Once the due diligence has been completed, valuations and appraisals conducted, terms and price initially negotiated, and financing arranged, the acquisition team must work carefully with legal counsel to structure and begin the preparation of the definitive legal documentation that will memorialize the transaction. The drafting and negotiation of these documents will usually focus on the key terms of the transaction, the past history of the seller, the present condition of the business, and a description of the rules of the game for the future. They also describe the nature and scope of the seller’s representations and warranties, the terms of the seller’s indemnification of the buyer, the conditions precedent to closing of the transaction, the responsibilities of the parties during the time period between the execution of the purchase agreement and the actual closing (if not simultaneous), the terms and structure of payment, the scope of post-closing covenants regarding competition and related obligations, the deferred or contingent compensation components, and what will happen if things go awry post-closing, such as any predetermined remedies for breach of the contract. See Figure 11-1.
The key terms of the purchase agreement will often be dictated by four major variables:
1.The relative drafting and negotiating skill of each party’s legal counsel
2.The special risks and unique structural challenges of the transaction (typically a reflection of problems identified during due diligence)
3.The relative bargaining strength of the parties
4.Market conditions at the time the transaction is consummated
On this fourth point, it is critical to understand that there is a wide variety of terms and conditions in the purchase agreement that may vary depending on the state of the overall economy. What terms may be “fair and reasonable” or “market” will be driven both by the specifics of the transaction and by whether the marketplace at the time of the deal is viewed as being more heavily weighted in favor of sellers, such as in 2006 and 2007, or in favor of qualified and cash-flush buyers, such as in 2008 and 2009. As we saw in Chapter 9, market conditions can also dictate the prevailing EBITDA multiples, but here they are also driving specific purchase agreement terms, such as the scope of the indemnification, the amount to be withheld in escrow for unknown liabilities (the holdback), limitations on specific types of post-closing liabilities (the basket), limitations on the amount of damages suffered by the buyer that can be recovered by making claims against the seller (the cap), the amount of equity to be retained by the seller or its team (the rollover), the extent of the conditional or contingent consideration (the earn-out), and a variety of other provisions.
In a buyer’s market, the terms that allocate risk will be much more heavily weighted in favor of the buyer, translating into larger holdbacks, more earn-outs, lower or “dollar-one” baskets, longer indemnity survival periods, and higher caps relative to the overall purchase price. In a seller’s market, it is typical to experience the converse of these terms unless there are significant risks uncovered during due diligence and/or a significant disparity in the bargaining power of the parties.
By way of illustration only, Figure 11-2 gives some typical terms depending on market conditions.
For the balance of this chapter, assume that Growth Co. Corp. (GCC) has identified Target Co., Inc. (TCI), a closely held manufacturer, as an acquisition candidate, but is concerned about unknown or contingent liabilities stemming from some prior product liability claims against TCI that may resurface. A memorandum of understanding is negotiated so that GCC will acquire substantially all of the assets of TCI for $10 million. The financing arranged by GCC will come from the four following sources:1
1.$2,000,000 in cash from the internal capital reserves and retained earnings of GCC
2.$3,000,000 in debt financing provided by Business Bank Corp. (BBC), which will be secured by the assets of TCI
3.$4,500,000 in seller’s take-back financing by TCI and in the securities of GCC, payable as follows:
a.$2,000,000 subordinated five-year promissory note
b.$1,000,000 in the common stock of Growth Co. Subsidiary, Inc. (GCS), a new subsidiary established by GCC to manage and operate the assets being acquired
c.$1,300,000 (as a target it could be more, it could be less) in the form of a contingent earn-out based upon the financial performance (such as a percentage of sales or net profits) of GCS over the next three years
d.$200,000 in the form of a two-year consulting agreement at $100,000 per annum for the founding shareholders of TCI2
4.$500,000 of TCI debt that will be assumed by GCC
In structuring this deal, notice that GCC has created a new subsidiary to receive, manage, and operate the assets being acquired from TCI. This is a risk management tactic that will help to insulate GCC assets in the event of a subsequent dispute and make the accounting for the earn-out component easier to calculate. GCC has also managed to shift the allocation of risk back to the seller by negotiating roughly 40 percent of the purchase price as being either contingent or deferred. From a liquidity and timing perspective, this deal is also favorable to GCC, since it must provide only 20 percent of the acquisition cost from its own funds and has several years to repay the lion’s share of its obligations to BBC and TCI. Notably, if GCC was paying the full or even majority of the purchase price in cash, it would have greater leverage in the negotiations. The officers of GCC have also managed to convince the shareholders of TCI to buy into the future business plan of GCS, since they have agreed to take 25 percent of their consideration in stock, in a consulting agreement, and in the form of a contingent earn-out. Notwithstanding these attractive features to GCC/GCS, the TCI shareholders are not exactly in terrible shape either—they receive 50 percent of their selling price in cash at closing, get $500,000 of their accounts payable assumed by GCS/GCC, and are second in line (behind BBC) with a security interest in the assets sold.
The transaction discussed here involves a wide variety of legal documents that must be prepared and negotiated in order to consummate the transaction, such as:
Asset purchase agreement (among GCC, GCS, and TCI).
List of schedules and exhibits to the asset purchase agreement (to be compiled and prepared by TCI and its counsel).
Intercreditor agreement (between BBC and TCI).
Loan agreement (among BBC, GCC, and GCS).
Promissory note, security agreement, and financing statements (for BBC loan).
Promissory note, security agreement, and financing statements (for TCI take-back financing).
Noncompetition and nondisclosure agreements (for TCI management team to GCC and GCS).
Consulting agreements (which serve as part of the deferred compensation to certain TCI shareholders).
Employment agreements (to the extent that any of TCI’s employees will be hired).
Assignment of key contracts and third-party consent agreements (e.g., leases, loan agreements, and so on) from TCI to GCS.
Board of directors and shareholders resolutions of TCI approving the transaction.
Board of directors resolutions of GCC and GCS approving the transaction.
Certificates for the GCS common stock (for TCI shareholders).
Assumption of liabilities agreement (also known as a liabilities undertaking by GCS to TCI, subject to the consent of the TCI creditors). In addition, TCI may want to obtain estoppel certificates or novation agreements from creditors covered by this agreement.
Bill of sale (for TCI assets sold to GCC and GCS).
Bulk sales affidavits (if applicable under Article 6 of the state commercial code) from TCI to its creditors.
Disclosure documents to TCI shareholders for issuance of GCS warrants (if required by federal or state securities laws).
Opinion of TCI counsel (to GCC and GCS).
Lien search reports on TCI assets.
Certificates of compliance with representations, warranties, and conditions precedent by TCI president and secretary.
Earn-out agreement (may be included in the main body of the asset purchase agreement or be separate).
Indemnification agreement (may be included in the main body of the asset purchase agreement or be separate).
Escrow agreement (if negotiated); proceeds of sale price to be placed in escrow until certain post-closing conditions are met and post-closing adjustments are made by TCI, or as a contingency reserve fund in the event that representations and warranties are subsequently found to be untrue.
Resignation and release agreements (from TCI employees who will not be retained after the transaction).
Personal guarantees (by key shareholders of GCC if demanded by BBC or TCI to secure the promissory notes).
License agreements (if any, to the extent that intellectual property rights are being retained by TCI and exclusively licensed by GCS).
Allocation certificates for federal, state, and local tax filings (as well as UCC filings where applicable).
Note: Had the transaction been structured as a stock purchase rather than an asset transaction, then TCI shareholders would also have to produce duly endorsed stock certificates, current corporate financial statements, certified copies of the corporate financial statements, certified copies of the corporate articles and bylaws, certificates of good standing, officer and director releases, termination and resignation agreements, termination of personnel and retirement plans (where applicable), and all other material corporate documentation at the closing. The structure is dictated by a combination of tax implications, the nature of the business, and the goals of the buyer.
Now, let’s take a look at a few of these agreements in more detail.
This document includes a statement of the parties to the transaction, identification of the specific tangible and intangible assets that are being sold and liabilities that are being assumed/assigned, the manner in which the assets and liabilities will be sold, the terms and conditions of the transaction, the amount and terms of payment of the consideration to be paid by the purchaser, the assurances of the seller as to the status and performance of the assets being sold, the rights of each party if another party fails to perform as contemplated by the agreement or otherwise breaches its representations and warranties, and the timetable for the closing of the transaction. The purchase agreement can be more easily understood by looking at its key components based on the three critical categories of issues to be addressed as set forth in Figure 11-3.
The asset purchase agreement should be balanced to protect the interests of both parties. From the buyer’s perspective, the asset purchase agreement should provide as much detail as possible concerning the status and performance of the business to be acquired; shift risk to the seller by establishing grounds for the buyer to terminate the transaction if the representations and warranties prove untrue and a basis for renegotiation if facts develop indicating that the transaction, as structured, is not what the buyer had bargained for; and provide a basis after closing for the buyer to seek monetary damages from the seller should the representations, warranties, and covenants of the agreement prove untrue.
The asset purchase agreement should provide a means for updating the information delivered to the purchaser by the seller and, if the transfer of the business is to occur on a date subsequent to the date on which the asset purchase agreement is signed, the asset purchase agreement should include covenants of the seller regarding its conduct of the business from the date of the asset purchase agreement through the closing or termination of the asset purchase agreement.
The initial draft of the asset purchase agreement is prepared by GCC’s counsel, as it is the purchaser who is responsible for ensuring that the purchaser acquires the assets and liabilities bargained for without assuming responsibility for any undisclosed obligations of the business or the seller.
An outline of the GCC/TCI asset purchase agreement is as follows:
Recitals identifying TCI and GCC, stating their relative roles, and identifying the assets being sold
Clauses that provide for the transfer of the assets being sold, the price to be paid and the manner in which the price will be paid (in the event that securities are being issued in payment of the purchase price, methods of valuing those securities might be appropriate in this section), and, in connection with the transfer of assets, provision for the buyer’s assumption of liabilities
Representations and warranties of TCI
Representations and warranties of GCC
A statement of the manner in which TCI will conduct the business (including restrictions on certain types of operations or merger purchases) prior to the closing
Those conditions that are to precede the obligations of GCC to be performed at the closing
Those conditions that are to precede the obligations of TCI to be performed at the closing
A summary of the closing itself, the mechanics thereof, and the documents to be delivered at the closing
Agreements and commitments relating to the relationship of the parties and the activities of the business sold after the closing
Agreements relating to the survival of the representations and warranties of the parties and, importantly, the indemnification provisions to be provided by TCI and GCC
For an asset transfer, provisions relating to bulk sales laws
For a stock transfer, provisions relating to the securities laws and rights to resell securities issued pursuant to registration statements or otherwise
A provision relating to brokers
Provisions related to employee benefits
Miscellaneous provisions, including notices, the completeness of the agreement, the law governing the interpretation of the agreement, whether or not the provisions of the agreement will be severable, and other general provisions desired by the parties
Legal counsel to GCC should also specify all conditions precedent to the obligations of the parties to close the transaction in the asset purchase agreement. Conditions are generally factors that are beyond either party’s control, such as regulatory approval or consents, the existence or nonexistence of which will excuse one or both parties from their obligation to close the transaction. The asset purchase agreement should include remedies for losses, liabilities, damages, or expenses arising out of a party’s breach either before or after the acquisition.
There is a wide variety of issues in the asset purchase agreement that will be hotly negotiated between TCI and GCC, which are discussed here. Common mistakes in preparing an asset purchase agreement are given in Figure 11-4.
Figure 11-4. Common Mistakes in Preparing and
Negotiating the Purchase Agreement
1.Lack of attention on customization of the R&Ws. The R&Ws are a key component of the Purchase Agreement that drive rush allocation issues. Yet, sellers often ignore the details and do not give careful thought to what they consider to be boilerplate and legal jargon. A post-closing dispute is not a great time for sellers to be reading these clauses for the first time. Similarly, lazy buyers will often plug in standard R&W clauses, failing to customize their specific concerns that they have about the seller’s business and/or specific issues and problems that were identified in the due diligence process.
2.The inadvertent assumption of liabilities. Smart buyers use the definitive purchase agreement provisions to hold sellers accountable for certain types of liabilities, but the failure to do so can result in the buyer stepping into the shoes of the seller inadvertently or unwittingly. A buyer inheriting liability that rightfully should have been retained by the seller can have a detrimental impact on the overall economics of the transaction. Be on the lookout for employment discrimination claims, pre-closing tax liabilities, product liability claims, and related issues that are often easily overlooked.
3.Right deal, wrong structure. Just as the parties often overfocus on price and underfocus on terms, so, too, can be the case with deal structure. Mistakes can be made when the “deal looks good on paper” but the structure selected is creating a material (and avoidable) adverse liability on one or more of the parties. Experienced tax advisors should weigh in on the proposed structure before the “cement” has dried.
