Buy Out Agreement Negotiation and Drafting: General Information and Instructions
Shannon and Caren, two sisters, own “Let’s Keep It Real, LLC,” (“Real, LLC) a commercial real estate investment and sales company. Shannon and Caren started this business 15 years ago and have built it into a very successful enterprise.
Shannon focuses more on the sales aspect of the company—attracting buyers for their properties, clients for new listings, etc. Caren is more heavily involved on the land acquisition and redevelopment side. She has been very successful at identifying emerging commercial spaces in Atlanta, investing in those properties, and redeveloping blocks of commercial space for resale or leasing, which Shannon handles.
Shannon owns 45 percent of Real, LLC (450 Units) and shares all management power with her sister. Shannon is married and has a 22-year-old daughter, Skyee, who is built in her mold—she is outgoing, gregarious and a natural sales woman. Skyee has been working with Real, LLC since her junior year at GSU as a part of the sales and client development teams. She grew up with the business and has a strong interest in building her career at Real, LLC.
Caren owns 45 percent of Real, LLC (450 Units) and shares all management power with her sister. Caren got the idea to start this company after her first husband died of a sudden heart attack. She acquired a warehouse in Kirkwood as a part of his estate. She held onto it for several years and was able to sell the building as a part of a downtown redevelopment that was very profitable. That was 15 years ago and Real’s first transaction. Caren has no children, but recently became engaged to her long-time boyfriend, Jeff, who also works in commercial real estate with his own company.
Real LLC has 1 other key employee, Ronny, who has been with the company for 10 years. Ronny holds a 10 percent ownership interest Real, LLC (100 Units) and is responsible for all operations, administration, and back-office support.
Shannon, Caren, and Ronny have decided that they need a members’ buy-sell agreement. Ronny, not having the same resources as the sisters, has agreed to take whatever proposal they come up with to his lawyer for review and editing prior to final signatures. Basically his position is that the sisters should work out their terms and make him a reasonable offer.
You are tasked with the following:
1. Identify all triggers that need to be addressed in this buy out agreement
2. Pick 2 triggers to address in further negotiation. For each of the 2 triggers, state the
a. Valuation methods applicable. You MUST use at least 2 different valuation models
b. Transfer/purchase restrictions/obligations.
c. Any other applicable conditions such as RFR, tiered purchase options, installment options, etc.)
d. You MUST vary the rights as between the members with respect to at least one trigger.
e. You MUST address as least 2 “other conditions” for each trigger (something from (b) and/or (c)).
3. Please identify the rights of Shannon, Caren and Ronny for each negotiated trigger scenario (note you will need to walk through the events assuming that each member triggers so you will be discussing a total of 6 fact patterns—three for each of the two triggers).
4. Please explain 3 funding sources or strategies contemplated in your buy out agreement.
To assist in your negotiations, attached please find a set of rough financials for Real LLC, including a recent balance sheet and a listing of the last 5 years worth of net profits.
Attached please find a sample buyout agreement. For this assignment you are not expected to complete a full agreement, rather you are required to negotiate and draft the trigger/valuation provisions subject to the guidelines stated above. The sample agreement is for your records and to serve as a reference and source of inspiration for the portions of the final agreement that you will be drafting in this assignment.
Each team will turn in 1 complete assignment, which is due on November 9, 2010. Each attorney on the team will receive the same grade.
5. Let’s Keep It Real LLC Financials
ASSETS / LIABILITIESTotal Liabilities / 3,000,000
Cash / $500,000 / EQUITY
Real Property
(acquisition price) / Shannon Capital Account / 450 Units
Kirkwood Station / 1,500,000 / APPROX. $2,047,500
Oakhurst Commons / 895,000
City View Mixed Use / 3,500,000 / Caren Capital Account / 450 Units
Arizona St. Warehouse / 955,000 / APPROX.
$2,047,500
Personal Property / Ronny Capital Account / 100 Units
Company Vehicles (2) / 50,000 / APPROX.
$455,000
Office Equipment / 100,000
Total Equity / $4,550,000
Total Assets / $7,550,000 M / Total Liabilities and Member Equity / $7,550,000 M
NET PROFITS
2005 $1,100,000
2006 $2,800,000
2007 $1,900,000
2008 $ 400,000
2009 $ 875,000
PROJECTED 2010 $2,300,000
SAMPLE
Georgia Buy-Sell Agreement
NOTE: You are NOT required to complete this agreement for the assignment. See specific negotiation and drafting instructions above
Agreement executed ______[date] between ______, of ______[address] ______, of ______[address], and ______, of ______[address], called the "members," and ______, a Georgia limited liability company with offices at ______[address], called the "the company."
Recitals
A. ______, ______, and ______[names of parties] are the sole members of the company, owning respectively ______, ______, and ______units. The term "units" shall mean all units representing an ownership interest in the company, $______par value, of the company now owned or subsequently acquired in any manner by the parties.
B. The members are ______[to be] actively engaged in the conduct of the business of the company, and ______[it is contemplated that] success or failure of the enterprise will at all times depend in large measure on the personal abilities of the members.
C. There is not now, nor is there likely in the future to be a substantial market for the units of the company.
D. For the foregoing reasons, the parties desire to provide for the purchase by the company or the remaining parties of the interest of any party desiring to sell the same, and for the purchase by the company or the surviving parties of the units of a deceased party.
