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