4.Sloppy indemnification clauses and procedures. From the buyer’s perspective, the indemnified language in the purchase agreement should be custom-tailored to the nature of the seller’s business and to the specific risks and concerns identified in due diligence. The interplay between time and dollar limits must be carefully considered. Certain types of businesses may be better served by larger time periods even if with smaller dollar sizes, and vice versa for other types of businesses. The clauses should also consider how the buyer will collect on a specific indemnification claim once it has been triggered. The consideration may be spread among one hundred or more shareholders—ask who will be accountable and push for a larger holdback, which will serve as protection until the indemnification period has expired.
Indemnification. One of the most contested areas is the indemnification provisions, usually because GCC/GCS will want to be reimbursed for any transaction or occurrence that took place before closing that subsequently gives rise to some claim or liability. TCI shareholders, on the other hand, will want to make a “clean break” from any liability attached to the assets being conveyed, including any responsibility for events that arose even before closing.
As discussed earlier in this book, one of the key aspects of an acquisition is the negotiation and allocation of the risks to each party, both before and after closing. The goal is to allocate risk in a balanced and economically appropriate manner. The buyer is concerned with both core risks, such as those raised by a misrepresentation or breach of covenant by the seller, and collateral risks, such as those raised by facts and circumstances that were not necessarily anticipated by the parties at the time of the negotiation. Buyers and their counsel will often seek a full indemnity from the seller against any specific liabilities that have not been assumed by the buyer as part of the transaction and any damages or loss (including costs and expenses) that were incurred as a result of inaccuracy in representations, warranties, or agreements. The party claiming indemnity is required to provide specific written notice of those claims to the other party and permit the other party to contest the claim. The indemnity provisions should provide for mutual access to all personnel and material that may be relevant to the claim and that no claim will be settled without the written consent of the injured party.
Indemnity provisions, along with opinions of counsel, are usually among the most contested negotiated items in a purchase agreement. The key variables to be negotiated, as set forth here, include time (the period of indemnity for post-closing obligations), the deductibles/baskets, the “caps” or ceilings on liability, one measure of damages, and the possible offsets to the seller’s obligation to indemnify. The seller will usually be unwilling to provide a comprehensive set of indemnity provisions.
Counsel for the seller may also try to negotiate a “basket” or a “trigger” as part of the trade-off for cash adjustments and no personal liability for the buyer’s stockholders. In our example, if the aggregate claims for which GCC demanded to be indemnified did not exceed $250,000, and a basket of $250,000 had been agreed to, no indemnity could be sought and GCC would be entitled to indemnification only for amounts in excess of $250,000. If TCI’s counsel suggests that a trigger of $250,000 rather than a basket should be built into the indemnity, then the trigger would provide that GCC could not seek indemnity unless the aggregate amount for which it was to be indemnified exceeded the triggering amount, in this case $250,000. However, once the amount for which the indemnity was sought did exceed $250,000, GCC/GCS would have the right under the indemnity provision to recover from TCI all monies from the first dollar involved. In such a case, the indemnity section could be drafted to state that any remedies available to either party were cumulative, so that they could be exercised one on top of another, and that they could be exercised at any time.
TCI and its advisors will seek a wide variety of additional limitations on the indemnification provisions. In addition to the basket negotiations, TCI could seek to establish a ceiling on overall liability, a limitation on the types of claims for which the seller can be held liable, a limitation on claims to only those for which the seller had actual knowledge (which makes the buyer’s burden of proof much higher in the event of a subsequent dispute), a limitation on the types of assets that would be available to repay GCC in the event of a claim, an exclusion of certain parties who will be held liable for certain types of claims, and a limitation on the time after closing (survival), after which GCC/GCS may no longer proceed against the seller for a breach or misrepresentation. It is not uncommon for the seller, in this case TCI, to attempt to negotiate some staged step-down in the amount of the overall indemnification ceilings over time following the closing. Sellers should also be aware of “double-dipping,” which occurs when a breach triggers both a purchase price adjustment and a claim for indemnification and is an over-enrichment of the buyer.
A sample negotiated indemnification provision (with a trigger) might look like Figure 11-5.
Note: The indemnification provision would then go on to address the procedures for making an indemnification claim.
M&A Centric Insurance Policies. The seller may also want to investigate obtaining insurance from a third-party provider for inadvertent or negligent violations of the covenants leading to an indemnification claim. Insurance policies of this type have become relatively commonplace, but they typically will not cover fraud, grossly negligent violations of the representations and warranties, or fraudulent breaches of the covenants. As insurance policies have gained credibility over the years, buyers have also begun to recognize the value of insurance policies as a tool to mitigate risk and provide protection against the unknowns. This type of insurance policy is known as Representation and Warranty (R&W). Other types of insurance policies such as Tax Indemnity Insurance and Contingent Liability Insurance protect against known risks that are discovered during the diligence process. Tax Indemnity Insurance is commonly used to insure a tax opinion or backstop, and typically in the case of tax-free reorganizations, liquidating trust status, cancellation of indebtedness, or the treatments of capital gains vs. ordinary income. The cost is generally 4 to 8 percent of the policy limit, though it varies based on the specifics of the transaction, and often no deductible is required. Covered items include additional tax liability, fines and penalties, interest, legal costs, and tax gross-up. Contingent Liability Insurance covers exposure for successor liability, specific indemnities, fraudulent conveyance, or legislative/regulatory risks. It is often tied to a specific issue identified in the diligence process as having a high risk of exposure. However, in order to insure the risk, it must be quantifiable, may not involve moral hazard, and there must be an analysis of the probability. The cost varies depending on the type of risk.
The type of insurance required will depend on various factors including the type of industry, the size of the deal, and the risks identified during the diligence process. As the insurance market continues to grow, companies can customize their policies more creatively with respect to the scope of coverage, liability limits, premium rates, and deductible levels based on their specific needs. The cost is approximately 3 to 4 percent of the policy limit and is often split between the buyer and seller—though this depends on the respective negotiating power of each party.
The terms of the Purchase Agreement will also significantly drive the scope of coverage and terms of the policy. Given that a seller has limited exposure, buyers will seek more comprehensive representations and warranties. However, the parties will need to address the concerns of the insurer as well, who will want to ensure all necessary steps are taken by the buyer and seller to minimize its risk, including reviewing (i) the buyer’s diligence review process and findings, (ii) seller’s disclosure schedules, and (iii) any other related agreements that implicate the insurer. The insurer will want to be sure the buyer has adequately vetted the seller and understands what risks are involved—though the parties and their attorneys should be mindful that sharing legal due diligence reports with an insurance provider waives privilege. Nevertheless, the insurer will want to understand what level of disclosure is required by the seller (e.g., a monetary threshold set forth in the agreement), and may require the buyer to diligence risks and obligations at a lower threshold. Additionally, disclosures made in the schedules will generally be excluded from coverage.
Other key terms in R&W policies that track the terms of the Purchase Agreement include the definitions of knowledge and losses and materiality scrapes. In insurance policies, knowledge is generally limited to actual knowledge of key members of the buyer’s deal team who were involved in the due diligence process. Consequential damages will generally be excluded from insurance policies—unless they are explicitly provided for in the Purchase Agreement, in which case the insurer will strive to keep both the Purchase Agreement and policy consistent. Additionally, terms that are limited by materiality in the Purchase Agreement will be limited in the policy as well. The insurer will also conform the terms of the insurance agreement with respect to the indemnity terms and survival periods, which dictate the period during which the seller is on the hook for claims relating to certain representations and warranties.
Claims relating to certain specific industries may be excluded from coverage, or may require a separate, more specific insurance policy, such as claims related to environmental risks, health-care reimbursements, cyber security, and FCPA. Recently, insurance companies have been seeking every opportunity to minimize their payout obligations and even rescind an entire policy for reasons such as untimely filing of a claim or even a technical error in the insurance application. This increases the risk for buyers, as the process of recovering from an insurance company can be complex—particularly if a seller has enough leverage to eliminate indemnity provisions altogether and require the buyer to rely solely on R&W insurance. The buyer should evaluate the amount of protection it needs when considering such an option.
The most common types of insurance breaches involve provisions relating to financial statements (primarily breach of accounting rules and misstatements of accounts receivable/payable), compliance with laws, intellectual property, and tax. A recent study identified a correlation between deal size and the frequency of claims made. One explanation for this correlation is that the larger the deal size the more difficult and complex the diligence process is, and often there is greater pressure to complete the transaction quickly. Thus there is a greater likelihood that something will be overlooked because parties will focus on what they believe are the high-risk areas in order to efficiently complete the diligence review. Policies typically survive for three to six years, but a majority of claims arise in the first six months, and the second most claims in the first year.
Representations and Warranties. TCI will be expected to make a wide range of written and binding representations and warranties (R&Ws) to GCS. These provisions are designed to broadly articulate information about the transactions as well as to create recourse against TCI in the event of inaccurate disclosures. The R&Ws will include that the sale is not in breach of any other agreement or obligation of TCI, that the assets are free and clear of all clouds on title to the assets, that the assets are in good operating condition, that all material facts have been disclosed, and so forth. Naturally, GCC/GCS will want the scope of the R&Ws to be as broad and comprehensive as possible, primarily because these clauses serve as a form of insurance policy for GCS. GCS will also want to have as many parties as possible be making the R&Ws (e.g., not just TCI, but also key shareholders). GCS will also want protection if it turns out that any representation or warranty has been breached, especially in an asset deal, where the selling entity is likely to be an empty shell on a post-closing basis (this is another reason that GCS may insist on key TCI shareholders being parties to the representations and warranties). It will be incumbent on TCI and its counsel to negotiate limitations on the scope of these provisions, where necessary.
Indemnification by the Seller. The Seller, TCI, and its shareholders, jointly and severally, covenants and agrees to indemnify, defend, protect, and hold harmless GCC and GCS and their respective officers, directors, employees, stockholders, assigns, successors, and affiliates (individually, an “Indemnified Party” and collectively, “Indemnified Parties”) from, against, and in respect of:
(a) all liabilities, losses, claims, damages, punitive damages, causes of action, lawsuits, administrative proceedings (including formal proceedings), investigations, audits, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interest from the date of such damages) and costs and expenses (including without limitation reasonable attorneys’ fees and disbursements of every kind, nature, and description) (collectively, “Damages”) suffered, sustained, incurred, or paid by the GCC Indemnified Parties in connection with, resulting from, or arising directly or indirectly out of:
(i) any misrepresentation or breach of any warranty of the Sellers, set forth in this Agreement or in any schedule or certificate delivered by or on behalf of the Seller in connection herewith; or
(ii) any nonfulfillment of any covenant or agreement on the part of any of the Sellers set forth in this Agreement; or
(iii) the business, operations, or assets of the Sellers prior to the Closing Date or the actions or omissions of the Sellers’ directors, officers, shareholders, employees, or agents prior to the Closing Date (except as to the Assumed Liabilities); or
(iv) failure to comply with country of origin marking requirements imposed by the Federal Trade Commission or by the U.S. Customs and Border Protection, including without limitation damages arising out of breaches of any contract relating to failure to deliver product as required under any contract, or delivery of nonconforming goods pursuant to any contract, fines, or other penalties for violations of such requirements; or
(v) the Excluded Liabilities.
(b) any and all damages incident to any of the foregoing or to the enforcement of this section.
Limitation and Expiration. Notwithstanding the above:
(a) there shall be no liability for indemnification under Section 7.1 unless, and solely to the extent that, the aggregate amount of damages exceeds $250,000 (the “Indemnification Threshold”); provided, however, that the Indemnification Threshold shall not apply to (i) adjustments to the Purchase Price; (ii) damages arising out of any breaches of the covenants of the Seller set forth in this Agreement or representations made in Sections 3.13 (environmental matters), 3.16 (inventory), 3.19 (employee benefit plans), 3.20 (conformity with law; litigation), 3.21 (taxes), or 3.26 (intellectual property); or (iii) the Excluded Liabilities;
(b) the indemnification obligations under this Section 7 or in any certificate or writing furnished in connection herewith shall terminate on the later of clause (i) or (ii) of this Section 7.2(b):
(i) (1) third anniversary of the Closing Date, or (2) with respect to representations and warranties contained in Sections 3.14 (real and personal property), 3.19 (employee benefit plans), 3.21 (taxes), and the Excluded Liabilities, on (A) the date that is six (6) months after the expiration of the longest applicable federal or state statute of limitation (including extensions thereof), or (B) if there is no applicable statute of limitation, (x) ten (10) years after the Closing Date; or
(ii) the final resolution of a claim or demand (a “Claim”) pending as of the relevant dates described in clause (i) of this Section 7.2(b) (such claim referred to as a “Pending Claim”);
(c) for purposes of the indemnity in this Section 7, all representations contained in Section 3 are made without any limitations as to materiality; and
(d) for purposes of the Indemnification Threshold, all damages incurred by GCC or any of its affiliates under any of the related Acquisition Agreements shall be included within the Indemnification Threshold under this Agreement.
