What Is a Contribution Agreement
Contribution Agreement is an arrangement that lays down the exact rights and responsibilities of the parties who are involved in an equity agreement. This Agreement talks about the parties that indulge in equity contribution, shares, intellectual property, or other assets to either an existing entity or to create a new entity.
Parties Involved in a Contribution Agreement:
Following Parties are involved in contribution agreement:
- Company: This is the company in which assets are transferred by the contributors.
- Contributors: They are the person who contributes assets, capital, intellectual property, etc. to the company.
Purpose of Contribution Agreement
Following is the purpose of contribution agreement:
- The Agreement clearly specifies the rights and responsibilities of the parties to the agreement.
- It also clearly provides the exact nature of the equity contribution made.
- It conveys all the rights, titles, interests of contributed assets in the company in which the asset is being contributed.
- It also provides for the exact nature of consideration being paid by the company receiving the contribution.
Contents of Contribution Agreement
A well-drafted equity agreement template should include the following:
- Capital Contribution: What is each party bringing to the table also needs to be included in the agreement. In a standard transaction, capital contribution is part of any agreement template
- Formation and nature: What type of entity will be formed as a consequence of contribution agreement also needs to be captured.
- Transfer of Interest: The agreement should specify the time and date on which the asset is to be transferred to the company.
- Consideration: The Agreement should also lay down the exact consideration to be paid by the parties for the contribution received by them. Basically, the money (monies) contribution should be part of the contract
- Restrictive covenants: Covenants such as non-compete and non-solicitation may be included.
- Closing date: The Agreement should also lay down the date of consummation of the assets being transferred.
How to Draft Contribution Agreement?- Points to Consider
Following points are to be covered while drafting equity agreement template:
- File a copy of Agreement with the parties: The copy of the agreement needs to be filed by all the parties with the prescribed authorities.
- List all the parties: The Agreement should clearly list all the parties to the agreement and should provide for all the necessary details about the parties involved in the agreement.
- Due Diligence: The Company should indulge in due diligence on the facts that the contributors are the actual owners of the property and the nature of the right, title, and interest which were being transmitted by the contributors. Representations and warranties to this effect should be included by both the parties in the agreement.
- Details of Items contributed: The Agreement should also provide for the details of the items being contributed by the contributors.
- Specify the details of the law to be applicable: The Agreement should also lay down the list of all the applicable statute to the Agreement.
Benefits and Drawbacks of Contribution Agreement
Following are the advantages of the Contribution Agreement:
- Clarity: The Contribution Agreement lays down the clarity concerning the rights and liabilities of the parties.
- Transfer of Interest: The Contributory Agreement also provides for manner and transfer of interest absolute.
- Binding: The Agreement makes it binding on parties to follow the exact terms and conditions of the Agreement.
Following are the drawbacks of the Contribution Agreement:
- Time Consuming: The process of entering into the Contribution Agreement is a very time-consuming method.
- Discourages contributors: The negotiation made or the provision of a complete waiver of rights of the contributors often discourages contributors from entering into contribution agreement.
What Happens in Case of Violation?
Following remedies are available in case of breach of Contribution Agreement:
- Suit for damages: The party can sue for damages when the terms of the agreement are breached. The parties can bring legal action for damages caused to them because of a violation of the terms of the agreement.
- Specific performance: The parties can demand specific performance in case of irreparable loss being suffered by the parties.
- Recession: The parties to the agreement may rescind the contract in case the other party is breaching the terms of the contract.
The Contribution Agreement is an agreement that talks about the rights and responsibilities of the parties to the agreement. This is an agreement that talks about the transfer of rights, title, and interest of the property from the contributor to the company. The agreement is binding on all the parties to the agreement. The Agreement should specify the details of the asset to be transferred and the nature of the interest which is being transferred. The Agreement is the effective source of binding the contributor from claiming any interest or share in the property on any future date. The Agreement provides for the dispute settlement between the parties and also ensures that the terms governing the agreement are to be clearly stated in it.
Although the agreement is time-consuming, it makes the contribution effective upon payment of consideration by the parties. The Agreement becomes binding as soon as the parties and witnesses to it sign the agreement. The Agreement is an effective source of disposing of the asset in favor of a company for certain for the fixed amount of consideration. The contributors, sometimes, also reserve certain rights on the agreement.
Hence, the contribution agreement is an effective way of contributing the asset to the company, and it also defines all the details of the parties to the agreement and provides for the transfer of assets, shares, capital, etc. to the company.
Contribution Agreement Sample
An Equity Contribution agreement Template can be downloaded from below.