June 28, 2017

Best Practices: Change of Ownership via Stock Purchase – A Primer

by Victor A. Diaz

Changes of ownership financed with SBA guaranteed loans are often structured as stock purchase transactions. Beyond the rigorous requirements imposed by the SBA, the transfer of fractional ownership interests from one individual or entity to another must adhere to strict, corporate formalities required by law. While these can vary significantly from jurisdiction to jurisdiction, some are generally established and should be observed when documenting and memorializing such transfers. The majority of these requirements are also applicable when documenting transfers involving the sale of membership units in limited liability companies.


Start by reviewing a fully executed copy of the Stock Purchase Agreement. Confirm the identity of the buyer/borrower and seller to verify it conforms with the approved loan structure and is otherwise eligible under general SBA change of ownership guidelines. Particular attention should be paid to the seller’s representations, warranties and any obligations between the parties surviving the purchase such as employment, consulting agreements or similar earn-out provisions impacting the loan’s eligibility. If not included, the following certification should be requested as part of documentation of the stock purchase: (i) that the stock of the corporation is validly issued, fully paid and non-assessable; (ii) that the stock of the corporation is not subject to any option, warrant, call, commitment, pledge, or lien of any kind; and (iii) a waiver from seller of any and all claims against the corporation.

Because of the nature of stock purchases and the liabilities being assumed, inquiry should be made as to any pending or threatened litigation against the corporation or seller. In the event there is a pending or potential claim against the corporation, further steps may require in depth review of the court records, demand letters and confirmation of the existence of any indemnity insurance. If there is pending litigation, confirm the insurance company is not proceeding under a reservation of rights letter. These letters allow an insurance carrier to reserve its rights to later deny coverage under the insurance policy.

The next step is to corroborate that the seller is the lawful owner of the shares being sold. For this, you should request a copy of the corporation’s Stock Register or Ledger as well as copies of all issued and outstanding stock certificates including the next blank certificate. Take a minute to match the stock certificate and stock ledger to confirm there are no missing certificates or other red flags pointing to undisclosed shareholders. Additionally, request and review copies of Shareholder Agreements, if any, to confirm the seller has the ability to sell the stock and what, if any, restrictions there may be on its sale or transferability.

Once satisfied with the seller’s ability to sell the stock, request and review copies of any and all corporate resolutions authorizing the sale by the seller and/or the corporation, and, if not included within the Stock Purchase Agreement, copies of any consulting, employment indemnification or non-competition agreements. Finally, obtain a Certificate of Good Standing for the corporation to ascertain it is active, able to do business lawfully and that any annual dues are paid current.

At Closing:

On the day of closing, the seller must produce the actual stock certificates, dated as of the Closing Date, duly endorsed for transfer and with appropriate stock powers attached, and if required by state law, all necessary transfer tax stamps affixed or provided for. Additionally, the lender should obtain and keep for their records all documentation evidencing the sale of the stock. These typically will include: (i) corporate minutes naming buyer/borrower as purchaser of stock; (ii) resignation of seller withdrawing as Officer/Director of the corporation; (iii) corporate resolution(s) accepting buyer/borrower as new Officer/Director/Shareholder of the corporation; (iv) copy of Stock Register reflecting stock transfer in favor of buyer/borrower; (v) new stock certificates issued to the buyer/borrower; and (vi) corporate resolutions adopting newly elected officers.

Lastly, as required by the SBA, obtain a certification from the corporation that: (a) the loan proceeds will be used to acquire all or part of its corporate stock; (b) it promises to be jointly and severally liable for the debt; (c) the loan assistance constitutes sufficient consideration for such promise; and (d) it waives any defense relating to failure of consideration.


As a final step, obtain verification from the Secretary of State, or similar office in your state, showing the changes to the corporation’s officers/directors and registered agent have been made of record. For more information on changes of ownership, please contact Victor at 407-667-8811 or via email at