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LLC Membership Interest Purchase Agreement: Basic Structure

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This article deals with a situation where a person wishes to purchase a membership interest in the LLC and the agreement has been reached by all parties (i.e. the negotiations are over and there is an agreement with respect to main substantive issues, such as price, timing, assets, et cetera). In particular, I will focus on what an LLC Membership Interest Purchase Agreement (hereinafter “Agreement”) must contain (i.e. the minimum basic structure of the contract) in order to adequately protect the buyer, while providing necessary assurances to the seller.

A. Recitals

Almost every business contract should contain recitals stating who the parties are and what are their intentions with respect to this Agreement.

B. Definition of Terms and Rules of Interpretation

In order to avoid ambiguity, the relevant terms of the contract should be defined. For example, you can state: “ ‘Indemnified Buyer Liabilities’ has the meaning specified in Article V of the Agreement” or “ ‘Membership Interest’ shall mean all of the economic, financial, and governance rights and interests of a member of the Company.” I suggest that the description of parties should be restated in this section of the Agreement, even if the parties are already described in the recitals.

C. Description of the Purchase Price and the Interest Sold

This is one of the most crucial parts of the Agreement. Here, you describe the terms of sale: the purchase price, the interest sold, how the sale will proceed, and the closing terms. Do not forget to indicate the documents that should be presented at the closing, the location and time of the closing, and the form of payment. I also usually include an additional paragraph to describe the effect of the sale.

D. Seller’s Representations and Warranties

This is the article of the Agreement that provides main protections for the buyer. The seller’s representations and warranties vary greatly from contract to contract. At the very least, however, the buyer should make sure that the seller guarantees clear title of its interest, lack of conflict with other seller’s obligations, good standing of the LLC, the company’s compliance with laws, no pending litigation, and intellectual property protection. These protections should be clearly and comprehensively described in the Agreement.

Again, there are many more protections available. I just described the minimum basic that must be in the Agreement.

E. Buyer’s Representations and Warranties

This is the article of the Agreement that provides main protection for the sellers. Many issues are negotiable here, but, at the very minimum, the seller should make sure that the buyer guarantees: the payment and protection of the seller from post-sale litigation. Again, these protections should be clearly and comprehensively described in the Agreement.

F. Indemnification

Indemnification is a complex part of the Agreement. The main idea behind indemnification provisions is to provide relief for the buyer (the seller may also enclose indemnification provisions for limited purposes) in case a problem arises due to the seller’s breach of its obligations, representations, and warranties under the Agreement, misstatement of material fact and failure to adequately disclosure required information. The provision itself is highly complex and involves many other issues, such as litigation, insurance, subrogation, and so on.

G. Consent to Transfer

In order to avoid unnecessary conflicts, it is crucially important to coordinate this Purchase Agreement with other existing documents and contracts. The most frequent issue – the limitations on transfer of a Membership Interest imposed by other organization documents, such as Member Control Agreement or LLC Operating Agreement. Often, these documents require a unanimous consent of other Members to the transfer. This is why the documentation of such consent is indispensable. This is precisely what “Consent to Transfer” provisions are designed to do.

H. General Provisions

“General” does not mean “not important”. On the contrary, general provisions often contain crucial provisions such as: amendment of the Agreement, notification process, consent to jurisdiction and venue, governing law, denial of waivers, and so on. These provisions are significant not only to the operation of the Agreement, but also to dispute management and economics of subsequent litigation. This is why these provisions should be drafted with care.

Contact Sherayzen Law Office for Experienced and Aggressive Legal Representation

This article describes only the basic general structure of an LLC Membership Interest Purchase Agreement. In reality, drafting and negotiating of this type of agreements can be a very complex process that should only be handled by a contract attorney. This is why you should contact Sherayzen Law Office. Our experienced contract firm will represent you during the negotiations, draft the necessary contract provisions, assure adequate documentation and due diligence during closing, and protect your interests throughout this whole process.

Time Limitations on Bringing a Contract Lawsuit and How Laches May Apply

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In previous articles I have discussed a few broad methods for getting out of contract in Minnesota, as well as how an opposing party may be able to stop you from claiming a right under contract by invoking equitable estoppel. This article is closely related with those topics and deals with the timing of claiming a right under contract, and how unreasonable delay can bar an otherwise valid legal claim.

Statute of Limitations and How the Doctrine of Laches Works

It is generally understood that a legal action (or the right to sue someone) is governed by a statute of limitations. For a civil case based on something such as breach of contract, a statute of limitations establishes a time limit for suing someone starting from the time when the right to assert a claim first arose (e.g. when the person harmed first discovered or could have discovered that they were harmed) . The applicable statute of limitations for breach of contract in Minnesota is Minn. Stat. Section 541.05, subd. 1(1) (2010). Section 541.05 provides for a six year statute of limitations for action upon a contract or other obligation, express or implied, unless another limitation is expressly prescribed.

