Taking Stock of Your Agreed Transaction:
Letter Agreements & Stock Purchase Agreements

Our firm is frequently asked to draft Letter Agreements, which are shorter versions of Purchase and Sale, Stock Purchase Agreements, or Membership Interest Purchase Agreements, often used for transactions with lower sale prices. While often less formal than a more comprehensive contract, a Letter Agreement must contain nearly all the same elements. A Letter Agreement must formalize and overcome any oral agreements between the parties, contain an offer and acceptance of the parties’ intentions to agree, state valuable consideration for the underlying transaction, contain all of the major terms in simple and comprehensible language and have meaningful timelines for any obligations, rights for termination, and all of the other necessary commercial terms. In this way, the Letter Agreement becomes a roadmap for the parties’ interactions before, during, and after a transaction, with clear remedies if one party is wronged by the other due to a breach of the duties and obligations noted internally.

Due to its near universal usage, a well-drafted Letter Agreement will anticipate major potential sources of disputes and disagreements that could arise from an underlying transaction. It will propose common sense solutions for those possible eventualities between the parties for issues like lack of payment, assignability of parties’ obligations under the Letter Agreement, bankruptcy, and audit rights, to name a few. In many instances, silence or lack of specific addressing of these and other scenarios will result in a forfeiture of a party’s rights. It may also lead to the application of unfavorable common law. Involve legal counsel early in the negotiation process to ensure enforceable terms and protection of your interests. A hastily drafted Letter Agreement with no remedies for non-compliance can lead to costly court cases and operation delays. An attorney drafted Letter Agreement can still be concise and less formal while not sacrificing a more comprehensive contract’s legal protections and detail. For simple transactions, lengthy agreements may not be necessary, and engaging counsel can enable customization.

Likewise, as the New Year approaches, many companies reach out to RR&A to help purchase an entity after executing a Letter Agreement covering the same transaction. In such cases, it is occasionally preferable, due to tax and liability considerations, for the parties involved to consider utilizing a Stock Purchase Agreement, which enables the purchasing company to acquire all the stock of the acquired entity. When parties come together for a Stock Purchase Agreement, they settle on a stock price for the acquired entity and hash out the fundamental aspects of the deal. This includes the sale agreement, considerations, warranties, indemnities, pre-closing covenants, conditions precedent to closing, and restrictive covenants. Additionally, a meticulously crafted set of schedules provides supplementary details to the agreement.

There are several reasons why Stock Purchase Agreements are becoming more and more popular as an acquisition mechanism. Sellers greatly appreciate the streamlined process, which assumes all the Seller’s liabilities, whether unknown or disclosed. Moreover, the Stock Purchase Agreement is a much more standardized form than the typical Purchase and Sale Agreement associated with an asset-based transaction, as there are fewer exceptions, qualifications, or carveouts from the transaction. With these generally standardized features and baked in assumptions, the Stock Purchase Agreement will require more comprehensive due diligence to identify any critical barriers to the transaction.

However, the Stock Purchase Agreement requires a high degree of risk due to the noted limitations on liabilities and negotiation, and, as a result, you should seek counsel in order to preserve your ability to properly assess risk in the due diligence process of the transaction. We strive to create value by questioning standardized templates and forms to work with the business realities and protect your bottom line.

At RR&A, we have the institutional memory to know what works and what does not when it comes to drafting and negotiating Letter Agreements and Stock Purchase Agreements. Even the simplest transactions require a keen eye for potential adversarial action, and we can ensure that your newly acquired entity does not become a source of unmitigated liability.  Help to secure your future business growth acquisitions, and contact us now.

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Andrew Clinton

Andrew Clinton

Andrew is a Partner at R. Reese & Associates and head of the Transactions and Corporate teams. His practice consists of energy and business transactional matters with additional competencies in real estate and title representation. To learn more about Andrew, visit his attorney page.

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