The sale or purchase of the members’ interest in a corporation is a transaction of significant importance. Since the value of the members’ interest is determined by the assets, liabilities and goodwill of the corporation’s business, it is essential to define clearly what is being sold and on what terms?
A sale of members’ interest agreement fulfils the above function and ensures that both the seller and the purchaser are in no doubt as to their respective rights and obligations. In this way, any potential for future disputes or uncertainty is removed. Some of the more important issues included in the agreement are the following:
- A careful definition of the members’ interest being sold, as well as all of the rights and obligations attaching to the members’ interest;
- Detailed provisions are included dealing with the calculation and payment of the purchase price and any penalties for late payment;
- A comprehensive range of warranties which protect the purchaser against any undisclosed facts of relevance to the members’ interest and/or the purchase price paid;
- The manner in which loan accounts, interest and suretyships previously granted by the seller are to be dealt with;
- The delivery of the members’ interest and the completion of all documents associated therewith;
- The allocation of members’ distribbutions during transitional phases and any associated tax liabilities;
- Mechanisms for the effective resolution of any disputes which may arise.
Through a careful recordal of the above aspects (and a range of additional terms), the parties are assured of a full and proper understanding of their respective rights and obligations in relation to the sale of the members’ interest. In this way, disputes are avoided and a successful transaction is ensured.