This seems simple enough, but other laws, such as the State Uniform Commercial Code may modify this limit, and the doctrine of laches can confuse things further. Note also that the common law doctrine Quod nullum tempus occurrit regi (or “No time runs against the King) can exempt some government entities from statutes of limitations and/or the application of the doctrine of laches. That is why it is essential to retain an experienced Minnesota contract attorney as soon as possible after your contract issue arises.

As alluded to above, in addition to the statute of limitations, the doctrine of laches plays an important part in determining whether a civil lawsuit was brought in a timely fashion. Laches is an equitable doctrine intended to prevent a party who has not been diligent in asserting a known legal right from recovering at the expense of another party who has been prejudiced by the delay. An example of a situation where laches may apply is where a party waits for essential witnesses that could support an opposing party’s claims or defenses to die before asserting a legal right. However, for the doctrine of laches to be applied in such a case, the prejudice to the party claiming laches must be the result of unreasonable delay. If the essential witnesses died before there is unreasonable delay, the death of those witnesses alone, even if it greatly prejudiced a party, does not mean that laches is applicable.

It is also essential to understand that laches is not an available defense in a contract action where only strict legal rights are in controversy. In those types of cases, only the applicable statute of limitations will bar a claim. This means that if your case depends only upon application of law to the language of the contract, then laches is likely not applicable.

However, if there is more at issue than strict legal rights under a contract and you are seeking equitable relief in addition to laches, then Minnesota law provides that the doctrine of laches may bar the lawsuit, even if the statute of limitations would not! While it may seem strange that a lawsuit brought within the time allowed by the statute of limitations can be untimely, this makes sense if you keep in mind that a delay in asserting the known legal right can be so unreasonable and can so adversely affect a party that it would be inequitable to allow the lawsuit to proceed.

Nevertheless, a couple important issues should be kept in mind. First, claiming only laches will not likely be successful in a contract case. A party must assert that there are other events that occurred that give rise to equitable relief (e.g. estoppel, fraud, duress, etc.) or laches itself is likely to be of little help. Second, laches concerns the question of whether a party has been unreasonable in asserting a known legal right, a broader category than a mere legal claim. To illustrate this, imagine two parties enter a contract where Company A promises to pay Company B in multiple payments for work Company B has done for Company A. Company B also has the right to notify Company A in writing and request Company A to pay in full (i.e. “call the loan” or require Company A to “purchase the loan”). Company A sets up a payment process through a third party that fails, but through no fault of Company A. The third party notifies only Company B of the problem on two occasions. Company B does nothing and waits seven years before realizing during an audit that it has not been paid. Company B then notifies Company A and requests payment in full (including years of accumulated interest) and then sues when Company A refuses. Company A asserts laches (among other equitable claims) and Company B contends that it sued Company A immediately after the refusal to pay in full, thus there was no unreasonable delay in bringing the lawsuit and laches cannot apply. However, the legal right to which laches applies is not the lawsuit (or legal claim), but rather the contract right to require the Company A pay in full after written notice (the legal right). There is no question that Company B delayed in asking Company A to purchase the loan. A court may take this under consideration and allow Company A to use laches as a defense.

Finally, Minnesota courts consider the following factors when deciding whether the doctrine of laches applies to a particular case:
1) Availability of the defense as determined by the nature of the action;
2) Reasons for delay;
3) Prejudice; and
4) Policy considerations.

The court may: find that your case involves a special situation where the doctrine of laches specifically does not apply; accept that there were legitimate reasons for delay; determine that the resulting prejudice was not severe enough support claiming laches; and/or take into account broad policy considerations that may suggest that laches is not appropriate in your case. Additionally, laches is an affirmative defense to a legal claim by another party. This means that the party claiming laches will bear the burden of showing facts and arguments that fulfill the elements of equitable estoppel in that particular jurisdiction. Contract litigation in Minnesota can be complex and you should retain a contract lawyer as soon as possible.

Conclusion

As always, issues such as complicated contract litigation and asserting laches as a defense to another party’s claim involve important legal considerations. It is also important that the consequences of particular actions should be evaluated appropriately. These issues should be analyzed by a skilled contract attorney who will be able to conduct proper legal analysis based on the particular facts of your case. Sherayzen Law Office can help you analyze your case, evaluate your options, and provide specialized advice on how to proceed with your contract litigation.

Call the professional tax law firm of Sherayzen Law Office, Ltd. at (952) 500-8159 to discuss your case with our contract litigation attorney!