The scope of the representations and warranties contained in the definitive purchase agreement is one of the most difficult aspects of closing a transaction. This is the section in which the TCI shareholders must “represent and warrant” everything about the company that has been told or implied to GCC/GCS. Representations and warranties set forth the financial responsibility for problems that may arise in the future, but that may not exist or be known to the parties at closing. The buyer typically views post-closing events that reduce assets or increase liabilities as being the responsibility of the seller. These provisions set forth the financial responsibility of each party if certain unknown or unforeseen problems arise in the future as a result of an existing situation. In many of the representations and warranties, GCC may be willing to accept the phrase “to the best of the seller’s knowledge” as a qualifier to certain provisions. In addition, some matters lend themselves to outside testing or evaluation by experts. Relying on the reports of outside experts may significantly reduce or even eliminate the need for certain areas to be addressed. In other cases, a time and/or dollar limit on a particular representation or warranty will be sufficient to allow the seller to provide assurances in situations in which it would otherwise be unwilling to do so. For example, a dollar limit is often attached to environmental and product liability representations and warranties. Liability matters. Sellers should make certain that their advisors are familiar with the types of representations and warranties they are likely to face and that the advisors are skilled in finding mutually acceptable positions. During actual negotiations, sellers should make a sincere attempt to understand the buyer’s underlying motivation in requesting each warranty and representation and point out any facts or circumstances that may be inconsistent with a given request. In our example, TCI and its counsel should expect that GCC will insist on the following types of representations and warranties:
The transaction is not in breach of any license or other agreement or in violation of any order or decree of any court or other government body.
TCI’s business entity is properly organized under state corporate law, is in good standing, and is qualified to do the business it is doing in the states in which it is doing business.
TCI has clear title to all assets that have been made part of the sale, these assets are not subject to any undisclosed restrictions or claims, and they are in good operating condition.
TCI has no knowledge or reason to know that its business relationship has changed with any customer or group of customers whose purchases constitute more than a stated percentage (usually 5 percent) of the business’s sales for the previous year.
TCI represents that all required tax returns have been filed and that all required payments have been made.
Licenses, zoning, and other permissions necessary to conduct TCI’s business as it is being conducted have been obtained, and benefits may be transferred to GCC/GCS.
TCI will need to represent and warrant the following facts regarding the accuracy of its financial statements (as presented to GCC):
1.The statements fairly present the financial condition of the business as of the date of the statements.
2.TCI is not subject to any material liability, including contingent liability, that is not reflected or noted in the financial statements.
3.The statements have been prepared in accordance with generally accepted accounting principles.
4.Since the date of the statements, TCI has not transferred any assets to or on behalf of any owner or employee other than in payment of customary salaries.
TCI is not in default on any material contract or loan nor is it aware of any claims pending or threatened against it.
TCI owns specified patents, trademarks, trade names, and copyrights, and has no knowledge of any claims of infringement pending or threatened.
TCI is in compliance with all applicable local, state, and federal laws, and has had no notice of any claimed violations.
TCI has not engaged or authorized anyone to act as broker or finder in connection with the sale.
Conditions Precedent to Closing. This section is essentially a checklist of events that must occur as a condition to closing the transaction. Both GCS and TCI will have their share of items that must be accomplished and documents or consents that must be signed. The nature and scope of these conditions must be carefully considered, since failure to satisfy them will give the opposing party the right to walk away from the transaction.
Material Adverse Effect/Change (MAE/MAC) Clauses. As a result of the recent credit market turmoil and general adverse economic conditions, there has lately been a significant increase in buyers attempting to renege on previously announced merger and acquisition deals. Although such buyers are advancing a variety of claims and legal theories to support their positions, many of these arguments are based, in whole or in part, on an assertion that the target business has suffered a material adverse effect (MAE), also referred to as a material adverse change (MAC). Such clauses typically provide that if, between the signing and the closing of the transaction, the business being sold suffers a material adverse effect (the definition of which is typically highly negotiated), the buyer is not obligated to close the transaction. Some of these deals have resulted in a reduced purchase price after renegotiations (e.g., the 2009 acquisition of Home Depot Inc.’s supply unit by an investor group led by Bain Capital LLC, the 2008 acquisition of Accredited Home Lenders Inc. by Lone Star Funds, and the two hundred transactions between Exxon Mobil and XTO Energy for $29 billion where the MAE clauses protected the buyer in the event of a change in regulations and ultimately the anticipated changes in the law did happen), some have been terminated by the parties upon mutual agreement (e.g., the merger between MGIC Investment Corp. and Radian Group Inc.), and some have ended up in court (e.g., the acquisition of Genesco Inc. by Finish Line Inc., which resulted in a hotly debated court decision). Both GCS and TCI would ideally want to use the MAE clause, in particular in current times, as a mechanism to allocate the risk of adverse changes to the business being sold between signing and closing. Typically, GCS will try to carve out the narrowest possible exceptions to the MAE clause and seek to include a whole list of events that trigger a right to renege on the deal.
As a procedural matter, case law has established that the party that is seeking to terminate an agreement on account of the fact that the other party has suffered an MAE has the burden of proving that the MAE has occurred. Case law has also shown that, typically, the bar for establishing an MAE is high, and buyers should be cautious about relying on an MAE clause to get out of a deal. However, even though based on case law precedents it may ultimately be difficult for a buyer to establish that a target business suffered an MAE in a fully litigated case, in many instances the mere claim by a buyer that an MAE has occurred may provide the buyer with sufficient leverage and instill in the seller sufficient uncertainty that the parties come to a negotiated resolution long before a court has a chance to rule on the matter. Indeed, the Finish Line decision also proves how important it is to avoid drafting ambiguities, miscommunications, and defeated expectations by sufficiently defining the exceptions to the MAE clause. Another alternative is to make certain events conditions precedent rather than including them in the MAE clause, thus avoiding hotly argued legal issues like “reasonable foreseeability” or “sufficient duration.”
Conduct of Business Prior to Closing. TCI must have a contractual obligation to preserve the goodwill of the business and the condition of the assets during the time period between the execution of the purchase agreement and the closing of the transaction. The parties should negotiate all affirmative and negative covenants that will be imposed on the conduct of TCI during this time period, as well as the penalties for non-compliance (e.g., reduction in the purchase price or the ability of GCC to walk away from the deal).
Intercreditor Agreement. An intercreditor agreement is a contract among multiple lenders (in this case TCI and BBC) to a particular borrower (GCC and GCS). The document governs the priority rights of the various lenders in the collateral (the assets acquired by GCC and GCS), otherwise known as subordination. Subordination and standby provisions govern “who gets what proceeds when” in the event of a default by the borrower. In the GCC/TCI transaction, it is likely that BBC and its counsel will prepare this agreement and demand that BBC receive the senior priority rights.
Noncompetition Agreements. Covenants against competition and disclosure of confidential information are commonly a key part of any business acquisition. This is especially true in situations like the GCC/TCI transaction, where the members of the target’s management team may be left out of the transaction and are therefore likely candidates to be future competitors. Counsel for GCS will naturally want to include covenants that are broad in terms of the scope of subject matter, duration, and geographic territory. Although these agreements will be carefully scrutinized by the courts as potential restraints of trade, agreements prohibiting sellers from competing against buyers are given considerably more latitude in a business purchase transaction than in other areas, such as employment or consulting agreements.
Earn-Out Agreements. When earn-out agreements are negotiated as part of the purchase price in an acquisition, part of the consideration payable to TCI essentially becomes contingent on the ability of GCS to meet its financial and growth projections. In the GCC/TCI transaction, TCI shareholders are betting on the ability of the GCS management team to manage and operate the assets being acquired in an efficient and profitable manner. If any of the TCI shareholders will become members of the GCS management team, then the earn-out provides an incentive for performance from which both GCC and TCI can gain. The key terms of the earn-out agreement to be negotiated are the formula to be used (e.g., tied to gross sales, earnings, or some other measure); the duration of the earn-out; the floor and ceiling on the payout to be provided to TCI shareholders; the controls that TCI shareholders will have, if any, over the budgets and expenditures made by GCS or GCC; the effect of the business distress or bankruptcy of GCS on the earn-out; and the tax implications of the transaction.
The typical earn-out provides additional consideration to the seller if certain financial and/or performance targets are met. But buyers may also want to consider reverse earn-outs as an additional penalty if performance targets are not met. For example, if the seller accepts a combination of cash and promissory notes, the principal of the note or the interest rate could be reduced if minimal performance criteria are not met, representations or warranties are breached, or sales fall below a given level.
Earn-outs can be used as incentives, as equalizers, or as riskmitigators. As an incentive, the earn-out may be used as a sweetener to motivate the founding entrepreneur (as seller) to stay on board to help build the business after closing or to ensure that a technical or engineering team remains in place after closing. The parties may even make a portion of the earn-out contingent on certain key management or personnel staying with the company for a certain period of time. As an equalizer, it can be used to resolve differing views concerning the valuation of the seller’s business, particularly when the seller feels that its stock or assets are being undervalued. As a risk-mitigator, the earn-out can be used to hold a seller’s feet to the fire regarding its representations of the future value of the company and to help ensure against overpayment if a buyer is unsure or unclear about the future value of the business.
The key issues to be addressed in the negotiation and structuring of the earn-out provisions include:
The financial formula to be used to determine the contingent payments to be made to the seller (e.g., specified minimum sales levels, net income before taxes, and so on).
The audit and inspection rights to be granted by the seller to ensure against underpayment by the buyer.
The business plan and financial benchmarks that are fair and reasonable over the course of the earn-out period. These performance-driven milestones may be better measuring sticks for the payment of the earn-out than a strict financial formula, especially for high-tech businesses.
The term of the earn-out period, the method and frequency of payment, and the form of consideration itself, such as cash, stock, notes, or warrants.
The relationship of the earn-out to the other liability and risk allocation sections of the acquisition agreement.
Deeds, bills of sale, and any other documents and instruments that the buyer deems sufficient to transfer title to the seller’s assets
Certificate by shareholders that the representations are true as of the closing date and that the shareholders have met their obligations under the agreement
Certificate by officers of the acquired corporation that the representations and warranties are true as of the closing date and that the corporation has met its obligations under the agreement
Duly endorsed stock certificates
Written opinion of the seller’s attorney to the effect that, to the best of the attorney’s knowledge, all representations are true, the agreement has been duly executed and constitutes a valid obligation of the seller, and the noncompetition agreement is valid and enforceable
Employment agreements
Shareholder incentive agreements
A certified copy of duly adopted resolutions by the board of directors and the shareholders authorizing the sale
A certified copy of the articles of incorporation and bylaws
Incumbency certificate for each person executing documents relating to the sale
Title insurance covering real estate
Releases of any claims that officers or directors may have against the seller or the buyer
Written resignations of certain officers and directors
Letter from accountant certifying the financial statements and certifying that, following inquiries, the accountant has no knowledge of any material adverse change in the business’s financial position between the date of the financial statements and closing
Certificate of good standing from each state in which the corporation to be acquired has been doing business
Estoppel certificates from creditors whose debts have been assumed by the buyer
Copy of bulk sales notice (for asset acquisitions)
The typical buyer will want to specify a virtual laundry list of categories of assets to be purchased, but the classic seller will want to modify the list by using words like exclusively or primarily. The seller may want to exclude all or most of the cash on hand from the schedule of assets to be transferred. In some cases, the seller may want to license some of the technology rights in lieu of selling them outright, or, at the very least, license back what has been sold.
When the seller is taking back a note from the buyer for all or part of the consideration, the issue of security for the note is always a problem. Naturally, the seller will want noncontingent personal and corporate guarantees from the buyer and from anyone else that it can manage to get. The buyer will be reluctant to offer such broad security. Several “creative” compromises have been reached between the parties, including partial or limited guarantees, the acceleration of the note based on post-closing performance, the right to repurchase the assets in the event of a default, the issuance of warrants or preferred stock in the event of default, commercial lender–like covenants to prevent the buyer from getting into a position where it is unable to pay the note (such as dividend restrictions, limitations on excessive salaries, limitations on excessive or risky investments, and so on), or contingent consulting agreements in the event of a default.
The financial statements provided by the seller to the buyer in connection with the due diligence and prior to closing are often a hotly contested item. The timing and scope of the financial statements and the standard to which they will be held are at issue. The buyer and its team may prefer a “hot-off-the-press” and recently completed audited set of financials from a Big 4 or major regional accounting firm, and the seller will want to serve up a “best efforts” unaudited and uncertified guesstimate. Somewhere in between is where most deals wind up, with verbiage such as “of a nature customarily reflected,” “prepared in substantial accordance with GAAP,” and “fairly present the financial condition” being bantered around. The scope of the liabilities included on the statements and who will bear responsibility for unknown or undisclosed liabilities will also be negotiated in the context of the overall discussion of the financial statements.
