An equity interest purchase agreement facilitates the purchase and sale of the equity interest of a company. It grants options to the buyer to buy equity interest of the target company at a pre-agreed price and on settled terms and conditions on a particular date which is otherwise referred to as closing date.
What is an Equity Interest Purchase Agreement?
An equity interest purchase agreement provides a company with an option to acquire the equity interest of the target company on certain pre-determined terms and conditions and after a certain specified period. The rights and liabilities of both parties would be contained in such a contract. The nature of the option to be provided, the terms and conditions, the price at which such equity interest shall be sold, the events triggering the rights under the agreement, need to be enumerated therein. It is pertinent to have all the commercials at hand before one sets out to draft this agreement.
Purpose of an Equity Interest Purchase Agreement?
As this contract is both an agreement for sale as well as an agreement to buy, it clarifies the rights and obligations of both the buyer and the seller. The main purpose behind the said agreement is to have the terms and conditions captured in a written form as the agreement is for a future date. This agreement is also known as a Share Purchase Agreement.
Inclusions in an Equity Interest Purchase Agreement?
An equity interest purchase agreement should inter alia include the names of the parties, the closing or the effective date, the number and percentage of shares to be sold, the options granted, the terms and conditions and other standard clauses such as a waiver, notices, remedies, jurisdiction, and severability. Compliance with applicable laws should also be inbuilt in the contract.
Key terms of an Equity Interest Purchase Agreement?
Key terms of an equity interest agreement are:
- Purchase and Sale: This clause mandates the sale and purchase of equity interest on a particular fixed date which is known as the closing date.
- Purchase price: The purchase price for the equity interest is pre-determined and should be included in the contract. A fixed price may be included or formula may be given for the calculation of the same.
- Closing obligations: These include the obligations of the buyer and the seller on the closing date.
- Conditions attached: Whether granting of the equity interest is conditional or unconditional, it needs to be mentioned. If conditional, then the conditions should be enumerated.
- Employment: How would the employees be affected by the said sale also needs to be captured in the equity purchase agreement. For example, “the employees will have their employment contracts modified to reflect the purchaser as the employer”.
Drafting an Equity Interest Purchase Agreement?
An equity purchase agreement should be drafted keeping the following guidelines in mind:
- The number of shares and the consequent percentage of the equity interest should be clearly mentioned.
- The options to be granted should be clearly drafted. For example, there are typically two types of options: Call and Put. The terms and conditions associated with each should be included.
- The calculation formula for the purchase price should be included.
- Warranties such as good title, shares free from encumbrance, etc. need to be included.
- Statement warranting compliance with laws should also be included.
- Clauses such as indemnity and limitation of liability which avert financial risk should be included.
- Simple and crisp language should be used.
Benefits of an Equity Interest Purchase Agreement?
An equity interest purchase agreement has the following advantages:
- Pre-determined price: As such a contract grants the option to buy at a later date at a pre-determined price, it makes the offer attractive for both the buyer and the seller. The former gets a buyer and the latter gets a fixed price.
- The rights and obligations are clearly captured in the agreement and hence prevents disputes from arising later on.
- The purchase price is either negotiated or arrived at after applying a decided formula. This makes the entire process transparent and fair.
- Other aspects such as effect on employees are also taken care of.
An equity interest purchase agreement provides assurance to both the buyer and the seller. Seller is assured an exit as there would always be a buyer available. On the other hand, the seller is assured a fixed price. Any disputes arising out of the same can be resolved through litigation or arbitration.
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