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Boilerplate Clauses in Business Contracts: Why They Matter

Posted on September 20, 2019July 30, 2024 by lindenlawpart1

Boilerplate clauses are those provisions typically placed at the end of a contract, often grouped together under a “Miscellaneous” or “Other” heading. They look like a lot of legalese that can continue for multiple pages. They do not relate to the substantive provisions of the contract, are mostly standardized, and not controversial, and parties typically don’t spend much time negotiating them. Do boilerplate clauses really matter, then?

Boilerplate Clauses in Business Contracts

Boilerplate clauses are important because they define how the parties must act to enforce rights and interpret the contract. They have significant practical implications and can save headaches and lawsuits in the event a dispute arises later. The absence of certain boilerplate clauses can create ambiguity or even a different result than the parties intended when they entered into the contract.

Done correctly, boilerplate provisions will better define the relationship of the parties to the contract and provide greater certainty in the event of later disagreements and substantially reduce the cost of legal bills associated with a dispute.

Each boilerplate clause serves a specific purpose. Not all boilerplate clauses belong in every contract. We have highlighted below a non-exhaustive list of common boilerplate clauses that should at least be considered as part of any business contract:

Attorneys’ Fees. This clause provides that in a legal dispute, the losing party pays the winning party’s legal fees and related costs. Under the so-called “American Rule,” each party is responsible for paying its own attorneys fees, win or lose. Including an attorneys’ fees provision can deter a party from bringing a claim where it may not clearly prevail. This can help push the parties to reach a fair negotiated business solution. On the other hand, if one party is generally more likely to be sued than the other party, such as a seller of a business, that party may not want an attorney’s fees provision as deterrent to the other party bringing a lawsuit over a relatively small amount when compared to the costs of litigation.
Entire Agreement. The entire agreement clause, sometimes referred to as the integration or merger clause, provides that the contract represents the entire agreement between the parties on the subject matter of the contract. This clause is intended to provide certainty that the contract signed by the parties includes everything the parties have agreed to. This prevents either party from claiming that prior negotiations, agreements, representations, emails, or discussions are part of the final agreement. Sometimes, other contracts are part of a transaction. In such instances those other contracts should be specifically mentioned as being part of the overall transaction.
Amendment. This clause typically provides that any amendments or modifications to the contract must be in writing and signed by both parties. This is intended to prevent a party from later claiming that a verbal change or one email to another party was made to amend the contract after its execution.
Assignment. Generally under common law, either party has the ability to assign its rights under a contract to a third party. This clause specifies whether assignment is permitted without the consent of the other party. Often it is tailored to the particular contract. For example, if one party anticipates its business being acquired at some point, it may want to provide for the right to assign its contract rights to a successor in a merger or acquisition without the consent of the other party. In many cases, though, the parties expect to be dealing with each other and may insist that consent is required for any assignment.
Further Assurances. A further assurances clause provides that the parties will take other actions not specifically set forth in the contract if necessary to carry out the intent of the parties if there was an unintentional omission or unanticipated situation. However, courts generally will not allow a further assurances clause to change or expand the parties’ rights or obligations.
Survival. Often contracts have provisions that the parties expect to continue beyond the end of a contract, such as confidentiality or an obligation to pay for services performed prior to termination. Specifying the particular provisions that should survive after the contract ends helps assure these obligations are enforceable.
Severability. Without a severability clause, your entire contract could be invalidated if one provision is found to be void or unenforceable. This clause is designed to keep the remainder of your contract intact and enforceable even if a court strikes down one or more of its provisions.
Governing Law. The governing law clause provides which state law will apply in the interpretation and enforcement of the contract. In general, parties should choose the law of a state in which the contract will be performed or in which they have a connection. When parties are located in different states, each party often wants the laws of its state to govern, resulting in a negotiation.
Forum or Venue. This clause specifies where lawsuits under the contract may be filed. This is especially important if the parties are located in different states. Litigating in another state typically is more costly and inconvenient, and there is a perceived benefit to the party in its home-town courts.

Other boilerplate clauses typically considered for most business contracts include those relating to:

Notice Requirements
No Third-Party Beneficiaries
Waiver of Jury Trial
No Waiver of Breach
Expenses
Cumulative Remedies
Force majeure
Interpretation
Counterparts and Electronic Signatures

While the boilerplate may not be the most exciting provisions in your contract, they are important to help assure the intent of the parties is implemented and enforceable. Boilerplate clauses should not be considered generic and simply copied and pasted from another contract. Which boilerplate clauses to include, and with what variations, should be tailored based on each particular business relationship?

The attorneys at Linden Law Partners have extensive specialized experience with drafting and negotiating a broad range of commercial and other business contracts of all types. Please contact us here if we can be of assistance to your business.

Six Areas to Consider in Partnership Agreements

Posted on August 20, 2019October 9, 2024 by lindenlawpart1

Are you considering a business Partnership Agreements? When structured properly, a partnership can benefit your business in ways supported by the timeless adage that “two heads are better than one.” Practical benefits of partnership might include access to a level of capital, labor, know-how, customers, or expertise not available absent partnership. However, just like personal relationships, business partnerships have their ups and downs.

