Membership Interest Purchase Agreement (Pro-Buyer)
This Membership Interest Purchase Agreement is for acquiring a minority membership interest in an LLC from an existing member. This membership interest purchase agreement contains limited representations and warranties, covenants and indemnification provisions. This agreement also assumes signing and closing are simultaneous, so it does not contain conditions precedent or termination provisions. The buyer should also consult with counsel to determine if this Purchase Agreement is appropriate for the transaction.
Membership interest purchase agreements may vary in length and complexity depending on several factors, such as:
- The relationship between the parties.
- Whether signing and closing are simultaneous or separate.
- The percentage interest acquired by the buyer.
- The size of the deal.
Parties should not use this Membership Interest Purchase Agreement to sell 100% of membership interests in a limited liability company (LLC). In a sale of all of the membership interests, the buyer is essentially acquiring all of the LLC’s assets. The purchase agreement must then contain more comprehensive representations and warranties about the acquired business because of the greater potential for post-closing liabilities. Comprehensive representations help the buyer learn about any potential liabilities to which it may be subject. Comprehensive representations also provide a greater foundation for the buyer’s indemnification rights. If signing and closing are not simultaneous, the purchase agreement must also include pre-closing covenants. These pre-closing covenants relate to obtaining any necessary consents and access to information.
This Membership Interest Purchase Agreement assumes the following:
There is a single buyer and a single seller.
- If there are additional buyers or sellers, adjustments must be made. For example, the buyers or sellers need to determine whether their obligations are joint, several, or joint and several. Once the buyers or sellers determine the status of their obligation they should amend the agreement accordingly. If there are many sellers, they may consider whether to have one party represent the interests of all the sellers (a seller representative) to simplify negotiations.
The acquisition is an arm’s-length transaction.
- Affiliated parties (such as a parent company and subsidiary) may not have any representations and warranties or indemnification rights (or if they do, these provisions are much more limited).
Signing and closing are simultaneous.
- In the event that signing and closing are not simultaneous, the parties should add sections containing pre-closing covenants, conditions precedent, and termination rights.
The buyer, the seller and the company are all US entities.
- The parties may need to modify the purchase agreement to comply with applicable laws if any of the parties or the company are organized in or operate in a foreign jurisdiction. Buyer’s counsel should consult local counsel in these jurisdictions to revise this purchase agreement as appropriate. In some cases, this purchase agreement may not be relevant or applicable and counsel may need to start with a different form altogether.
The seller is selling its entire interest in the company.
- If the seller is not selling its entire interest in the company, the parties should consider adding a provision addressing the division of the seller’s capital account between the retained and sold membership interests.
The transaction does not trigger filing requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
- The HSR Act requires parties to certain M&A transactions to file premerger notification forms with the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) and to wait a specified period before the acquisition is closed. The size of the parties and the size of the transaction threshold trigger the HSR Act filing and waiting period. A filing under the HSR Act is generally not required on the sale of a non-controlling interest in an LLC. However, the parties must revise the purchase to reflect the HSR requirements agreement if the transaction triggers the HSR Act filing requirements. Additionally, the purchase agreement must provide for a separate signing and closing by making changes to the representations, warranties and covenants and adding closing conditions and termination rights.
The IRS treats the company as a partnership for US federal income tax purposes.
- If the company is a disregarded entity, S-corporation or C-corporation for tax purposes, the tax matters article must be modified. In addition, the representations and warranties must also be modified.
Other assumptions related to specific sections of the purchase agreement are discussed in the relevant drafting notes, including:
- The consideration is in cash.
- There is no purchase price adjustment.
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