In consideration of the mutual covenants set forth, the parties agree as follows:
Section 1. Unit Transfer Restricted
No member shall transfer, pledge, assign, or encumber all or any part of his or her stock holdings in the company except as provided in this agreement.
Section 2. Legend on Units
The secretary of the company shall endorse the following legend on each share certificate prior to its delivery to a member:
"The units of stock evidenced by this certificate may not be transferred, pledged, assigned, or encumbered except in accordance with the terms of a buy-sell agreement dated ______, a copy of which is on deposit with ______[the president of the company]."
Section 3. Inter Vivos Repurchase
In the event any member desires to sell, transfer, or otherwise dispose of all or any part of his or her units in the company, he or she shall deliver written notice of such desire to the company and to each member, specifying the number of units he or she desires to dispose of. On receipt of such notice, the company ______[may or shall to the extent it is permitted to do so by the Georgia Business Company Code or any successor statute] buy, and the member shall sell to the company the number of units set forth in the notice at the place and on the terms set forth in Paragraphs 6 and 7 below.
Section 4. Repurchase on Death of Member
On the death of any member, the company shall, if not prohibited by the Georgia Business Company Code or any successor statute from doing so, buy, and the executor, administrator, or personal representative of the member will sell to the company, all of the units owned by the member at the time of his or her death at the price and on the terms set forth in Paragraph 6 below.
Section 5. Members' Option
If the company is prohibited by the Georgia Business Company Code or any successor statute from buying any of the units offered for sale to it, ______[or if the company elects not to buy any of the units offered for sale to it], then each of the other members shall have the option to buy, and the offering member shall be obligated to sell to each, a proportion of such units equal to the ratio of the number of units owned by such member to the total units owned by the remaining members excluding the seller, and if a member is unable or unwilling to buy the proportion of stock allotted to him or her, the other members shall have the right to buy the balance in a similar ratio. The purchase price for such units and the terms of sale shall be as set forth in Section 6 below.
Section 6. Price and Terms of Sale
The purchase price shall be ______[the net book value per share multiplied by the number of units to be purchased] such value to be determined in the case of inter vivos transfers on the date of delivery to the company of the notice specified in Section 3 above, and in the case of transfers occasioned by the death of a member, on the date of death. The term net book value per unit shall mean the aggregate book value of the units of the company divided by the number of units then issued and outstanding. The term "aggregate book value of the units" shall mean the excess of the cost of all of the assets of the company over the sum of (a) reserves for depreciation maintained on the books of the company; (b) treasury stock, if any; (c) all determinable liabilities; and (d) the amount of any dividends paid or payable to members of record on a date prior to the valuation date but not reflected in the books of the company as of the valuation date.
In the event of any disagreement among the parties, their executors, administrators, personal representatives, or any of them with respect to the determination of the book value of any of the units to be purchased, book value shall be computed in accordance with this section by an independent certified public accountant selected by the company, and this computation shall be final and binding on the company and each of the members and their executors, administrators, and personal representatives. The cost of such accounting shall be born equally by the parties unable to reach agreement.
It is understood that the purchase price, determined as set forth above, shall be the value of the purchased units for all tax purposes. In the event such value is later increased by any federal or state taxing authority, any tax liability resulting from such increase shall be borne by ______[the selling member or his or her executor, administrator, or personal representative, as the case may be].
The purchase price shall be payable at the option of the company or purchasing member either in a lump sum within ______days following the valuation date as set forth above, or in ______equal monthly installments of principal beginning ______days after the valuation date, with interest on the unpaid balance at the rate of ______percent per annum, such interest to be payable with the final installment of principal. Any party electing to pay in installments shall have the right at any time to prepay without penalty all or any portion of the unpaid principal balance plus interest accrued to the date of payment.
Section 7. Delivery of Certificates
Certificates for all units sold, properly endorsed to the company or purchasing member, as the case may be, shall be delivered to the purchasing party by the seller not later than the date of the lump sum purchase price payment or first installment payment, whichever first occurs. Thereafter, the selling member, or his or her estate, shall cease to be a member of the company with respect to such units.
Section 8. Company To Maintain Insurance
To insure or partially insure its obligation under this agreement to purchase from the estate of a deceased member the units owned by such member prior to his or her death, the company has purchased, and shall continue in force by timely payment of premiums, the policies of insurance covering the lives of each of the members summarized in Exhibit A, which is attached and incorporated by this reference. In the event any member ceases to be a member of the company or reduces his or her holdings of the units of the company, by voluntary transfer or otherwise, the company shall, as appropriate, terminate or procure a proportionate reduction in the face amount of insurance outstanding on the life of such member, and in the event any member increases his or her holdings of the units of the company, the company shall procure and maintain additional insurance on the life of such member proportionate to the increase in the holdings of such member.
Section 9. Obligation of Company as to Transfer of Units
In no event shall the company sell, transfer, or otherwise dispose of any of the units of the company, including any units repurchased by it pursuant to this agreement, to any person or entity until such person or entity has become a party to this agreement and is bound by its provisions.
Section 10. Amendments; Waiver of Agreement
This agreement may be amended or altered by execution of a written agreement duly authorized by corporate resolution and signed by all the parties to it, and any of the units subject to this agreement may be disposed of by any member to the company or to any other person without regard to the terms of this agreement on the written consent of a majority of the company's board of directors and each of the members.