Lawrence Hsieh is an attorney with his own corporate law practice and is a member of the New York Bar. He is a graduate of the University of Chicago Law School and Cornell. His website is www.contractadviser.com.
Introduction xviii Part I ' CORPORATE STRUCTURES 1 1 Business Entity Selection 3 Overview 3 Entity Selection 3 2 Organizational Documents 7 Overview 7 Sample Contract Excerpts 8 Certificate of incorporation/LLC certificate of formation ' business purpose 8 Certificate of incorporation ' authorized number of shares 8 Preemptive rights 9 Bylaws 9 Certificate of incorporation and/or bylaws 11 3 Shareholder Agreements and LLC Operating Agreements 14 Overview 14 Sample Contract Excerpts 15 Shareholder agreement/LLC operating agreement transfer restriction 15 Right of first refusal ' to the company only 16 Right of first refusal ' to the company and then the other shareholders/members 18 Drag-along rights 21 Tag-along rights 23 Status of ownership upon death ' no sale 23 CONTENTS v vi The Small-Business Contracts Handbook Status of ownership upon death ' mandatory sale 24 Other Sale or No Sale Triggering Events 25 Transferees subject to agreement 26 Preemptive rights 27 Non-competition 28 Additional capital contributions 28 Owner loans 29 Owner voting 29 Part II ' BASIC CORPORATE TRANSACTIONS 31 4 Sale of Goods 33 Overview 33 The law governing the sale of goods 36 What about international sales contracts? 37 Sample Contract Excerpts 38 Principal obligations 38 Price 41 Payment terms 42 Quantity 47 Delivery terms 48 Acceptance of goods; claims for damage, shortfall, etc. 50 Appointment of distributor; territory/customer restrictions ' distribution agreements only 51 Other provisions relating to the appointment of a distributor 53 Minimum purchase quantity ' primarily found in distribution agreements 58 Warranties 59 Intellectual property ' seller's ownership 63 Intellectual property ' infringement 64 Liability cap 65 No consequential damages 66 Insurance 66 Termination 69 Non-competition ' primarily found in distribution agreements 70 5 Sale of Services 72 Overview 72 Sample Contract Excerpts 75 Principal obligations ' service agreement 75 Principal obligations ' sales representative agreement 76 Service fee/compensation ' flat fee 76 Service fee/compensation ' percent commission (sales representative agreement) 78 Late payments/set-off 82 Appointment of sales representative territory/customer restrictions 82 Contents vii Independent contractor status 83 Other provisions relating to the appointment of a sales representative 85 Termination 88 Non-competition 90 Claims of service provider ' liability cap and no consequential damages 91 Compliance with laws 92 Indemnity 92 6 Non-Disclosure Agreements (NDAs) 94 Overview 94 Key Provisions of Confidentiality Agreements 98 Sample Contract Excerpts 100 Principal obligations 100 Confidentiality 100 Non-use 100 Need-to-know exception 101 Court-ordered disclosure exception 101 Definition of confidential information 102 Information types 103 Information formats 104 Exceptions to definition of confidential information 105 Exceptions to exceptions 106 Patents versus trade secrets 106 Term of confidentiality agreement 107 Return of confidential information 108 No obligation to enter into transaction 109 Part III ' BUYING OR SELLING A BUSINESS 111 7 Structuring the Deal 113 Overview 113 Due Diligence 114 Due Diligence Checklist 116 Contracts ' full force and effect analysis 116 Contracts ' restrictions on transfer/purchase 117 Encumbrances 118 Environmental 119 Litigation and government investigations 120 Incentive compensation/retirement plans 120 Health benefit plans 122 Intellectual property 122 Letter of Intent 124 Legal Structure of Sale of Business 125 Asset versus Stock Sale 126 viii The Small-Business Contracts Handbook Asset sale 126 Liabilities of the business assumed by the purchaser in an asset transaction 127 Stock sale 127 Tax impact 128 Allocation of purchase price 130 Incentive compensation/retirement plans 131 Collective bargaining obligations 131 Intellectual property 133 Key Provisions of Sale of Business Agreements 133 Summary of key provisions 133 8 Principal Obligations of the Buyer and Seller 136 Overview 136 Sample Contract Excerpts 137 9 Corporate Assets Purchased 139 Overview 139 Sample Contract Excerpts 140 Assets (to be sold) 140 Asset categories 141 Equipment (and other personal property) 142 Inventory 143 Accounts receivable 144 Real property 144 Fixtures 145 Contracts 145 Warranties 146 Personal property leases 146 Intellectual property 147 Permits 148 Records 148 Prepaid expenses 149 Goodwill 149 Excluded assets 149 Cash 150 Certain contracts 150 Corporate entity documents/items 150 Insider loans 150 Tax rights 151 Unliquidated claims 151 APA 151 Contents ix 10 Corporate Obligations Assumed 152 Overview 152 Sample Contract Excerpts 152 No obligations/liabilities assumed 152 Seller's conduct 153 Seller's default 153 Alternative ' certain obligations assumed 153 Seller's accounts payable 153 Obligations under assigned contracts 153 11 Purchase Price and Payment Terms 154 Overview 154 Sample Contract Excerpts 154 Cash at closing 154 Alternative ' deferred payment 155 Alternative (APA) ' cash plus assumption of liabilities 156 Allocation of SPA purchase price to individual selling stockholders 156 Earnouts (APA and SPA) 157 12 The Closing 160 Overview 160 Sample Contract Excerpts 160 Closing ' time and place 160 Seller deliveries at closing (APA or SPA) 160 