Any veteran transactional lawyer knows that there are certain key “buzzwords” that can be inserted into sections of the purchase agreement that will detract or enhance or even shift liability by and among the buyer and seller. Depending on which side of the fence you are on, look out for words or phrases like the following as tools for negotiation and as phrases:
“materially”
“to the best of our knowledge”
“could possibly”
“without any independent investigation”
“except for . . .”
“subject to . . .”
“reasonably believes . . .”
“ordinary course of business”
“to which we are aware”
“would not have a material adverse effect on . . .”
“primarily relating to . . .”
“substantially all”
“solely”
“might” (instead of “would”)
“exclusively”
“other than claims that may be less than $”
“have received no written notice of . . .”
“have used our best efforts (or commercially reasonable efforts) to . . .”
“endeavor to . . .”
It is only natural for the buyer to expect that the seller will agree to stay out of the business being sold for some reasonable amount of time. Depending on the seller’s stage of life and post-closing plans, which may include actual retirement, the parties are likely to argue over the scope, duration, and geographic focus of the covenant against noncompetition. The more difficult issues often arise when a conglomerate is spinning off a particular division or line of business and the remaining divisions will continue to operate in industries similar or parallel to the business being sold to the buyer. The allocation of the purchase price to a non-compete covenant raises certain tax issues that must be analyzed, and these covenants may have only limited enforceability under applicable state laws if their scope or duration is deemed to be unreasonable or excessive.
As discussed earlier in this chapter, the heart and soul of the purchase agreement is, in many ways, merely a tool for allocating risk. The buyer will want to hold the seller accountable for any post-closing claim or liability that arises relating to a set of facts that occurred while the seller owned the company or that has occurred as a result of a misrepresentation or material omission by the seller. The seller, on the other hand, wants to bring as much finality to the transaction as possible to allow some degree of sleep at night. Like a children’s game of “hot potato,” risks are shifted back and forth in the negotiations until settled at closing. When both parties are represented by skilled negotiators, a middle ground is reached, both in general and on specific issues of actual or potential liability. The buyer’s counsel will want to draft changes, covenants, representations, and warranties that are strong and absolute, and the seller’s counsel will seek to insert phrases like “except insignificant defaults or losses that have not, or are not likely to, at any time before or after the closing, result in a material loss or liability to or against the buyer,” leaving some wiggle room for insignificant or nonmaterial claims. The battleground will be the indemnification provisions and any exceptions, carve-outs, or baskets that are created to dilute these provisions. The weapons will be the buzzwords referred to earlier.
As a reference point, an abbreviated version of the asset purchase agreement for use in the GCC/TCI transaction is provided as Figure 11-6. This sample agreement is included to give the reader a feel for what the starting point or first draft of the agreement will look like before the negotiation process begins.
Figure 11-6. GCC/TCI Asset Purchase Agreement
THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made and entered into this ______ day of ____________, 20__, by and among Growth Co. Corp., a Maryland corporation (the “Buyer”) and Target Co., Inc., a New York corporation (the “Seller”), and Jane C. Doe and John F. Doe individually (each a “Shareholder” and collectively, the “Shareholders”).
W I T N E S S E T H :
WHEREAS, the Seller is engaged in the equipment manufacturing business and activities related thereto (herein referred to as the “Business”); and
WHEREAS, Seller and the Shareholders (constituting all of the beneficial shareholders of the Seller), desire to sell, convey, transfer, assign and deliver to Buyer the Business and substantially all of the assets, properties and operations used in the Business, and Buyer desires to purchase the Business and such assets, properties and operations, on the terms and subject to conditions contained in this Agreement, and other agreements related hereto.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. SALE AND PURCHASE OF ASSETS.
1.1Sale of Assets to Buyer. Upon the terms and subject to the conditions herein set forth, at the Closing referred to in Section 3, Seller shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase and acquire from Seller, all of the properties, assets and goodwill that are used in the Business, of whatever kind and nature, real or personal, tangible or intangible (including all rights of the Seller arising from its operation of the Business) and excluding only those assets referred to in Section 1.2 of this Agreement (collectively, the “Assets”), as those Assets exist on the Closing Date (as defined in Section 3). The Assets include, but are not limited to, the following:
(a) all of Seller’s machinery, equipment, equipment leases, chemicals, supplies, vehicles, furniture, fixtures, tools, computers and all other personal property, wherever located, which are used in the Business, including, but not limited to, the items listed on Schedule 1.1(a);
(b) all interests of Seller in real property, including leases, options, rights of way, zoning and development rights and easements described in Schedule 1.1(b);
(c) all inventory of Seller used in the Business, wherever located, including, without limitation, the parts, chemicals and materials listed on Schedule 1.1(c);
(d) all of Seller’s computer software used in the Business, and all rights, title and interest of Seller in, to and under all trademarks, trademark rights, trademark applications, patents, patent rights, patent applications, trade secrets, inventions, training and equipment manuals, technology, methods, manufacturing, engineering, technical and any other know-how, processes, projects in development, trade names, service marks, other intellectual property rights, and other proprietary information of the Seller used in or relating to the Business. All material intellectual property, including all trade names and patents used or held by Seller, are listed on Schedule 1.1(d);
(e) all of Seller’s rights under any written or oral contracts, unfilled service and/or purchase orders, agreements, leases, instruments, registrations, licenses, certificates, distribution agreements or other documents, commitments, arrangements or authorizations relating to the Business, including, but not limited to, the agreements and other instruments identified on Schedule 1.1(e) (the “Contracts”); provided, that nothing contained in this Agreement shall be construed as an attempt to agree to assign any contract which is by itself non-assignable without the consent of the other party or parties thereto, unless such consent shall be given;
(f) all rights in connection with all permits, certificates, licenses, approvals, registrations and authorizations of Seller which may be necessary or desirable in order to conduct the Business (the “Permits”);
(g) all of Seller’s rights under manufacturers’ and vendors’ warranties relating to those items included in the Assets and all of Seller’s similar rights against third parties relating to items included in the Assets;
(h) all of Seller’s accounts receivable, notes and other receivables, unbilled costs and fees, all prepaid items, amounts on deposit of Seller, and other current assets existing on the Closing Date, including, but not limited to, the receivables and other assets set forth on Schedule 1.1(h), but excluding cash and cash equivalents;
(i) all goodwill, customer and vendor lists, telephone numbers, and other intangible property, and all of Seller’s rights to commence or maintain future and existing actions relating to the operation of the Business or the ownership of the Assets, for events occurring after the Closing Date, and the right to settle those actions and retain the proceeds therefrom;
(j) all shares of stock and partnership interests owned by Seller, if any;
(k) all of Seller’s rights under the insurance or similar policies in effect on or prior to the Closing Date set forth on Schedule 1.1(k);
(l) all financial, operational, and any other files, logs, books and records and data of the Business of Seller, (collectively, “Books and Records”) and including, without limitation, all correspondence, accounting records, personnel records, purchase orders and invoices, customer records, supplier records, advertising and promotional materials and files, and other business records which are owned by Seller relating to the Business.
1.2Excluded Assets. The following assets (the “Excluded Assets”) shall be retained by the Seller and shall not be sold or assigned to Buyer:
(a) all cash on hand and cash equivalents (excluding the prepaid proceeds from the Baxter Contract) and cash-value life and other split-life insurance policies of Seller;
(b) the corporate minute books and stock books of Seller; and
(c) any lease, commitment or other agreement listed on Schedule 1.2(c) with respect to which the Buyer does not desire to acquire concurrent with its purchase of the Assets under this Agreement, including any employee advance.
1.3Method of Conveyance. The sale, transfer, conveyance, and assignment by the Seller of the Assets to the Buyer in accordance with Section 1.1 hereof shall be effected on the Closing Date by the Seller’s execution and delivery to the Buyer of a general assignment and bill of sale, in substantially the form attached hereto as Exhibit A (the “General Assignment and Bill of Sale”). At the Closing, all of the Assets shall be transferred by the Seller to the Buyer free and clear of any and all liens, encumbrances, mortgages, security interests, pledges, claims, equities, and other restrictions or charges of any kind or nature whatsoever (collectively, “Liens”) except for a lessor’s interest in any leased assets or as otherwise listed in Schedule 4.5(a).
2. PURCHASE PRICE. The purchase price to be paid by the Buyer for the Assets to be sold, transferred, and conveyed by the Seller pursuant to this Agreement shall be:
(a) cash in the amount of Three Million Dollars ($3,000,000), paid by cashier’s check or wire transfer, subject to adjustment as described in Section 2.2; and
(b) two promissory notes, one for the principal amount of Five Hundred Thousand Dollars ($500,000) (the “Short-Term Note”); and the second for the principal amount of Eight Hundred Thousand Dollars ($800,000) (the “Long-Term Note” and, together with the Short-Term Note (the “Notes”), each Note subject to adjustment as described in Sections 2.3(a) and 2.3(b), in the forms attached hereto as Exhibits B-1 and B-2, with the Short-Term Note secured by a pledge of marketable securities pursuant to a Pledge Agreement and a Stock Power in the forms attached hereto as Exhibit C and Exhibit D.
3. CLOSING.
3.1Date of Closing. Subject to the terms and conditions set forth herein, the closing of the transactions contemplated hereby (the “Closing”) shall be held at 10:00 a.m. at the offices of counsel for the Seller on or before ____________, 20__, provided that all conditions to the Closing have been satisfied, or at such other time, date, and place as shall be fixed by agreement among the parties hereto. The date on which the Closing shall occur is referred to herein as the “Closing Date.” At the Closing, the parties shall execute and deliver the documents referred to in Section 3.2.
3.2Items to be Delivered at Closing. At the Closing and subject to the terms and conditions herein contained:
(a) Seller shall deliver or cause to be delivered to Buyer the following:
(i) one or more Bills of Sale and such other good and sufficient instruments and documents of conveyance and transfer executed by Seller, in a form reasonably satisfactory to Buyer and its counsel, as shall be necessary and effective to transfer and assign to and vest in Buyer all of Seller’s right, title, and interest in and to the Assets, including without limitation, (A) good and valid title in and to all of the Assets owned by Seller, (B) good and valid leasehold interests in and to all of the Assets leased by Seller as lessee, and (C) all of the Seller’s rights under all agreements, contracts, instruments and other documents included in the Assets to which Seller is a party or by which it has rights on the Closing Date;
(ii) all third-party consents required to be delivered as a condition to Closing as set forth in Section 8.2(d), which may be necessary or desirable in connection with the transfer of the Assets, including the Contracts and the Permits;
(iii) all of the agreements, contracts, commitments, leases, plans, computer programs and software, data bases whether in the form of computer tapes or otherwise, manuals and guidebooks, customer lists, supplier lists, and other documents, books, records, papers, files, office supplies, and data belonging to the Seller which are part of the Assets;
(iv) one or more Assignment and Assumption Agreements executed by Seller;
(v) executed lease for the Seller’s home offices (the “Darien Property”), attached hereto as Exhibit M and assignment of lease for the Seller’s Wisconsin warehouse and office (the “Wisconsin Property”), transferring the leasehold and subleasehold interests in said properties to Buyer;
(vi) a written opinion of Joseph P. Doe, Esq., counsel for Seller, dated the Closing Date, in the form of Exhibit F hereto;
(vii) a certificate, signed by a duly authorized officer of the Seller and dated the Closing Date, representing that the conditions contained in Section 8.2(b) of this Agreement have been satisfied;
(viii) certified copies of resolutions of the Seller’s Board of Directors and its Shareholders with respect to the approval of this Agreement and the transactions contemplated hereby (Exhibit O);
(ix) Employment Agreements, executed by Jane C. Doe and John F. Doe, respectively (Exhibit G and Exhibit H, respectively); and
(x) any other opinions, certificates, or other documents and instruments required herein to be delivered by the Seller or the Shareholders.
(b) Buyer shall deliver or cause to be delivered to the Seller the following:
(i) the Purchase Price pursuant to Section 2 hereof;
(ii) a certificate, signed by a duly authorized officer of the Buyer and dated the Closing Date, representing that the conditions contained in Section 8.1(a) of this Agreement have been satisfied;
(iii) certified copies of resolutions of the Manager of the Buyer with respect to the approval of this Agreement and the transactions contemplated hereby;
(iv) executed counterparts of the lease amendments with respect to the Darien and Wisconsin Properties;
(v) the executed Promissory Notes;
(vi) the Operating Agreement of the Buyer, providing for the Equity Interest in the Buyer to be issued to Seller, in accordance with Section 2.1(c) hereof;
(vii) the Pledge Agreement and the Pledged Collateral Account Agreement executed by the Pledgor in accordance with Section 8.1(f) hereof;
(viii) executed Employment Agreements as provided in Section 8.2(f); and
(ix) any other certificates or other documents and instruments required herein to be delivered by Buyer.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. In order to induce the Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Seller and each of the Shareholders, jointly and severally, hereby represent and warrant to the Buyer as follows:
4.1Organization and Authority. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Illinois. Seller has the full power and authority to enter into and perform this Agreement, to own, operate, and lease its properties and assets, to carry on its business as it is now being conducted, and to execute, deliver, and perform its obligations under this Agreement and consummate the transactions contemplated hereby. Each Shareholder has the full power and authority to enter into and perform this Agreement. Seller has delivered to the Buyer complete and correct copies of its Articles of Incorporation and Bylaws, each as amended to date. Seller is duly qualified to do business as a foreign corporation and in good standing in Anytown.
