Stock/Membership Interest Purchase Agreements: How to Come Out on Top in the Sale or Purchase of Your Company
What is a Stock/Interest Purchase Agreement?
A stock or interest purchase agreement is the main transaction document for business acquisitions. A stock purchase agreement is specifically for corporations and an interest purchase agreement for partnerships and LLCs. The stock/interest purchase agreement is used to transfer any or all parts of seller’s interests and liabilities in the business.
What Key Issues Should I Consider when Drafting an Stock/Interest Purchase Agreement?
While each deal has different issues, there are certain provisions in the stock/interest purchase agreement that the buyer and seller typically negotiate. Key issues to consider when drafting or reviewing a first draft of the stock/interest purchase agreement are:
Key definitions. The definition of terms such as "material adverse change" and "knowledge" are often heavily negotiated because they can significantly affect the allocation of risk between the parties.
Purchase price. It is important to determine the purchase price, how and when the purchase price will be paid, and the price of the down payment for the seller’s equity payment.
The Details of the Company. Details of the company include the company assets, liabilities, the type of stock, and whether the company has other ownership interests.
Stock Details. It is important to determine the type of stock (common, preferred, etc.), how many shares are available, and any limitations to the stock.
Representations and warranties. Parties negotiate the scope of the representations and warranties. For example, if the buyer is only purchasing certain enumerated stocks or interests, the seller will try to limit the representations and warranties to those areas. Parties also negotiate whether a representation and warranty may be qualified by materiality, material adverse effect, knowledge, or the disclosure schedules.
Closing conditions. In addition to the usual standard conditions to closing, deal-specific conditions, such as obtaining buyer financing or third-party consents, are typically topics of negotiation.
Covenants. Parties negotiate the scope of the restrictive covenants. For example, the buyer usually tries to limit the actions of the seller under the interim operating covenant while the seller generally tries to expand what actions are permissible. The parties also negotiate the inclusion and scope of other common restrictive covenants such as a no-shop (or exclusivity) and a non-compete. Another key area of negotiation is the allocation responsibility for liabilities in post-closing covenants such as those arising from employee and tax matters.
Termination. Parties negotiate who has the right to terminate the agreement, under what circumstances, and whether break-up fees are payable in connection with a termination. If the agreement provides for the payment of a break-up fee, the parties negotiate the size of the break-up fee.
Indemnification. Parties negotiate what is indemnified and the procedure for obtaining the indemnification. Limitations on indemnification are also heavily negotiated (for example, the size of any caps, baskets, or deductibles).
It is important to be as clear as possible while drafting the agreement and to ensure compliance with the Articles of Incorporation and Bylaws for the company. If there are any terms in the documents that do not comply with the purchase agreement, the entire purchase could be entirely invalidated.
If you need help drafting, enforcing, or defending a stock or interest purchase agreement, or have any questions about selling or purchasing companies in Colorado, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.