Many transactions have that awkward moment where the napkin sketch of the basic deal terms is followed by an overwhelming sense of confusion about which instrument must be drafted to help confirm and formalize the parties’ intentions. To better guide you in that “where do we go from here” mentality, the goal of this article is to briefly address the most common agreements and describe the utility of each in effectuating a transaction, according to their intended use, helping you move from concept to contract with confidence.

1. Deed – A Deed is probably the most well-understood transactional instrument. It’s used to reflect and memorialize of public record, the parties’ conveyance of a real property interest in land from the seller, usually referred to as a grantor, to the buyer, usually referred to as a grantee. The Deed will state the legal description of the lands, reservations, and exceptions from the sale, and the consideration given in exchange for the conveyance. For the Deed to be legally effective, it must be properly executed by each party before a notary public. Once executed, it must then be recorded with the County Clerk in the county where the property is located. Recording requirements vary by jurisdiction and may include specific rules about the format of the deed. These can cover seemingly minor details such as font type, font size, return address placement, margin width, and line spacing.

2. Assignment and Bill of Sale – An Assignment and Bill of Sale (“ABOS”), similar to a Deed, is used to reflect and memorialize the parties’ conveyance of an interest in equipment and leasehold. If that interest pertains to a leasehold affecting real property, the ABOS must also be recorded with the County Clerk in the county where the leasehold interest is located. However, for simpler transactions, such as assignments of office leases, tractors, or equipment, an ABOS would remain a private agreement between the parties. Such an ABOS could be executed with electronic signatures, remaining unrecorded. The bill of sale portion of the ABOS verbiage and documentation serves as the physical manifestation of the transfer of ownership of the leasehold or equipment, detailing the condition and circumstances of the transfer, including any warranties given and indemnities between the parties related to that transfer. In certain instances, especially if many of the commercial terms of the transaction are stated in the ABOS, it is prudent to file a memorandum of the ABOS of record instead of the whole ABOS. Such a memorandum will describe the assets transferred, clearly identify the interests conveyed, and reference the ABOS without making the parties’ commercial terms part of the public record.

More complex commercial terms of a transaction cannot and need not be literally stated in the public record under a Deed or ABOS. For those instances, an additional instrument is recorded to reflect all the parties’ intentions as noted below:

3. Letter Agreement – A Letter Agreement is a concise instrument that outlines the basic contractual terms proposed by one party to the other, which must be executed by both parties to enter into the transaction. The Letter Agreement can have an anticipated closing date, detail which additional documents will be executed by and between the parties, note any indemnities and payment details, and any due diligence or eventualities that would act to kill the deal between the parties. Generally speaking, a Letter Agreement is more appropriate where the parties (or the assets) are smaller in size or between parties who would prefer a more business-oriented and minimally papered process in lieu of a more formalized and legalistic process.

4. Purchase and Sale Agreement – A Purchase and Sale Agreement (“PSA”) is a formal contract that outlines the rights and obligations of the parties involved in a proposed transaction. It typically includes:

1. A description of the assets or interests being transferred,
2. The financial terms, including the type and method of payment,
3. Restrictions or covenants imposed on the parties,
4. Representations, warranties, and indemnities,
5. Conditions that must be satisfied before closing,
6. Procedures and logistics for closing itself, and
7. Any post-closing responsibilities that may arise between the parties.

There is no standard form PSA, and the actual draft can expand in size from a threadbare short form of a few pages to a highly customized long form legal document that contains hundreds of pages of surviving and terminating obligations and post-closing indemnities, which will bind the parties long after the transfer has been effectuated.

5. Stock Purchase Agreement – A Stock Purchase Agreement (“SPA”), is an instrument under which the buyer acquires the stock of an existing entity, usually a corporation, without forming a new entity by stepping in their shoes and acquiring that entities’ legal liabilities and obligations, rather than just the assets associated with that entity. This process will require extensive due diligence by the parties and outside counsel to adequately identify and mitigate risks associated with inheriting these obligations.

6. Membership Interest Purchase Agreement – A Membership Interest Purchase Agreement (“MIPA”) is similar to a SPA, in that you are purchasing the membership interest/equity in an entity, rather than assets, except that it pertains only to the equity in a limited liability company or LLC, or a professional limited liability company or PLLC, rather than a corporation.

Suffice it to say, there is no more fundamental and impactful decision than choosing the correct instrument to paper your transaction. That decision must adequately balance the deal size, complexity, budget, and time horizons of the parties to the transaction.  The Transactional Team at RR&A has the background and real-world deal experience to guide you through this process, familiarize you with the correct structure for your transaction, and explain the upside and pitfalls associated with each. Contact us from the outset of your deal to better understand your options and protect your bottom line!