4.2Authorization of Agreement. The execution, delivery, and performance by the Seller of this Agreement and of each and every document and instrument contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by all necessary corporate action of the Seller. This Agreement has been duly executed and delivered by the Seller and by each of the Shareholders and constitutes (and, when executed and delivered, each such other document and instrument will constitute) a valid and binding obligation of the Seller and each of the Shareholders, enforceable against the Seller and each of the Shareholders in accordance with its terms.
4.3Capitalization and Share Ownership of Seller. The Seller’s authorized capital stock consists of one thousand (1,000) shares of common stock, no par value. There are 1,000 shares of the Seller’s common stock presently outstanding, all of which shares are owned by the Shareholders, free and clear of all Liens. All of the Shareholders’ shares have been duly authorized and validly issued, are fully paid and nonassessable. No equity securities (or debt securities convertible into equity securities) of the Seller, other than the Shareholders’ shares, are issued and outstanding. There are no existing contracts, subscriptions, options, warrants, calls, commitments, or other rights of any character to purchase or otherwise acquire any common stock or other securities of the Seller.
4.4Non-Contravention; Consents and Approvals.
(a) Neither the execution and delivery by the Seller of this Agreement nor the consummation by the Seller or the Shareholders of the transactions contemplated hereby, nor compliance by the Seller or the Shareholders with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws of the Seller, (ii) result in the breach of, or conflict with, any of the terms and conditions of, or constitute a default (with or without the giving of notice or the lapse of time or both) with respect to, or result in the cancellation or termination of, or the acceleration of the performance of any obligations or of any indebtedness under, any contract, agreement, lease, commitment, indenture, mortgage, note, bond, license, or other instrument or obligation to which the Seller or any Shareholder is a party or by which the Seller, the Shareholders, or any of the Assets may be bound or affected, (other than such breaches, conflicts, and defaults set forth in Schedule 4.4(a) hereto, which shall have been waived at or prior to the Closing), (iii) result in the creation of any Lien upon any of the Assets, or (iv) violate any law or any rule or regulation of any administrative agency or governmental body, or any order, writ, injunction, or decree of any court, administrative agency, or governmental body to which the Seller, the Shareholders, or any of the Assets may be subject.
(b) Except as set forth in Schedule 4.4(b) hereto, no approval, authorization, consent, or other order or action of, or filing with, or notice to any court, administrative agency, or other governmental authority or any other person is required for the execution and delivery by Seller or the Shareholders of this Agreement or the consummation by the Seller and the Shareholders of the transactions contemplated hereby.
(c) A description of all Permits held by Seller and necessary or desirable for the operation of the Business are set forth in Schedule 4.4(c) hereto. All Permits listed in Schedule 4.4(c) are valid, and neither Seller nor any Shareholder has received any notice that any government authority intends to modify, cancel, terminate, or deny renewal of any Permit. No current or former stockholder, officer, director, or employee of Seller or any affiliate of Seller owns or has any proprietary, financial, or other interest in any Permit which Seller owns or uses. Seller has conducted the Business in compliance with the requirements, standards, criteria, and conditions set forth in the Permits and other applicable orders, approvals, variances, rules, and regulations and is not in violation of any of the foregoing. The transactions contemplated by this Agreement will not result in a default under or a breach of or violation of or adversely affect the rights and benefits afforded to the Seller by any Permits. Except as set forth in Schedule 4.4(c) hereto, no approval by a governmental authority is required for transfer to Buyer of such Permits.
4.5Ownership of Assets
(a) the Seller has and will have at the Closing good, valid, and marketable title to each and every item of the tangible and intangible personal property and assets included in the Assets, and valid leasehold interests in all leases of tangible personal and real property included in the Assets, free and clear of any Liens except as set forth in Schedule 4.5(a). At the Closing, the Seller will transfer to Buyer good, valid, and marketable title to the Assets, free and clear of any and all Liens, except as set forth in Schedule 4.5(a).
(b) No affiliate of the Seller has, or has indirectly acquired, any right, title, or interest in or to any of the Assets.
(c) The Seller has not sold, transferred, assigned, or conveyed any of its right, title, and interest, or granted or entered into any option to purchase or acquire any of its right, title, or interest, in and to any of the Assets or the Business. No third party has any option or right to acquire the Business or any of the Assets.
4.6Balance Sheet; Existing Condition; Ordinary Course. Attached hereto as Schedule 4.6 are (i) the Seller’s unaudited balance sheet (the “2016 Balance Sheet”) as of December 31, 2006 (the “Balance Sheet Date”), together with the related unaudited statements of income, shareholders equity, and cash flows for the year then ended, and (ii) the Seller’s unaudited balance sheets as of December 2015 and 2014, together with the related unaudited statements of income, shareholders equity, and cash flows for the years ended December 31, 2015, and 2014 (such unaudited financial statements for 2014, 2015, and 2016 being referred to herein collectively as the “Financial Statements”). The Financial Statements (i) are true, complete, and correct, (ii) are in accordance with the books and records of the Seller, (iii) fairly, completely, and accurately present the financial position of the Seller as of the respective dates thereof and the results of the Seller’s operations for the periods presented, and (iv) were prepared in conformity with generally accepted accounting principles consistently applied throughout the periods covered thereby. Since the Balance Sheet Date, except as set forth in Schedule 4.6 hereto, there has not been with respect to the Seller:
(a) any material adverse change in the Assets or the Business of the Seller from their condition as set forth on the 2016 Balance Sheet;
(b) any damage, destruction, or loss, whether covered by insurance or not, materially and adversely affecting the Business or Assets of the Seller or any sale, transfer, or other disposition of the Assets other than in the ordinary course of business;
(c) any declaration, setting aside, or payment of any dividend, or any distribution with respect to the capital stock of the Seller, or any direct or indirect redemption, purchase, or other acquisition by the Seller of shares of its capital stock, or any payment to any affiliate of any intercompany payable or any transfer of Assets to any affiliate; or
(d) except as set forth on Schedule 4.6(d), any increase in the compensation payable by the Seller to any Shareholder or any of the Seller’s officers, employees, or agents, or in the payment of any bonus, or in any insurance, payment, or arrangement made to, for, or with any such officers, employees, or agents.
Since the Balance Sheet Date, Seller has conducted its Business in the ordinary course and has made no material change to its marketing, purchasing, collections, or accounting procedures.
4.7Litigation. There is no litigation, suit, proceeding, action, claim, or investigation, at law or in equity, pending or, to the best knowledge of the Seller or any Shareholder, threatened against, or affecting in any way the Assets, the Seller, or any Shareholder’s ability to own or operate the Business, or which questions the validity of this Agreement or challenges any of the transactions contemplated hereby or the use of the Assets after the Closing by the Buyer. Neither the Seller, nor any of the Shareholders, nor any of the Assets is subject to any judgment, order, writ, injunction, or decree of any court or any federal, state, municipal, or other governmental authority, department, commission, board, bureau, agency, or other instrumentality.
4.8Compliance with Laws. Except as set forth in Schedule 4.8, the Seller’s Business has at all times been conducted in compliance with all applicable laws, regulations, ordinances, and other requirements of governmental authorities (including applicable federal, state, and local laws, rules, and regulations respecting occupational safety and health standards). Except as set forth in Schedule 4.8, neither the Seller nor any Shareholder has received any notice, advice, claim, or complaint from any employee or governmental authority that the Seller has not conducted, or is not presently conducting, its business and operations in accordance with all applicable laws and other requirements of governmental authorities.
4.9Permits and Licenses. The Seller has all permits, certificates, licenses, approvals, registrations, and authorizations required in connection with the conduct of the Business. The Seller is not in violation of, and has not violated, any applicable provisions of any such permits, certificates, licenses, approvals, registrations, or authorizations. Except as set forth on Schedule 4.9, all permits, certificates, licenses, approvals, registrations, and authorizations of the Seller which are necessary for the operation of the Seller’s Business are freely transferable.
4.10Contracts.
(a) Schedule 4.10(a) contains a true and complete list of all material contracts and agreements related to or involving the Business or the Assets or by which any of the Assets is subject or bound in any material respect, including, without limiting the generality of the foregoing, any and all: contracts and agreements for the purchase, sale, or lease of inventory, goods, materials, equipment, hardware, supplies, or other personal property; contracts for the purchase, sale, or lease of real property; contracts and agreements for the performance or furnishing of services; joint venture, partnership or other contracts, agreements, or arrangements involving the sharing of profits; employment agreements; and agreements containing any covenant or covenants which purport to limit the ability or right of the Seller or any other person or entity to engage in any aspects of the business related to the Assets or compete in any aspect of such business with any person or entity (collectively, the “Scheduled Contracts”). As used herein, the terms “contract” and “agreement” mean and include every material contract, agreement, commitment, arrangement, understanding, and promise whether written or oral. A complete and accurate copy of each written Scheduled Contract has been delivered or made available to the Buyer or, if oral, a complete and accurate summary thereof has been delivered to the Buyer. Except as set forth on Schedule 4.10(a), the Scheduled Contracts are valid, binding, and enforceable in accordance with their respective terms, are in full force and effect, and were entered into in the ordinary course of business on an “arms-length” basis and consistent with past practices. The Seller is not in breach or default of any of the Scheduled Contracts and, except as set forth on Schedule 4.10(a), no occurrence or circumstance exists which constitutes (with or without the giving of notice or the lapse of time or both) a breach or default by the other party thereto. Neither the Seller nor any Shareholder has been notified or advised by any party to a Scheduled Contract of such party’s intention or desire to terminate or modify any such contract or agreement. Neither the Seller nor any Shareholder has granted any Lien on any Scheduled Contract included in the Assets.
(b) Except as set forth on Schedule 4.10(b) and this Agreement, neither the Seller nor any Shareholder is a party to, and neither the Seller nor any Shareholder nor any of the Assets is subject or bound in any respect by any written or oral contract and agreement related to or involving the Business which will affect in any manner the Buyer’s ownership, use, or operation of the Assets, including, without limitation, any contracts or agreements (i) for the purchase, sale or lease of inventory, goods, or equipment or for the performance or furnishing of services; (ii) for the furnishing of services for which the Seller has received payment in advance of furnishing such services and has not yet furnished such services; and (iii) containing any covenant or covenants which purport to limit the ability or right of the Seller or any other person or entity to engage in any aspects of the business related to the Assets or compete in any aspect of such business with any person or entity.
(c) Except as set forth on Schedule 4.10(c), all Scheduled Contracts included in the Assets will be fully and validly assigned to the Buyer as of the Closing.
(d) Except as set forth in Schedule 4.10(d), there is no Scheduled Contract or any other Contract included in the Assets which cannot be terminated without any further obligation, payment, or penalty upon thirty (30) days’ notice or more to the other party or parties to such Contract.
4.11Condition of Purchased Assets. Each and every one of the tangible Assets to be purchased by Buyer pursuant to this Agreement is in good operating condition and repair, ordinary wear and tear excepted, and is fit and suitable for the purposes for which they are currently used by Seller. The Assets include all of the properties and assets of Seller required, necessary, or desirable to enable Buyer to conduct the operation of the Business in the same manner in which the Business has been conducted prior to the date hereof by Seller.
4.12Customers. Seller has delivered to Buyer a complete and accurate list of all customers which has been included in Schedule 4.12. Except as set forth in Schedule 4.12, no current customer (i) has cancelled, suspended, or otherwise terminated its relationship with the Seller or (ii) has advised the Seller or any of the Shareholders of its intent to cancel, suspend, or otherwise terminate such relationship, or to materially decrease its usage of the services provided by Seller.
4.13Employee Benefit Plans. Except as set forth in Schedule 4.13, there are not currently, nor have there ever been, any Benefit Plans (defined below) in place or established by Seller. “Benefit Plan” means any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen’s compensation, or other insurance, severance, separation, or other employee benefit plan, practice, policy, or arrangement of any kind, whether written or oral, including, but not limited to, any “employee benefit plan” within the meaning of Section 3(3) of ERISA. All group health plans of the Seller have been operated in compliance with all applicable federal and state laws and regulations.
