure and organization of the seller;
2) Ownership of all outstanding equity interests in the seller, including a representation that no additional ownership interests exist other than those being sold;
3) The fact that no equity interests are encumbered by liens, claims, or other liabilities;
4) The fact that issuance and transfer of equity and the terms of the transaction are duly authorized by the seller shareholders;
5) The fact that the transaction creates no conflicts with any of the seller's organic documents or its contracts, including agreements among shareholders; and
6) The fact that the seller entity itself has unencumbered ownership interests in all of the assets it claims to own.

Acquirers also are wise to negotiate for additional representations and warranties in specific areas about the seller's business. For example, these might address:

• Financial matters;
• Real and personal property;
• Environmental issues;
• Contracts;
• Employees;
• Employee benefits;
• Insurance;
• Bank and credit agreements;
• Taxes;
• Indebtedness;
• Compliance with laws;
• Current or possible litigation;
• Intellectual property;
• Insider transactions;
• Competing businesses; and
• Data privacy and security.

Depending on the transaction, negotiations might address any number of other areas relating to the nature of the seller's business.

Because stock is a "security" under applicable state and federal securities laws, seller shareholders should remain mindful of their obligations and potential liability under these...