What is a Membership Interest Purchase Agreement?
Membership Interest Purchase Agreements are the documentation used when selling limited liability company membership interests. LLC Membership Interest Purchase Agreements are contracts that legally transfer ownership of an LLC membership interest from the seller to the buyer (also known as "Assignor" and "Assignee", respectively) for an agreed amount of consideration (i.e., payment). The purchaser pays the price of a membership interest to the seller in exchange for the ownership of the membership.
LLC Membership Interest Purchase Agreements are similar to Purchase Agreements of other entities, in that they are legally binding contracts that allow owners of membership interests to sell the membership interests to the purchaser for a mutually beneficial amount . These Agreements provide the details of each membership purchase transaction, including the amount of money involved and if the payments are periodic or one-time only. If payments are required in more than one installment, the Agreement should state the amounts, dates, and amounts of interest charged on each installment (if any). Membership Interest Purchase Agreements generally have an expiration date, usually six months after the signing of the Agreement.
A Membership Interest Purchase Agreement is a very important document that should be given a lot of thought and care because they are complex legal documents with many clauses designed to benefit the recipients of the membership (i.e., the seller(s) and the purchaser).
Elements of a Purchase Agreement Template
As you begin to draft your membership interest purchase agreement template, you will want guidelines on the essential components of such a document. A typical purchase agreement template will have sections detailing the parties involved, the purchase price, the date of closing, representations and warranties, delivery of documents and more.
Parties
This section of the membership interest purchase agreement template will simply name the buyer and seller of the membership interests that are involved in this transaction.
Purchase Price
This section will detail the price being paid for the membership interests of the seller. It will state the amount being paid either in its entirety, or if there is an initial amount paid, and the remainder is paid over time, it will state the amount and timeframe of the additional payments.
Closing Date
This section will specify when the closing of the purchase(s) of membership interests will be. A closing is the agreed upon time and date that the transfer of ownership of membership interest will take place.
Representations and Warranties
This section will be critical to the membership interest purchase agreement template. It will set forth the representations of the parties involved in the transaction. Typically, the party selling the membership interest will be making representations to the buyer. The membership interest purchase agreement template creates representations and warranties that require the seller to truthfully state certain basic qualities about the assets and liabilities of their business. This will protect the buyer and make them whole in the event that the seller has not accurately stated their items of value or areas where they could possibly lose money. In other words, if you state in your agreement that there are no lawsuits pending against the business, and after the transfer of the membership interest is complete, a lawsuit is brought forth against the company, you will be responsible for the legal protection of the company. You can then seek reimbursement of those expenses from the seller in the court system.
Delivery of Documents
This will be the section of the membership interest purchase agreement template that details the items that are due at closing. They could include things like balance sheets, title documentation, payment of associated costs, and other related paperwork. This section could also name who is responsible for the paying of fees associated with the transfer.
Advantages of a Template
Using a standardized membership interest purchase agreement template has a number of advantages. These templates provide a basis for commercial terms agreed upon by experienced attorneys. Further, the standard template is far more likely to have all necessary clauses and protections than an individual drafting the agreement from scratch. These templates place the parties in a stronger position to negotiate the provisions of the agreement, and they will speed the transaction process as well, saving both time and money.
Typical Terms and Conditions
A Membership Interest Purchase Agreement Template comes with its own set of clauses and terms. A few of the most common ones include:
Confidentiality Clause
With a confidentiality clause, the buyer and seller will both agree to the confidentiality of certain information is being kept confidential and agree to pay for any damages if the clause is violated. This will protect the income, business information, plans and strategies of the business, as well as any confidential information the buyer may have about the seller’s business potentially gained through the sale.
Dispute Resolution Clause
The buyer and seller will agree to resolve some or all of their disputes out of the court, should a disagreement arise. This can help both parties avoid long expensive legal battles. However, in certain cases the buyer may still want to keep open the option to pursue legal action.
Indemnification Clause
Under an indemnification clause, the buyer will have the seller reimburse them for any losses after the sale that the seller caused during the negotiation or the selling process. Some of the specific expenses the seller may be held responsible for include misrepresentations about their business or any problems regarding the sale of their business.