4.14Warranties. Schedule 4.14 sets forth a complete and correct copy of all of the Seller’s standard warranties (collectively, the “Warranties” or individually a “Warranty”) currently extended by the Seller to the customers of the Seller. There are no warranty claims outstanding against the Seller.
4.15Trademarks, Patents, Etc. Except as set forth in Schedule 4.15, the Seller does not own or have any rights to any patents, trademarks, trade names, brand names, service marks, service names, copyrights, inventions, or licenses and rights and applications with respect to the foregoing (collectively, the “Marks and Patents”). All the Marks and Patents are valid and have not been abandoned, and there are no prior claims, controversies, lawsuits, or judgments which affect the validity of the Seller’s rights to the Marks and Patents nor are there any legal proceedings, claims, or controversies instituted, pending, or, to the best knowledge of the Seller or the Shareholders, threatened with respect to any of the Marks and Patents, or which challenge the Seller’s rights, title, or interest in respect thereto. Except as set forth on Schedule 4.15, none of the Marks and Patents are the subject of any outstanding assignments, grants, licenses, liens, obligations, or agreements, whether written, oral, or implied. All required renewal fees, maintenance fees, amendments, and/or other filings or payments which are necessary to preserve and maintain the Marks and Patents have been filed and/or made. The Seller owns or has the right to use all Marks and Patents and the like necessary to conduct its Business as presently conducted and without conflict with any patent, trade name, trademark, or the like of any other person or entity.
4.16Insurance. Set forth in Schedule 4.16 is a complete and accurate list of all insurance policies which the Seller maintains with respect to its Business or the Assets. Such policies are in full force and effect. Such policies, with respect to their amounts and types of coverage, are adequate to insure fully against risks to which the Seller, the Business, or the Assets are normally exposed in the operation of the Business. There has not been any material adverse change in the Seller’s relationship with its insurers or in the premiums payable pursuant to such policies. The insurance coverage provided by the Seller’s insurance policies shall not be affected by, and shall not lapse or otherwise be terminated by, reason of the execution of this Agreement. Neither the Seller nor either Shareholder has received any notice respecting the cancellation of such insurance policies.
4.17Environmental Matters.
(a) Except as set forth on Schedule 4.17(a) attached hereto, Seller has obtained all permits, licenses, and other authorizations (collectively, the “Licenses”) which are required in connection with the conduct of the Business under all applicable Environmental Laws (as defined below) and regulations relating to pollution or protection of the environment, including Environmental Laws and regulations relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic, or hazardous substances or wastes into the environment (including without limitation, ambient air, surface water, groundwater, or land) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic, or hazardous substances or wastes.
(b) Except as set forth in Schedule 4.17(b), Seller is in substantial compliance in the conduct of the Business with all terms and conditions of the Licenses and is in substantial compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables contained in the Environmental Laws or contained in any regulation, code, plan, order, decree, judgment, injunction, notice (written or verbal), or demand letter issued, entered, promulgated, or approved thereunder.
(c) Except as set forth on Schedule 4.17(c), neither Seller nor any Shareholder is aware of, nor has Seller received any written or verbal notice of, any past, present, or future events, conditions, circumstances, activities, practices, incidents, actions, or plans which may interfere with or prevent compliance or continued compliance with any Environmental Laws or any regulations, code, order, decree, judgment, injunction, notice (written or verbal), or demand letter issued, entered, promulgated, or approved thereunder, or which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study, or investigation based on or related to the Seller’s, processing, storage, distribution, use, treatment, disposal, transport, or handling, or the emission, discharge, release, or threatened release into the environment, of any pollutant, contaminant, chemical, or industrial, toxic, or hazardous substance or waste.
(d) There is no civil, criminal, or administrative action, suit, demand, claim, hearing, notice, or demand letter, notice of violation, investigation, or proceeding pending or threatened against Seller or the Shareholders in connection with the conduct of the Business relating in any way to any Environmental Laws or regulation, injunction, notice, or demand letter issued, entered, promulgated, or approved thereunder.
(e) For purposes of this Agreement, “Environmental Laws” means collectively, all federal, state, and local environmental laws, common law, statutes, rules, and regulations including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sec. 9061 et seq.), as amended, the Hazardous Materials Transportation Act (49 U.S.C. Sec. 1801 et seq.), as amended, the Resource Conservation and Recovery Act (42 U.S.C. Sec. 6901 et seq.), as amended, the Federal Water Pollution Control Act (33 U.S.C. Sec. 1251 et seq.), as amended, the Safe Drinking Water Act (42 U.S.C. Sec. 300f et seq.), as amended, the Clean Air Act (42 U.S.C. Sec. 7401 et seq.), as amended, the Toxic Substances Control Act (15 U.S.C. Sec. 2601 et seq.), as amended, the Federal Emergency Planning and Community Right-to-Know Act (42 U.S.C. Sec. 11001 et seq.), as amended, any so-called “superfund” or “super-lien” law and such statutes and ordinances as may be enacted by state and local governments with jurisdiction over any real property now owned or leased by the Seller or any real property upon which the Seller now conducts its Business and any permits, licenses, authorizations, variances, consents, approvals, directives, or requirements of, and any agreements with, any governments, departments, commissions, boards, courts, authorities, agencies, officials, and officers applicable to such real property or the use thereof and regulating, relating to, or imposing liability or standards of conduct concerning any pollutant, contaminant, chemical, or industrial, toxic, or hazardous substance or waste.
4.18Notes, Accounts, or Other Receivables. Set forth on Schedule 1.1(h) is a complete list of Seller’s notes, accounts, or other receivables included in the Assets as existing on the Closing Date and included in the Estimated Accounts Receivable valuation pursuant to Section 2.2. All of the Seller’s notes, accounts, or other receivables included on Schedule 1.1(h) are properly reflected on the books and records of the Seller, and are in their entirety valid accounts receivable arising from bona fide transactions in the ordinary course of business.
4.19Real Estate.
(a) The Seller does not own any real property.
(b) The Seller has valid leasehold interests in all of the real property which it leases or purports to lease, free and clear of any Liens, other than the interests of the lessors, including the Darien Property and the Anytown Property.
(c) The Seller enjoys peaceful and undisturbed possession under all of the leases pursuant to which Seller leases real property (the “Real Property Leases”). All of the Real Property Leases are valid, subsisting and in full force and effect, and there are no existing defaults, or events which with the passage of time or the giving of notice, or both, would constitute defaults by the Seller or by any other party thereto.
(d) Neither Seller nor any Shareholder received notice of any pending condemnation, expropriation, eminent domain, or similar proceedings affecting all or any portion of any real property leased by the Seller and no such proceedings are contemplated.
(e) The Shareholders enjoy peaceful and undisturbed possession of the Darien Property and have the right to lease and collect all rents on the Darien Property and clear of any Liens.
4.20No Guarantees. The Seller has not guaranteed or pledged any Assets with respect to any obligation or indebtedness of any person or entity and no person or entity has guaranteed any obligation or indebtedness of the Seller.
4.21Taxes.
(a) The Seller has timely filed or will timely file all requisite federal, state, and other Tax (defined below) returns, reports, and forms (“Returns”) for all periods ended on or before the Closing Date, and all such Tax Returns are true, correct, and complete in all respects. Neither the Seller nor any Shareholder has any knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of such Seller or any Shareholder or otherwise have an adverse effect on the Seller, the Assets, or the Business.
(b) For purposes of this Agreement, the term “Tax” shall include any tax or similar governmental charge, impost, or levy (including, without limitation, income taxes, franchise taxes, transfer taxes or fees, sales taxes, use taxes, gross receipts taxes, value added taxes, employment taxes, excise taxes, ad valorem taxes, property taxes, withholding taxes, payroll taxes, minimum taxes, or windfall profits taxes) together with any related penalties, fines, additions to tax or interest imposed by the United States or any state, county, local, or foreign government or subdivision or agency thereof.
4.22Labor Matters. Schedule 4.22 sets forth a true and complete list of all employees of Seller together with a brief summary of their titles, duties, terms of employment and compensation arrangements, including the salary and any bonus, commission, or other compensation paid to each employee during the twelve (12) month period prior to the date hereof and the current employment and compensation arrangements with respect to each such employee. Further, with respect to employees of and service provided to Seller:
(a) Seller is not a party to any collective bargaining or similar labor agreements, no such agreement determines the terms and conditions of employment of any employee of Seller, no collective bargaining or other labor agent has been certified as a representative of any of the employees of the Seller, and no representation campaign or election is now in progress with respect to any of the employees of the Seller;
(b) Seller is and has been in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including without limitation, any such laws respecting employment discrimination and harassment, workers’ compensation, family and medical leave, the Immigration Reform and Control Act, and occupational safety and health requirements, and has not and is not engaged in any unfair labor practice;
(c) there is not now, nor within the past three years has there been, any unfair labor practice complaint against Seller, pending or to Seller’s best knowledge, threatened before the National Labor Relations Board or any other comparable authority; nor any labor strike, slowdown, or stoppage actually ending or, to Seller’s best knowledge, threatened against or directly affecting Seller; there exist no other labor disputes with regard to Seller’s employees or relative to Seller’s Employee Technician Manual (“Manual”), including, without limitation, any reports of harassment, substance abuse, disciplinary, safety, or punctuality problems in contravention of Seller’s Manual, or other acts or omissions filed or recorded by or against any employee of Seller. Seller’s cessation of operations will not violate any laws, rules, regulations, or employment policies applicable to its employees.
(d) As of the Closing Date, each employee of the Seller has received any pay owed him or her with respect to vacation, compensatory or sick time, and any other employee benefits due, except as otherwise set forth in Schedule 4.22(d).
4.23Absence of Undisclosed Liabilities. Neither the Seller nor any Shareholder has any material liabilities or obligations with respect to the Business, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, other than (a) those reflected in the 2006 Balance Sheet and (b) those liabilities or obligations incurred, consistently with past business practice, in or as a result of the normal and ordinary course of business since the Balance Sheet Date.
4.24Liabilities. The liabilities to be assumed by Buyer pursuant to this Agreement consist solely of liabilities of Seller under Contracts included in the Assets which relate solely to the operation of the Business and the Assumed Liabilities in Schedule 1.2.
4.25Accuracy of Documents and Information. The information provided to the Buyer by the Seller and the Shareholders with respect to the Seller, the Assets, and the Business, including the representations and warranties made in this Agreement and in the Schedules attached hereto, and all other information provided to the Buyer in connection with their investigation of the Seller, does not (and will not at the Closing Date) contain any untrue statement of a material fact and does not omit (and will not omit at the Closing Date) to state any material fact necessary to make the statements or facts contained herein or therein not misleading.
4.26Brokers and Agents. Neither Seller nor any Shareholder has employed or dealt with any business broker, agent, or finder in respect of the transactions contemplated hereby.
5. NON-COMPETITION. Each of the Shareholders agrees that for a period of six (6) years from the date of this Agreement, he or she shall not, directly or indirectly: (a) engage in competition with the Buyer in any manner or capacity (e.g., as an advisor, consultant, independent contractor, principal, agent, partner, officer, director, stockholder, employee, member of any association, or otherwise) or in any phase of the business conducted by the Buyer during the term of this Agreement in any area where the Buyer is conducting or initiating operations during the period described above; provided, however, that ownership by a Shareholder as a passive investment, of less than one percent (1%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this provision; (b) hire or engage or attempt to hire or employ any individual who shall have been an employee of the Buyer at any time during within one (1) year prior to such action taken by a Shareholder, whether for or on behalf of such Shareholder or for any entity in which such Shareholder shall have a direct or indirect interest (or any subsidiary or affiliate of any such entity), whether as a proprietor, partner, coventurer, financier, investor or stockholder, director, officer, employer, employee, agent, representative, or otherwise; or (c) assist or encourage any other person in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section if such activity were carried out by Shareholder, either directly or indirectly; and in particular each Shareholder agrees that he or she will not, directly or indirectly, induce any employee of the Buyer to carry out, directly or indirectly, any such activity. In the event of any conflict between this provision and the terms of an Employment Agreement in full force and effect, the Employment Agreement will govern.
6. REPRESENTATIONS AND WARRANTIES OF THE BUYER. In order to induce the Seller to enter into this Agreement and to consummate the transactions contemplated hereby, each of the Buyer, jointly and severally, hereby represents and warrants to the Seller as follows:
6.1Buyer’s Organization. The Buyer is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Maryland. The Buyer has all requisite power and authority to own and operate and lease its properties and assets, to carry on its business as it is now being conducted, and to execute, deliver, and perform its obligations under this Agreement and consummate the transactions contemplated hereby.
6.2Authorization of Agreement. The execution, delivery, and performance by the Buyer of this Agreement and of each and every agreement and document contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action of the Buyer. This Agreement has been duly and validly executed and delivered by Buyer and constitutes (and, when executed and delivered, each such other agreement and document will constitute) a valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms.
