The Purchase / Sale / Transfer Agreement Itself
A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?” Of course, you can also have a situation in which a current Member is only transferring or selling some of that Member’s interests in the company.
See Part 1 of this series for a general overview of sale / purchase / transfer of company membership interests and the legal process. This Part 2 focuses on the contract between the parties involved in the transaction, typically the Seller (Transferor) and the Buyer (Transferee), with the limited liability company itself often being a party to the agreement as well.
The agreement between the parties involved in the transaction is often called the “Membership Interest Transfer Agreement” or “Membership Interest Purchase and Sale Agreement” and states the terms of the agreement between the parties transferring ownership interests amongst each other. It’s important to note that the LLC itself may also want to be or need to be a party to such agreements.
Is this business contract a private document or does it become a public record? Typically, a Membership Interest Purchase and Sale Agreement is a private document and does not get “filed” or “recorded” anywhere. That doesn’t mean it can’t be ordered produced by a court, and of course there are other situations in which it must be or should be produced to certain government agencies or other private third parties.
What are the goals and purposes of a Membership Interest Transfer Agreement? There are many, and to some extent they will vary from situation to situation. The most common, most fundamental goal and purpose is to set forth in specific, clear detail what the
Here are some key issues which should definitely be covered in a Membership Interest Purchase and Sale Agreement, and of course this is not a complete list.
- The full names of the parties; the full name of the LLC should be listed even if the LLC is not a party.
- The date the transaction is effective.
- The ownership structure before the transaction and what it will be after the transaction.
- What items of value are being exchanged between the transacting parties (most often, Member A is selling ____% of the company’s membership interests in exchange for $_____).
- What responsibilities / liabilities each of the parties has and doesn’t have as a result of the transaction, and the timing of the same.
○ For example, if Member A is selling all Member A’s interests, does Member A retain any responsibility or liability after the date of the transaction?
○ What happens if the new Member is subjected to negative consequences related to a new legal claim for events which occurred before becoming a Member, especially if Member A helped cause the claim?) - That the transaction has been approved, to the extent necessary, by other Members and/or the limited liability company itself.
- Signatures of the parties (and sometimes of relevant other persons or entities).
We also point out that there are arguments to be made that the selling / transferring Member’s spouse (if there is one) should join in the Membership Interest Purchase and Sale Agreement.
Finally, we observe that if it’s a purchase / sale situation and the selling Member is not receiving all the purchase price up front, there are additional important items to add to the Membership Interest and Purchase Agreement and the use of a well-qualified attorney becomes even more important.
Look for more parts of this series to come!