How to Alter Your Template
When adapting a generic membership interest purchase agreement template for a specific transaction, several key sections may require adjustment, including the payment terms, representations and warranties, and indemnification provisions. It is important to ensure that the details and language of the template accurately reflect the specifics of your situation. For the payment terms, the template should include the total purchase price to be paid, as well as the method of payment (e.g., one lump sum or installments over time). The payment terms must also include any additional conditions that must be satisfied prior to payment (e.g., third-party consents, delivery of financial information, etc.). Representations and warranties are statements made by the buyer or seller regarding the condition of the company or its assets. These statements may be specific to the company being acquired, its assets, or other considerations such as indemnification. A standard membership interest purchase agreement template will lack company-specific representations and warranties , which must be added to the document after the template is adapted to fit specific needs. Indemnification provisions relate to damages that may be incurred if the company or its assets are not in good order prior to sale. For example, if the target company has not fully satisfied its tax obligations, the buyer may hold the seller responsible for any liabilities stemming from the failure to pay taxes. In an indemnification provision, the parties will lay out the compensation the seller (or buyer) will owe if the company is not in good order at the time of purchase. Even if your purchase agreement already includes payment terms, representations and warranties, and indemnification provisions, they may not meet the specific requirements of your planned transaction. Legal counsel can guide you through the process of customizing your membership interest purchase agreement template for your particular transaction.
Legal Considerations and Compliance
Before using a membership interest purchase agreement, it is important to determine that the terms contained within the document will comply with applicable state laws and the requirements of any applicable securities regulations. Whenever a sale of membership interests takes place and there is an earnest money deposit involved, the transaction must comply with the requirements set forth in the state laws, and the buyer should be given a set period of time upon receipt of the earnest money deposit to have the right to conduct a full review of the business. In order for the buyer to safeguard their interests, it is crucial that they are given the opportunity to perform all necessary due diligence prior to the sale.
In addition to complying with the requirements set forth by various state laws, a membership interest purchase agreement must also contain provisions that will ensure that the transaction is in compliance with the requirements of the Securities and Exchange Commission (SEC). If the membership interest complies with the requirements set forth in Section 4(a)(2) of the Securities Act of 1933, then it will qualify as what is known as a "safe harbor" exemption from SEC registration. Section 4(a)(2) of the Securities Act will generally apply to most sales of membership interests because the investors that are buying the membership interests are considered to be sophisticated purchasers. To ensure compliance with Section 4(a)(2), the company must meet one of the following obligations:
Negotiation Tips
A membership interest purchase agreement is a legal document outlining the sale of a member’s (or multiple members’) interest in an LLC. The negotiation process between the buyer and seller can be difficult, but if done carefully, it can lead to a fair and agreeable deal. Here are a few strategies and tips to assist you in negotiating the terms of the agreement. For the seller, it’s recommended that any agreement specify not only the terms for the sale, but also conditions that would allow the company to buy the member’s interest back at the buyer’s cost, like relocation or failure to meet performance expectations. The seller should look out for a "bad leaver" provision as well, which would see them receive nothing for their interest if they are fired for gross misconduct, theft or other violation of the operating agreement. The seller should stay away from a "good leaver" provision, which would allow them to walk away with compensation. The asset purchase is a safer option for the buyer, but they should still do their homework. A buyer should request that the seller discloses the LLC’s potential liabilities from any litigation, estimates and pending transactions. The buyer could accept the assets "as is" if they can adjust pricing to reflect their risks and if the risks are low. If the sales transaction is part of the LLC’s dissolution, it’s important that the buyer obtains the dissolution of the operating agreement. If the sellers carry on the activities of the LLC after the transaction closes, in violation of the operating agreement, the buyer could be liable for any claims relating to those activities. There are several aspects to a membership interest purchase agreement that require careful negotiation by both the buyer and seller. With the right strategies and tips, both parties can come out of the deal with favorable terms.
FAQs
Do I need a separate membership interest purchase agreement for each interest holder?
That depends on your situation. It is often easier to manage the sale of multiple interests in a single agreement, but if an interest holder has unique terms, a separate agreement may be more appropriate.
Can members know the purchase price before they sign the membership interest purchase agreement?
In many cases, yes. However, best practice generally dictates that you keep the sale price as a secret until all members have signed the agreement to avoid the possibility that one or more members will decide to bide their time until other members have signed the agreement.
Should the company be a party to the membership interest purchase agreement?
If the agreement is the member’s right to sell their membership interest, there is no need to include the company in the agreement . If you require the company’s approval before the member can sell their interest, however, and the approval comes in the form of a written consent occasioned by signing the membership interest purchase agreement, the company will have to be a party to the agreement.
When do members receive payment for the sale of their membership interest?
Unless the membership interest purchase agreement provides for other terms, the member usually receives payment closing when the membership interest sale closes. If you wish to make multiple payments over time, the agreement must specify this.
Are membership interest purchase agreements the same as asset purchase agreements?
No. A membership interest purchase agreement is the sale of an ownership interest in the company, while an asset purchase agreement is a salesperson’s promise to purchase specific assets from the company. Because these two agreements involve different business components, there are different rules and regulations governing each.