6.3Non-Contravention; Consents. Neither the execution and delivery by the Buyer of this Agreement nor the consummation by the Buyer of the transactions contemplated hereby, nor compliance by the Buyer with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of the Articles of Organization or Operating Agreement of the Buyer, (ii) result in the breach of, or conflict with, any of the terms and conditions of, or constitute a default (with or without the giving of notice or the lapse of time or both) with respect to, or result in the cancellation or termination of, or the acceleration of the performance of any obligations or of any indebtedness under any contract, agreement, commitment, indenture, mortgage, note, bond, license, or other instrument or obligation to which the Buyer is now a party or by which the Buyer or its respective properties or assets may be bound or affected (other than such breaches, conflicts, and defaults as shall have been waived at or prior to the Closing), or (iii) violate any law or any rule or regulation of any administrative agency or governmental body, or any order, writ, injunction, or decree of any court, administrative agency, or governmental body to which the Buyer may be subject. No approval, authorization, consent, or other order or action of, or filing with or notice to any court, administrative agency, or other governmental authority or any other person is required for the execution and delivery by the Buyer of this Agreement or consummation by the Buyer of the transactions contemplated hereby (other than such consents as shall have been obtained at or prior to the Closing).
6.4Litigation. There is no litigation, suit, proceeding, action, claim, or investigation, at law or in equity, pending, or to the best knowledge of the Buyer, threatened against, or affecting in any way, the Buyer’s ability to perform its obligations as contemplated by this Agreement.
6.5The Equity Interest. The Equity Interest has been duly authorized and issued in accordance with the terms hereof and the Operating Agreement.
6.6Accuracy of Financial Statements. The Financial Statement for (personal balance sheet of buyer) set forth in Schedule 6.6, is true and correct in all material respects.
7. FURTHER AGREEMENTS OF THE PARTIES.
7.1Operation of the Business. From and after the Balance Sheet Date until the Closing Date, except to the extent contemplated by this Agreement or otherwise consented to in writing by the Buyer, the Seller shall have continued to operate its Business in substantially the same manner as presently conducted and only in the ordinary and usual course and substantially consistent with past practice and in substantial compliance with (i) all laws and (ii) all leases, contracts, commitments, and other agreements, and all licenses, permits, and other instruments, relating to the operation of the Business, and will use reasonable efforts to preserve intact its present business organization and to keep available the services of all employees, representatives, and agents. The Seller and each of the Shareholders shall have continued to use all reasonable efforts, consistent with past practices, to promote the Business and to maintain the goodwill and reputation associated with the Business, and shall not take or omit to take any action which causes, or which is likely to cause, any material deterioration of the Business or the Seller’s relationships with material suppliers or customers. Without limiting the generality of the foregoing, (a) the Seller will have maintained all of its equipment in substantially the same condition and repair as such equipment was maintained prior to the Balance Sheet Date, ordinary wear and tear excepted; (b) the Seller shall not have sold, transferred, pledged, leased, or otherwise disposed of any of the Assets, other than in the ordinary course of business; (c) the Seller shall not have amended, terminated, or waived any material right in respect of the Assets or the Business, or do any act, or omit to do any act, which will cause a breach of any material contract, agreement, commitment, or obligation by it; (d) the Seller shall have maintained its books, accounts, and records in accordance with good business practice and generally accepted accounting principles consistently applied; (e) the Seller shall not have engaged in any activities or transactions outside the ordinary course of business; (f) the Seller shall not have declared or paid any dividend or make any other distribution or payment of any kind in cash or property to the Shareholder or other affiliates; and (g) the Seller shall not have increased any existing employee benefits, established any new employee benefits plan, or amended or modified any existing Employee Plans, or otherwise incurred any obligation or liability under any employee plan materially different in nature or amount from obligations or liabilities incurred in connection with the Employee Plans.
7.2Consents; Assignment of Agreements. Seller shall obtain, at the earliest practicable date, all consents and approvals of third parties (whether or not listed on Schedule 4.4) which are necessary or desirable for the consummation of the transactions contemplated hereby (including, without limitation, the valid and binding transfer of the Assets to Buyer) (the “Consents”). The Consents shall be written instruments whose form and substance are reasonably satisfactory to Buyer. The Consents shall not, without Buyer’s express consent, impose any obligations on Buyer or create any conditions adverse to Buyer, other than the conditions or obligations specified in this Agreement.
7.3No Discussions. The Seller shall not enter into any substantive negotiations or discussions with any third party with respect to the sale or lease of the Assets or the Business, or the sale of any capital stock of the Seller, or any other merger, acquisition, partnership, joint venture, or other business combination until the earlier to occur of (a) the Closing Date or (b) the termination of this Agreement.
7.4Employee Matters. The Seller shall permit the Buyer to contact and make arrangements with the Seller’s employees for the purpose of assuring their employment by the Buyer after the Closing and for the purpose of ensuring the continuity of the Business, and the Seller agrees not to discourage any such employees from being employed by or consulting with the Buyer. Nothing herein shall obligate the Buyer to employ or otherwise be responsible for any of the Seller’s employees (other than the persons with whom the Buyer has entered or will enter into an employee agreement in accordance with Section 8.2 hereof) or to pay any employee any compensation or confer any benefit earned or accrued prior to the Closing Date, except as set forth in Schedule 4.22(d).
7.5Notice Regarding Changes. The Seller shall promptly notify the Buyer in writing of any change in facts and circumstances that could render any of the representations and warranties made herein by the Seller materially inaccurate or misleading.
7.6Furnishing of Information. The Seller will allow Buyer to make a complete examination and analysis of the Business, Assets, and records, financial or otherwise, of the Seller. In connection with the foregoing review, Seller agrees that it shall furnish to the Buyer and Buyer’s representatives all such information concerning the Seller’s Business, Assets, operations, properties, or affairs as may be reasonably requested.
7.7Notification to Customers. At the Buyer’s request and in a form approved by the Buyer, the Seller agrees to notify all customers of the Business identified by Buyer and all customers of the Business during the year preceding the Closing as identified by Buyer, either separately or jointly with the Buyer, of the Buyer’s purchase of the Business and Assets hereunder and that all further communications or requests by such customers with respect to the Business and Assets shall be directed to the Buyer. Without limiting the foregoing, promptly following the Closing, the Seller shall send a letter, in a form approved by the Buyer, to each debtor with respect to the notes, accounts, or other receivables included in the Assets directing that all payments on account of such receivables made after the Closing shall be made to the Buyer.
7.8Collection of Receivables. The Seller agrees that it will reasonably cooperate with the Buyer in collecting the notes, accounts, and other receivables included in the Assets from any customers and will immediately deliver to the Buyer the amount paid on any and all receivables it collects after the Closing Date in connection with the Business, less out-of-pocket expenses incurred by Seller.
7.9Brokers and Agents. Buyer, on the one hand, and the Seller, on the other hand, agree to indemnify and hold the other harmless from and against all fees, expenses, commissions, and costs due and owing to any other broker, agent, or finder on account of or in any way resulting from any contract or understanding existing between the indemnifying party and such person.
8. CONDITIONS PRECEDENT TO CLOSING.
8.1Conditions Precedent to the Obligations of Seller. Seller’s and Shareholders’ obligations to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to Closing, of each of the following conditions (any or all of which may be waived in writing, in whole or in part, by the Seller and the Shareholders):
(a) The Buyer shall have performed and complied in all material respects with each obligation and covenant required by this Agreement to be performed or complied with by them prior to or at the Closing.
(b) The representations and warranties of the Buyer contained herein shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such time.
(c) Buyer shall have delivered to the Seller the items set forth in Section 3.2(b) of this Agreement.
(d) No action, suit, or proceeding by any person shall have been commenced and still be pending, no investigation by any governmental or regulatory authority shall have been commenced and still be pending, and no action, suit, or proceeding by any person shall have been threatened against the Buyer, the Seller, or the Shareholders (a) seeking to restrain, prevent, or change the transactions contemplated hereby or questioning the validity or legality of any such transactions or (b) which if resolved adversely to any party, would materially and adversely affect the business or condition, financial or otherwise, of the Buyer, or the Seller.
(e) All proceedings to be taken by the Buyer in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Seller and its counsel, and the Seller and said counsel shall have received all such counterpart originals or certified copies or other copies of such documents as it or they may reasonably request.
(f) Buyer shall have delivered to the Seller the Pledge Agreement together with the marketable securities and other collateral securing the Note.
(g) Buyer shall have delivered to the Seller all such other certificates and documents as the Seller and its counsel shall have reasonably requested.
8.2Conditions Precedent to the Obligations of the Buyer. The obligation of the Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to Closing, of each of the following conditions precedent (any or all of which may be waived in writing, in whole or in part, by the Buyer):
(a) The Seller shall have performed and complied in all material respects with each obligation and covenant required by this Agreement to be performed or to be complied with by it on or prior to the Closing Date.
(b) The representations and warranties of the Seller and the Shareholders contained herein or in any Schedule attached hereto shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such time.
(c) The Seller and the Shareholders shall have delivered or caused delivery of the items set forth in Section 3.2(a) hereof.
(d) Except as otherwise set forth in this Agreement, the Buyer shall have received written evidence, in form and substance satisfactory to it, that all material consents, waivers, authorizations, and approvals of, or filings with, or notices to, governmental entities and third parties required in order that the transactions contemplated hereby be consummated have been obtained or made.
(e) There shall not have occurred since the Balance Sheet Date any material damage or loss by theft, casualty, or otherwise, whether or not insured against by the Seller or the Shareholders, of all or any material portion of the Assets, or any material adverse change in or interference with the Business or the properties, assets, condition (financial or otherwise), or prospects of the Seller.
(f) Buyer shall have entered into an employment agreement with Jane C. Doe and John F. Doe, in substantially the forms attached hereto as Exhibit G and Exhibit H, respectively.
(g) No action, suit, or proceeding by any person shall have been commenced and still be pending, no investigations by any governmental or regulatory authority shall have been commenced and still be pending, and no action, suit, or proceeding by any person shall have been threatened against the Buyer, the Seller, or the Shareholders, (a) seeking to restrain, prevent, or change the transactions contemplated hereby or questioning the validity or legality of any such transactions or (b) which if resolved adversely to any party, would materially and adversely affect the business or condition, financial or otherwise, of the Buyer, or the Seller.
(h) All proceedings to be taken by the Seller and the Shareholders in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Buyer and its counsel, and the Buyer and said counsel shall have received all such counterpart originals or certified copies or other copies of such documents as it or they may reasonably request.
(i) Seller shall have delivered to the Buyer all such other certificates and documents as the Buyer or its counsel shall have reasonably requested.
9. INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
9.1Indemnification by Seller and Shareholders. Each of the Sellers and the Shareholders, jointly and severally, covenants and agrees to indemnify, defend, protect, and hold harmless the Buyer and any of the Buyer’s officers, directors, stockholders, representatives, affiliates, assigns, successors in interest, and current and former employees, each only in their respective capacities as such (collectively, the “Buyer Indemnified Parties”), from, against, and in respect of:
(a) any and all liabilities, claims, losses, damages, punitive damages, causes of action, lawsuits, administrative proceedings, demands, judgments, settlement payments, penalties, and costs and expenses (including, without limitation, reasonable attorneys’ fees, travel expenses, expert witness fees, and disbursements of every kind, nature, and description) (collectively, “Damages”), suffered, sustained, incurred, or paid by Buyer or any other Buyer Indemnified Party in connection with, resulting from, or arising out of, either directly or indirectly:
(i) any misrepresentation or breach of any warranty of the Seller or any Shareholder set forth in this Agreement or any Schedule or certificate delivered by or on behalf of the Seller or any Shareholder in connection herewith; or
(ii) any nonfulfillment of any covenant or agreement on the part of the Seller or any Shareholder set forth in this Agreement; or
(iii) the Business, operations, or Assets of the Seller prior to the Closing Date or the actions or omissions of the Seller’s directors, officers, shareholders, employees, or agents prior to the Closing Date (except with respect to the Assumed Liabilities); or
(iv) the Excluded Liabilities.
(b) any and all Damages incident to any of the foregoing or to the enforcement of this Section 9.1.
9.2Limitation and Expiration. The indemnification obligations under this Section 10 or in any other certificate or writing furnished in connection with the transactions contemplated hereby shall terminate on the later of (a) the date that is six (6) months after the expiration of the longest applicable federal or state statute of limitation (including extensions thereof), or (b) if there is no applicable statute of limitation, four years after the Closing Date, or (c) the final resolution of a claim or demand (a “Claim”) as of the relevant dates described above in this Section.
