Partnering Agreements

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Acquisition Agreements

Initial Agreements
Acquisition Agreements are often composed of a one or two core agreements and multiple sub-agreements. Larger transactions are often associated with larger number of sub-agreements and as well as an increased page count. Here are the more common such agreements:

Core Agreements

Miscellaneous Agreements
Equity and Debt Instruments
Core Agreements
Stock Purchase Agreements
Asset Purchase Agreements

As their titles indicate, a stock purchase agreement is an agreement to purchase the stock of a company and an asset purchase agreement is an agreement to purchase its assets.

The decision to purchase stock versus assets is usually driven by tax and liability considerations. The stock purchase agreement is more useful than the asset purchase agreement when you are purchasing a portion of a business for investment purposes as opposed to buying the entire business. The asset purchase agreement is best when there may be hidden or visible liabilities that you want to avoid. You can leave those with the original corporation.

The major elements of both types of agreements are dedicated payment terms, warranties, indemnifications, and conditions to closing. Whether purchasing stock or assets, a buyer will still want substantially the same warranties on assets and other aspects of the business.

Shareholder Agreements

If you own an interest in a privately-held business, you need the ability to sell it in a predictable and orderly fashion. You also want to make sure that other shareholders are unable to divert profits, salaries and other benefits of ownership to themselves. If this happens, it reduces the value of the interest.

Even if you own a majority interest in a company, you want some control over who other shareholders sell their stock to. The purpose of shareholder agreements is to address all these problems.

Shareholder agreements can include the following types of provisions:

  • A right of first refusal on the sale of company shares.
  • A right of appraisal in the event of forced sales.
  • Participation rights in the sales of stock by other shareholders.
  • Veto rights over compensation and disbursements to other shareholders.
  • Veto rights over specified corporate actions or transactions.
  • The right to be represented on the board of directors.
Partnership Agreements

Do you know the difference between shareholder agreements and partnership agreements? Not that much. The major difference is that partnerships differ in structure from corporations.

Both agreements deal with substantially the same concerns: control and extraction of the benefits. It is just that the structure of the partnership causes these concerns to play themselves out in a different set of issues. The provisions of a Partnership Agreement will address:

  • Control of the partnership.
  • Distribution of profits.
  • Ability to dispose of partnership interests.
Equity and Debt Instruments

An option is the right to purchase stock at a pre-agreed price. Both the price and the number of shares can be fixed or determined by formulas. The formula can be based on earnings or revenue. It can also be based on some measure of the option holder's performance. For example, the option holder might be a distributor of the company's products. The exercise price of the option might vary depending on how much product the option holder sells. Most options must be exercised within a fixed period of time or the right terminates.

When options are granted to employees, they normally vest over a period of time. Employees that leave the company before vesting is complete lose the unvested portion of the option.

Once the shares are purchased under an option, the new shareholder will have the same need to be protected by a shareholder agreement as any other shareholder. Usually, these issues are neglected until the shares are purchased. Unfortunately, if they are not addressed at the time the option is issued, they are difficult to negotiate later. We will talk about shareholder agreements later on.

Options to purchase stock can be issued by any shareholder who owns the stock. In fact, they can even be issued by someone who doesn't own the stock. However, issuing an option without the stock to back it up can be dangerous. If the option is exercised, you will have to scramble to get the stock necessary to deliver to the option holder.


A warrant is identical to an option except that it is issued by the corporate issuer of the stock to which the holder is entitled to purchase. This distinction has become blurred over the years as a result of primarily as a result of the use of the term "stock options" for the common practice of granting "warrants" to employees.

The issuing corporation can issue the warrant out of treasury stock or it can merely authorize new stock. When you accept a warrant, it is generally prudent to require that the corporation's board of directors authorize and set aside shares of the corporation's stock to be dedicated to fulfilling the option on its exercise.

Convertible Debt

Convertible debt is debt that can be exchanged for stock. The exchange rate may be fixed or determined by a formula. The formulas that you can use are the same ones you would use with a formula option. It can be based on earnings or revenue, or on some measure of the option holder's performance.

It is possible that the debt will never be converted to equity. The exchange of the debt for stock can be triggered by any of the following:

  • The election of the debt holder.
  • The election of the issuing company.
  • The occurrence of specified events such as a public offering.

The need for shareholder protections such as those provided in a shareholder agreement applies to convertible debt in the same way it applies to options.

Redemption Agreements

Redemption Agreements gives their holders the right to sell stock to the issuing company.

There are many variations of (a) what can trigger this right, and (b) the formula that controls the price at which the corporation must buy its the shares.

Promissory Notes

These are notes that promise to pay their holders a sum of money, usually with interest. The money may be paid in a lump sum or in a series of payments over the life of the note.

The note can be secured with property. If it is secured, it can limit the holder's recourse to the property, thereby protecting the issue from any further liability.

We will next look at Credit & Security Agreements. Keep in mind that promissory notes often contain many of the same provisions you will find in Credit & Security Agreements.

Letters of Credit

A letter of credit is a promise by a bank to pay a specified amount of money to the holder of the letter of credit. In order to receive the money, the holder must present whatever documents that the letter of credit specifies to the bank.