Ancillary documents 161 Officer and director ' ancillary documents 163 Contract consents 165 Government consents 165 Legal opinion 166 Resolutions 166 Purchaser deliveries at closing (APA or SPA) 167 Purchase price 167 Ancillary documents 167 Resolutions 168 13 Representations and Warranties of the Seller 169 Overview 169 How to qualify representations 170 Sample Contract Excerpts 173 Survival of representations 173 APA introductory language 177 SPA introductory language 178 x The Small-Business Contracts Handbook Organization, power, and authority to run business 178 Qualification in foreign jurisdictions 180 Authority to sell 180 Consent of third parties to transaction 181 Consent of government authorities to transaction 183 No conflict with corporate documents, contracts, or laws 183 No liens resulting from transaction 184 Enforceability 184 Capitalization 185 Financial statements 186 No material adverse change 188 Extraordinary transactions or events (generally) 189 Litigation and investigations 191 Undisclosed liabilities (other than taxes) 192 Taxes 193 Compliance with law 194 Environmental 195 Assets 196 Title to assets ' balance sheet 199 Sufficiency and condition of assets 199 Inventory 200 Accounts receivable 201 Contracts 202 Intellectual property 203 Real estate 204 Employee benefit plans 206 Labor matters 208 No brokers 209 Brokers ' alternative 210 Full disclosure 210 Sandbagging 212 14 Representations and Warranties of the Buyer 214 Overview 214 Sample Contract Excerpts 215 Organization; power and authority to run business 215 Authority to buy 215 Enforceability 215 Securities laws 215 15 Affirmative Covenants and Negative Covenants 217 Overview 217 Sample Contract Excerpts 217 Access 217 Contents xi Consummation of agreement 218 Conduct of business 219 Notice of changes 220 16 Closing Conditions 221 Overview 221 Closing conditions of the purchaser 221 Sample Contract Excerpts 222 Representations and warranties ' “bring downa 223 Compliance with covenants 224 No legal and government action 225 Contract consents 225 Government consents 225 Ancillary documents 226 Financing 226 Other documents/actions 227 Additional closing conditions to consider 227 Closing conditions of the seller 228 Representations and warranties 229 Compliance with covenants and no legal and government action 229 17 Indemnity 230 Overview 230 Termination 230 Close, but recover post-closing 230 Renegotiate and then close 231 Mutual indemnities 232 Sample Contract Excerpts 232 Part IV ' LOANS 233 18 Types of Business Loans 235 Overview 235 Promissory notes 236 Lines of Credit 237 Term Loans 238 Revolving Loans 239 19 Loan Payment Issues 242 Overview 242 Sample Contract Excerpts 243 Advances ' term loan 243 Advances ' revolving credit facility 243 Fixed interest 244 Floating interest ' alternative 245 Default interest ' fixed rate loan 246 xii The Small-Business Contracts Handbook Default interest ' floating rate loan 247 Usury 247 Payments ' term loan 248 Prepayments ' optional ' term loan 248 Prepayments ' mandatory 250 Prepayments ' mandatory ' revolving borrowing base 250 Commitment fee ' revolving credit facility 251 Facility fee ' revolving credit facility or term loan 251 Closing fee ' revolving credit facility or term loan 252 Defaults and events of default ' revolving credit facility or term loan 252 Event of default remedies ' revolving credit facility or term loan 256 20 Representations, Warranties, and Covenants 257 Overview 257 Contract Clause Discussion 258 Organization; power and authority to run business; and qualification in foreign jurisdictions 258 Authority to enter into the loan transaction (i.e., borrow the money and enter into the loan agreement, promissory note, etc.) 258 Consent of third parties to transaction; consent of government authorities to transaction; no conflict with corporate documents, contracts, or laws 258 Enforceability 259 Financial statements 259 No material adverse change 260 Undisclosed liabilities (other than taxes) 260 Litigation and investigations 260 Compliance with laws 261 List of assets; title to assets; sufficiency and condition of assets 261 Full disclosure (a.k.a., 10b-5 representation) 261 Covenants 262 Sample Contract Excerpts 265 Introductory language (covenants) 265 Affirmative covenants 266 Negative covenants 273 Financial covenants 280 21 Guaranties 287 Overview 287 Sample Contract Excerpts 288 The guaranty 288 Absolute, unconditional, and irrevocable liability of the guarantor 289 Guaranty of payment (versus collection) 290 Continuing guaranty 290 Waivers of defenses 291 Contents xiii Reinstatement 295 Part V ' STANDARD CONTRACT CLAUSES 297 22 Boilerplate in General 299 Overview 299 23 Termination 301 Overview 301 Sample Contract Excerpts 302 Termination for cause (breach) 302 Termination for cause (bankruptcy) 303 Termination for cause (death or disability) 304 Termination for cause (assignment) 305 Termination for convenience 305 24 Remedies and Limitation of Liability 306 Overview 306 Remedies quick primer 306 Sample Contract Excerpts 308 Cumulative remedies 308 Exclusive remedies 309 Liquidated damages 310 Exclusion of consequential and incidental damages 310 Liability cap 311 Availability of equitable remedies 311 25 Severability 312 Overview 312 Sample Contract Excerpts 313 Alternative 1 ' Offending provision severed 313 Alternative 2 ' Severable to extent determined by court 313 Alternative 3 ' Not severable 313 Alternative Severability Clause for Non-Compete Provisions 314