9.3Indemnification by Buyer. The Buyer covenants and agrees to indemnify, defend, protect, and hold harmless the Shareholders, the Seller, and any of the Seller’s officers, directors, stockholders, representatives, affiliates, assigns, successors in interest, and current and former employees, each only in their respective capacities as such (collectively, the “Seller Indemnified Parties”), from, against, and in respect of:
(a) any and all Damages sustained, incurred, or paid by Seller or any other Seller Indemnified Party in connection with, resulting from, or arising out of, either directly or indirectly:
(i) any breach of any warranty of the Buyer set forth in this Agreement or any Schedule or certificate delivered by or on behalf of the Buyer in connection herewith; or
(ii) any nonfulfillment of any covenant or agreement on the part of the Buyer set forth in this Agreement; or
(iii) the ownership of the purchased Assets or the operation of the Business by the Buyer following the Closing Date.
(b) any and all Damages incident to any of the foregoing or to the enforcement of this Section 9.3.
9.4Notice Procedures; Claims. The obligations and liabilities of the parties under this Section with respect to, relating to, caused (in whole or in part) by or arising out of claims of third parties (individually, a “Third Party Claim” and collectively, “Third Party Claims”) shall be subject to the following conditions:
(a) The party entitled to be indemnified hereunder (the “Indemnified Party”) shall give the party obligated to provide the indemnity (the “Indemnifying Party”) prompt notice of any Third Party Claim (the “Claim Notice”); provided that the failure to give such Claim Notice shall not affect the liability of the Indemnifying Party under this Agreement unless the failure materially and adversely affects the ability of the Indemnifying Party to defend the Third Party Claim. If the Indemnifying Party promptly acknowledges in writing its obligation to indemnify in accordance with the terms and subject to the limitations of such party’s obligation to indemnify contained in this Agreement with respect to that claim, the Indemnifying Party shall have a reasonable time to assume the defense of the Third Party Claim at its expense and with counsel of its choosing, which counsel shall be reasonably satisfactory to the Indemnified Party. Any Claim Notice shall identify, to the extent known to the Indemnified Party, the basis for the Third Party Claim, the facts giving rise to the Third Party Claim, and the estimated amount of the Third Party Claim (which estimate shall not be conclusive of the final amount of such claim or demand). The Indemnified Party shall make available to the Indemnifying Party copies of all relevant documents and records in its possession.
(b) If the Indemnifying Party, within a reasonable time after receipt of such Claim Notice, fails to assume the defense of any Third Party Claim in accordance with Section 9.4(a), the Indemnified Party shall (upon further notice to the Indemnifying Party) have the right to undertake the defense, compromise, or settlement of the Third Party Claim, at the expense and for the account and risk of the Indemnifying Party.
(c) Anything in this Section 9.4 to the contrary notwithstanding, (i) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any Third Party Claim or consent to the entry of judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of an unconditional release from all liability in respect of the Third Party Claim; (ii) if such Third Party Claim involves an issue or matter which the Indemnified Party believes could have a materially adverse effect on the Indemnified Party’s business, operations, assets, properties, or prospects of its business, the Indemnified Party shall have the right to control the defense or settlement of any such claim or demand, at the expense of the Indemnified Party without contribution from the Indemnifying Party; and (iii) the Indemnified Party shall have the right to employ its own counsel to defend any claim at the Indemnifying Party’s expense if (x) the employment of such counsel by the Indemnified Party has been authorized by the Indemnifying Party, or (y) counsel selected by the Indemnifying Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such action, or (z) the Indemnifying Party shall not have employed counsel to assume the defense of such claim in accordance with Section 9.4(a).
(d) In the event that the Indemnified Party should have a claim against the Indemnifying Party hereunder which does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Party shall promptly send a Claim Notice with respect to such claim to the Indemnifying Party. If the Indemnifying Party does not notify the Indemnified Party within thirty (30) calendar days that it disputes such claim, the amount of such claim shall be conclusively deemed a liability of the Indemnifying Party hereunder.
(e) Nothing herein shall be deemed to prevent any Indemnified Party from making a claim hereunder for potential or contingent claims or demands, provided that (i) the Claim Notice sets forth (A) the specific basis for any such potential or contingent claim or demand and (B) the estimated amount thereof (to the extent then feasible) and (ii) the Indemnified Party has reasonable grounds to believe that such a claim or demand will be made.
9.5Survival of Representations, Warranties, and Covenants. All representations, warranties, and covenants made by the Seller, the Shareholders, and the Buyer in or pursuant to this Agreement or in any document delivered pursuant hereto shall be deemed to have been made on the date of this Agreement (except as otherwise provided herein) and, if a Closing occurs, as of the Closing Date. The representations of the Seller and the Shareholders will survive and the Closing and remain in effect until, and will expire upon, the termination of the relevant indemnification obligation as provided in Section 9.2. The representations of Buyer will survive and remain in effect until and will expire upon, the later of the third anniversary of the Closing Date or the satisfaction in full of any payment obligation pursuant to the Promissory Note.
9.6Indemnification Trigger. Notwithstanding the provisions of Section 9.1 or 9.3 above, neither Seller nor Buyer shall be liable to the other for any indemnification under this Section 9 unless and until the aggregate amount of Damages due to an Indemnified Party exceeds Two Hundred Thousand Dollars ($200,000) (the “Trigger Amount”). Once the Trigger Amount has been exceeded, the Indemnified Party shall be entitled to indemnification for all Damages, including the amount up to the Trigger Amount and any amount in excess thereof. The foregoing trigger provision shall not apply, however, with respect to any Damages suffered, sustained, incurred, or paid by an Indemnified Party related to Taxes or assessments by any governmental authority, or with respect to any claim of actual fraud or intentional misrepresentation relating to a breach of any representation or warranty in this Agreement.
9.7Remedies Cumulative. The remedies set forth in this Section 9 are cumulative and shall not be construed to restrict or otherwise affect any other remedies that may be available to the Indemnified Parties under any other agreement or pursuant to statutory or common law.
10. POST-CLOSING MATTERS.
10.1Transition Services. The Seller agrees to provide reasonable assistance to the Buyer in connection with the transition of the Business to the Buyer. The Shareholders will provide assistance to Buyer in accordance with their respective Employment Agreement.
10.2Further Assurances. The Seller and each of the Shareholders hereby covenants and agrees to (a) make, execute, and deliver to the Buyer any and all powers of attorney and other authority which the Seller may lawfully make, execute, and deliver, in addition to any such powers and authorities as are contained herein, which may reasonably be or become necessary, proper, or convenient to enable the Buyer to reduce to possession, collect, enforce, own, or enjoy any and all rights and benefits in, to, with respect to, or in connection with, the Assets, or any part or portion thereof, and (b) upon the Buyer’s request, to take, in the Seller’s name, any and all steps and to do any and all things which may be or become lawful and reasonably necessary, proper, convenient, or desirable to enable the Buyer to reduce to possession, collect, enforce, own, and enjoy any and all rights and benefits in, to, with respect to, or in connection with, the Assets, and each and every part and portion thereof. The Seller and each of the Shareholders also covenants and agrees with the Buyer, its successors and assigns, that the Seller and each of the Shareholders will do, execute, acknowledge, and deliver, or cause to be done, executed, acknowledged, and delivered, any and all such further reasonable acts, instruments, papers and documents as may be necessary to carry out and effectuate the intent and purposes of this Agreement. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Assets or the Business to Buyer.
10.3Payment of Liabilities; Discharge of Liens. The Seller shall satisfy and discharge, as the same shall become due, all of Seller’s liabilities, obligations, debts, and commitments including but not limited to Tax liabilities, in accordance with this Agreement, other than the Assumed Liabilities.
10.4Transfer of Permits; Additional Consents. Subsequent to the Closing, Seller shall use its commercially reasonable best efforts to effectively transfer to Buyer all Permits which were not so transferred at or prior to the Closing and to obtain all approvals, consents, and authorizations with respect to such transfers. In addition, subsequent to the Closing, to the extent requested by Buyer, Seller shall use its reasonable efforts to obtain any required consents of the other parties to the Scheduled Contracts included in the Assets to the assignment thereof to the Buyer which were not obtained at or prior to the Closing.
10.5Inspection of Documents, Books, and Records; Financial Reports. Subsequent to the Closing, Buyer shall make available for inspection by Seller or its authorized representatives during regular business hours and upon reasonable notice, any original documents conveyed to Buyer under this Agreement. Upon reasonable notice to the Buyer, for five years from the Closing Date forward, Seller or its representatives shall be entitled, at Seller’s expense, to audit, copy, review, and inspect the Buyer’s books and records at the Buyer’s offices during reasonable business hours. For so long as any payment obligation is outstanding under this Agreement, Buyer shall make available to Seller and its representatives, copies of Buyer’s annual corporate tax returns and any quarterly financial statements or reports prepared or compiled by or for Buyer.
10.6Acceleration of Notes. In the event that Buyer shall subsequently sell, convey, transfer, or assign assets of the Buyer to a nonaffiliated third party (other than as collateral under a lien or security arrangement), the value of which is greater than twenty-five percent (25%) of the total assets of the Buyer at the time of the transfer, all amounts of principal and interest then outstanding under both Notes shall become immediately due and payable.
11. RISK OF LOSS. Prior to the Closing, the risk of loss (including damage and/or destruction) of all of the Seller’s property and assets, including, without limitation, the Assets, shall remain with the Seller, and the legal doctrine known as the “Doctrine of Equitable Conversion” shall not be applicable to this Agreement or to any of the transactions contemplated hereby.
12. MISCELLANEOUS.
12.1Entire Agreement. This Agreement, and the Exhibits and Schedules to this Agreement, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, agreements, arrangements, and understandings, whether oral or written, among the parties hereto with respect to such subject matter (including, without limitation, the letter of intent dated _____________, 20___, as amended, between the Seller and the Buyer).
12.2No Third Party Beneficiary. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person, firm, corporation, partnership, association, or other entity, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.
12.3Amendment. This Agreement may not be amended or modified in any respect, except by the mutual written agreement of the parties hereto.
12.4Waivers and Remedies. The waiver by any of the parties hereto of any other party’s prompt and complete performance, or breach, or violation of any provision of this Agreement, shall not operate nor be construed as a waiver of any subsequent breach or violation, and the failure by any of the parties hereto to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation.
12.5Severability. If any term, provision, covenant, or restriction of this Agreement (or the application thereof to any specific persons or circumstances) should be held by an administrative agency or court of competent jurisdiction to be invalid, void, or unenforceable, such term, provision, covenant, or restriction shall be modified to the minimum extent necessary in order to render it enforceable within such jurisdiction, consistent with the expressed objectives of the parties hereto. Further, the remainder of this Agreement (and the application of such term, provision, covenant, or restriction to any other persons or circumstances) shall not be affected thereby, but rather shall be enforced to the greatest extent permitted by law.
12.6Descriptive Headings. Descriptive headings contained herein are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement.
12.7Counterparts. This Agreement may be executed in any number of counterparts and by the separate parties hereto in separate counterparts, each of which shall be deemed to be one and the same instrument.
12.8Notices. All notices, consents, requests, instructions, approvals, and other communications provided for herein and all legal process in regard hereto shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) when received by facsimile transmission, with printed confirmation of transmission and verbal (telephonic) confirmation of receipt, (c) one day after being sent by a nationally recognized overnight express service, or (d) five (5) days after being deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, as follows:
If to the Seller: |
If to Buyer: |
or to such other address as any party hereto may from time to time designate in writing delivered in a like manner.
12.9Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. None of the parties hereto shall assign any of its rights or obligations hereunder except with the express written consent of the other parties hereto.
12.10Applicable Law. This Agreement shall be governed by, and shall be construed, interpreted, and enforced in accordance with, the internal laws of the State of Maryland.
12.11Expenses. Each of the parties hereto agrees to pay all of the respective expenses incurred by it in connection with the negotiation, preparation, execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby.
12.12Confidentiality. Except to the extent required for any party to obtain any approvals or consents required pursuant to the terms hereof, no party hereto shall divulge the existence of the terms of this Agreement or the transactions contemplated hereby without the prior written approval of all of the parties hereto, except and as to the extent (i) obligated by law or (ii) necessary for such party to defend or prosecute any litigation in connection with the transactions contemplated hereby.
12.13Attorneys’ Fees. In the event any suit or other legal proceeding is brought for the enforcement of any of the provisions of this Agreement, the parties hereto agree that the prevailing party or parties shall be entitled to recover from the other party or parties upon final judgment on the merits reasonable attorneys’ fees and expenses, including attorneys’ fees and expenses for any appeal, and costs incurred in bringing such suit or proceeding.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement on the date first above written.
GROWTH CO. CORP.
By:
____________________, President
TARGET CO., INC.
By:
____________________, Chief Executive Officer
1. This financing structure may be more complex than the typical asset acquisition at this level; however, it is designed to provide the reader with some different approaches to structuring such an acquisition.
2. Note that when part of the overall consideration to the seller will be a consulting agreement, there are often certain fiduciary issues that must be addressed in terms of a majority shareholder being favored over the minority shareholders. There are also certain tax advantages to the buyer when the deal is structured in this fashion.