Letters of credit are useful because of the flexibility you have in determining what these documents can be. They can be shipping documents, warehouse receipts, inspection reports, or third party certifications that specified events have occurred. By carefully selecting what documents a letter of credit requires, you can design a letter of credit to guarantee almost any type of transaction.

In practice, letters of credit are used only to guarantee payment obligations. When the guaranteed performance involves more complex performance obligations like the performance of construction contractors, performance bonds are usually used. They are issued by insurance companies.

When the holder of a letter of credit exercises it and the bank disburses the money, the procuring party must reimburse the bank. Banks are required to unwaveringly honor their letters of credit without compromise. They are prohibited from looking at any discrepancies or problems in the underlying transaction between the holder and the procuring party.

Small banks and foreign banks can not always be relied upon to do what they are supposed to do. If you hold a letter of credit from such a bank, it is often advisable to get it "confirmed" by a major money center bank. A confirming bank must honor the letter of credit as if it were its own. A money center will be careful to comply with its obligations and disburse the money when it is presented with the letter of credit and the required documentation. Without the confirming bank, the procurer may be able to delay or prevent the issuing bank from honoring the letter of credit.

A small or foreign bank may permit itself to be influenced by an important local customer. A major money center bank can't afford to sully its banking reputation by permitting a customer to influence its decision to honor a letter of credit. Its reputation as a reliable issuer of letters or credit is too important to its ability to function as a money center bank.

Credit & Security Agreements

These agreements contain provisions that help ensure payment of debt. In most instances, the debt will be represented by a promissory note.

These agreements will usually secure the debt with a lien on the debtor's property. In addition, they will include details on payment terms, what constitutes an event of default, rights to accelerate payments in the event of default, rights to ongoing financial information, and other creditor rights.

These agreements can also include operational restrictions such as negative covenants prohibiting specified actions and affirmative covenants requiring specified actions. These covenants can also control any activity that may impair the debtor's ability to pay. For example they can impose restrictions on compensation paid to shareholders, additional debt, and the disposition of property. They can also require maintenance of specified financial ratios such as debt to equity ratios.

Revenue Participation Agreements

A revenue participation agreement entitles its holder to be paid a stream of revenue based on some measure of a corporation's performance. The revenue stream can be based on gross revenue, gross profits, net profits, compensation and dividends paid to shareholders, or some other measure.

When structuring a deal where you will participate in the success of a privately held company, revenue participation agreements are usually preferable to obtaining a direct minority interest in the company.

Miscellaneous Agreements
Employment Agreements

These are agreements that control terms of employment. They usually contain provisions relating to duration of employment, employee compensation, employee benefits and perquisites, employee duties, rights to terminate, and termination pay.

Employers often assume that it is possible for an employment agreement to force an employee to work for an agreed period of time. This is neither legal or practical. It went out with indentured servitude. You can't force performance from an employee who does not want to work for you.

Employment agreements are effective only as a carrot to encourage an employee to stay. Here's an idea. If you combine an employment agreement with a non-compete agreement and a proprietary rights agreement, you can often provide an employee with strong encouragement to stay.

Non-competition Agreements

These agreements prohibit one party from competing with another. They are often called "non-compete" agreements. The scope of restricted activities will vary from agreement to agreement. Sometimes, the restricted parties will have an obligation to periodically report on their activities.

Ease of enforcement varies substantially from situation to situation. A non-compete agreement arising out of an employment relationship can be difficult to enforce. A non-compete agreed to as part of the sale of a business is much easier to enforce.

Even an employment related non-compete agreement, though can be made enforceable by adding provisions that make the impact of enforcement less burdensome on the employee. For instance, you can provide an employee who must forgo employment as a result of the agreement a reasonable consulting fee during the period of non-competition.

In assessing enforceability, courts require that the restrictions be reasonable. They look at the nature of the relationship, the bargaining power of the parties, the scope of the relationship, the length of time the restrictions remain in place, and the geographical reach of the restrictions. The determination of reasonableness is made on a case by case basis. It can be controlled in large part by the predisposition of the judge to particular legal theories or fact patterns.

One of the most effective tools for assuring compliance with non-compete restrictions is the right to withhold money owed to the restricted party.

Proprietary Rights Agreements

These agreements control ownership and rights to proprietary rights that are developed or acquired during the course of a relationship. These proprietary rights can include patents, trademarks, copyrights, and trade secrets.

Believe it or not, these agreements can even reach out and control proprietary rights that come into existence after the end of the relationship.

The relationship can be other than an employment relationship. It can be a relationship with an independent contractor, a partner, a shareholder, a vendor, or a customer.

Personal and Corporate Guarantees

These are agreements to guarantee the performance of another party under a separate agreement. The guarantor is often an owner of the company whose performance is being guaranteed.

Sometimes, though, the guarantor is an independent third party that is compensated for providing the guarantee. Guarantors are frequently compensated with equity, warrants, options, and/or revenue participation agreements. They will often insist that an owner of the company co-guarantee its performance.

Enforcement of a guarantee can be made subject to numerous types of pre-conditions. Also, the liability of the guarantor can be limited to a specified amount. This last condition is one of the most frequently negotiated elements of a guarantee.

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