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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.

Contract Lawyers: Top Legal Fee Issues

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Legal fees usually constitute a top concern for potential clients who wish to retain a St. Paul contract attorney.  In this essay, I would like to point out the top three legal fee issues that are usually associated with retaining a contract lawyer in St. Paul, Minnesota.

1. Payment Structure

There are three main models of payment that St. Paul contract lawyers use: hourly fee, contingency fee, and flat fee. The most common payment structure is hourly fee. This arrangement occurs where a contract attorney is paid based on how much time he spends on a case. If you’re paying your St. Paul contract lawyer by the hour, the agreement should set out the hourly rates of the business attorney and anyone else in this attorney’s office who might work on the case.

The contingency fee is relatively rare in a contract litigation setting, and virtually non-existent in the contract drafting and negotiations. This payment structure is characterized by payment to a contract lawyer of a mutually-agreed percentage of recovery (or contract amount) at the end of a case.

In a flat-fee arrangement, you pay an agreed-upon amount of money for a project Flat-fee payment is often used by St. Paul contract lawyers only in certain contract drafting situations. Usually, these situations are characterized by predominance of one party over another (for example, in employment context) or there has been an established consensus among parties (for example, in partnership agreement context). Flat fee, however, is less used where contract negotiation is required, and this payment structure is almost non-existent in contract litigation context (unless, a very large retainer is involved). Generally, flat fees are disliked by St. Paul contract attorneys due to its inflexibility. On the other hands, I have seen how a combination of a flat fee payment structure with hourly fees appeals to many clients while it reduces the inflexibility inherent in a simple flat-fee context.

Finally, as I just hinted above, it is possible to merge various payment structures to create a fee arrangement most agreeable to the parties.

2. Timing of Payment

Where hourly-fee arrangement is used, St. Paul contract lawyers usually bill their clients on a monthly basis. In a flat-fee arrangement, a contract attorney would prefer to receive at least half of the payment before he begins to work on a project. In any case, a retainer is usually required by St. Paul contract attorneys.

3. Retainer Fee

Most contract lawyers in St. Paul require their client to pay a retainer. Retainer can mean two different fee arrangements. First, retainer may be the amount of money a client pays to guarantee a contract lawyer’s commitment to the case. Under this arrangement, the retainer is not a form of an advance payment for future work, but a non-refundable deposit to secure the lawyer’s availability. Second, a retainer is simply the amount of money a St. Paul contract attorney asks his client to pay in advance. In this scenario, the lawyer usually deposits the retainer in a client trust account and withdraws money from it for the work completed according to the fee agreement. The fee agreement should specify the amount of the retainer and when the lawyer can withdraw money form the client trust account (usually, on a monthly basis).

Conclusion

Obviously, the three issues discussed above do not cover all of the issues associated with legal fees when you are hiring St. Paul contract lawyers. These three issues, however, are likely to provide the necessary background for you to understand the basics of the legal fee arrangements with your St. Paul contract attorney.

One of the key areas of our practice at Sherayzen Law Office is contract law. We are highly experienced in the matters of contract drafting, negotiation, and litigation. We also regularly offer our contract review and consultation services to our clients throughout Minnesota.

Contact Sherayzen Law Office NOW to discuss your contract with an experienced contract lawyer!

Minnesota LLC Formation V: Member Control Agreement

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Member Control Agreement can be the most important governance document in the process of the LLC Formation because it may provide the LLC members with maximum governance flexibility, including overruling some provisions of the Minnesota Limited Liability Company Act.

In fact, a Member Control Agreement may completely reorganize the governance structure of an LLC away form the Act’s default corporate model.  Instead, the members of the LLC may choose to adopt a partnership-like governance model which may greatly facilitate the conduct of business, especially where there are few LLC members.

One of the least-known aspects of a Member Control Agreement is that a person, who is neither a member nor a party to a contribution agreement, may nevertheless be a party to a Member Control Agreement.  This provision may provide a new level of flexibility by incorporating in the Agreement persons who may have financial rights under the Agreement even though they do not possess the usual membership rights (such as voting).

Typically, a Member Control Agreement can regulate a wide range of ownership and management issues, including: transfer of membership interest; contributions of capital, property or services during and after the formation of an LLC, management and governance structure of an LLC, tax elections, distributions of cash and other assets, allocation of profit and loss, establishment and maintenance of bank accounts, books and records; access to books and records, valuation of membership interests, employment of members, dissolution and winding up of the LLC, et cetera. A Member Control Agreement may even re-determine the rights of dissenting members as provided in Minn. Stat. §322B.383 and Minn. Stat. §322B.386. Even this non-exclusive list of issues already emphasizes the significance of the Member Control Agreement to the operation of the LLC.

Precisely due to this significance, special requirements are imposed by the Act on the execution of a Member Control Agreement. In order to be valid, a Member Control Agreement must scrupulously follow the requirements of Minn. Stat. §322B.37.  Even then, the Agreement can only be enforced “by persons who are parties to it and is binding upon and enforceable against only those persons and other persons having knowledge of the existence of the member control agreement.” Minn. Stat. §322B.37, Subd. 3(a). Finally, special recordkeeping requirements are demanded by the Act, including filing of the Member Control Agreement with the required records of an LLC.  The records themselves must note that the members’ interests are governed by a Member Control Agreement.

Thus, a Member Control Agreement may provide a great business opportunity by allowing maximum flexibility in the governance structure of an LLC.  This opportunity, however, must be handled with care and knowledge of a legal professional; otherwise, it may turn into a litigation nightmare.  Therefore, you should retain a Minnesota business lawyer to advise you and ultimately draft the Agreement.

Sherayzen Law Office is an experienced business law firm with one of its primary concentrations in advising and creating business governance documents.  We can advise you with respect to whether you need a Member Control Agreement, help you negotiate the necessary provision, draft the Agreement, make sure it is properly executed, and establish the right recordkeeping procedures to comply with Minn. Stat. §322B.37.