What might seem to be an enthusiastic partnership arrangement at the beginning often will hit bumps in the road. The odds of failure in partnerships (or worse, failure coupled with lawsuits) increase substantially when structured hastily or without a proper written partnership agreement.

The potential for success and the ability of the partners to work through issues increase significantly with a partnership agreement that has been specifically crafted with the objectives and desires of the partners in mind and which provides for a dispute resolution mechanism.

Types of Partnership Agreements

For purposes of this blog, we refer to a “partnership agreement” generally as meaning a written agreement between the owners of a business. The legal type and form of the written agreement is determined by the legal entity of the underlying business. For example, “operating agreements” or “limited liability company agreements” are used to document the agreements of the parties in limited liability companies.

“Shareholders’ agreements” or “stockholders’ agreements” are utilized for interests in corporations. True “partnership agreements” are used for entities legally formed as partnerships, such as limited partnerships (LPs), limited liability partnerships (LLPs) or limited liability limited partnerships (LLLPs).

Your legal and tax advisors can advise you on the best entity to use based on the business and the objectives of the partners. While we refer to “partnerships” or “partnership agreements” generically below in this blog, the principles would also largely apply to written agreements among owners in a corporation or limited liability company context.

What to Include to Consider in Partnership Agreements:

1) Purposes; Roles and Responsibilities. Include a description of the principal business and activities to be conducted by the partnership. In addition, whether in the partnership agreement or another written agreement, the partners should consider and memorialize their respective roles and responsibilities involved in any day-to-day or even periodic activities, as well as the rights of more passive owners (when applicable).

2) Capital (and other) Contributions. Disputes over money often occur in partnerships when the financial commitments of the parties are not appropriately spelled out. A clear statement providing for the amount(s) of required initial capital contributions of each partner is critical. The partnership agreement should also provide whether additional capital contributions are required, permitted or prohibited.

Consider ownership vesting over a period of time for partners receiving “sweat equity” in exchange for expected provision of services or expertise. With vesting, if partners receiving equity in exchange for services or expertise do not perform as expected, they will typically lose the portion of their ownership interest that has not become earned (i.e., the unvested portion).

This can happen for any number of unanticipated changes in life circumstances, discontinuation of service before becoming fully vested, and/or a failure to provide the services required in the manner or at the level required in the written agreement of the parties. Without a vesting provision, non-performing partners are typically able to retain their entire equity stake (and the voting power that goes with it), and in turn often leading to messy disputes with the other partners.

3) Management and Decision-Making Authority. It is paramount to determine the management of the partnership and provide detailed terms regarding the decision-making authority of the partners. While it is inadvisable to require unanimity or consensus of the partners for literally every routine activity or decision (this is simply counter-productive), it may be advisable for some partnerships to require super-majority or unanimous consent of the partners on key “major decisions”.

Major decisions tend to be those that could intuitively be expected to have a material impact on the equity or ownership value of a partner or class of partners. In practice, the provisions of a partnership agreement covering these major decision categories are often referred to as “protective provisions”. Examples of protective provisions in the partnership agreement might include provisions (among others) concerning:

Incurring debt above an established threshold amount;
Increasing or decreasing the size of a board of directors or board of managers;
Hiring or firing executive personnel;
Admitting new partners or issuing equity to third parties;
Acquiring or starting a new line of business;
Approving a change in control over the business (and/or permitting or prohibiting the sale or transfer of the equity interests of any partner or class of partners); and
Dissolving the partnership.

4) Distributions and Allocations. Limited liability companies, legal partnerships and s-corporations are often referred to as “pass-through entities” because the profits and losses get allocated for accounting and tax-paying purposes to the owners, rather than staying at the entity level.

This avoids “double taxation,” where the entity pays taxes on its profits and then the owners pay taxes on funds distributed to them. Allocations are accounting entries, and are different from actual cash distributed, which is frequently what matters most to the partners. A good partnership agreement will have clear and detailed provisions regarding distributions of cash, as well as the allocation of profits and losses.

It is common in instances where a particular partner (or class of partners) makes disproportionate cash investments (such as venture capital investors) relative to other partners (such as founders or sweat equity partners) for the cash investors to receive their money and a return (referred to as a “preferred return”) before the non-cash partners begin to participate in distributions. Partnership agreements will also often permit cash investors to take a higher percentage of losses given they have taken a greater financial risk (from a pure investment standpoint anyway).

5) Dissolution. The partnership agreement should provide for the circumstances under which the partnership can be terminated through a wind-down or dissolution mechanism. The agreement should also document the understanding of the partners on the disposition of partnership property and the distributions to the partners upon liquidation (such as on a sale of the business).

6) Other Key Considerations. While the specifics of each partnership differ, other terms that should at least be considered in any partnership agreement include:

A buy-sell provision;
General restrictions on transfers by partners of their partnership interests;
Right of first refusal on possible transfer of partnership interests (in instances where a transfer is even permitted);
Co-sale and drag-along rights;
Deadlock and dispute resolution procedures;
Meetings of partners and the persons managing the partnership;
Financial, reporting and other information rights of the partners;
Buy-out or disposition of partnership interest in the event of a partner death, disability or other exit from the business;
Non-competition and non-solicitation obligations (or not) of the partners; and
Key-man insurance policies benefiting the partnership or other partner(s).

Linden Law Partner’s Experience with Partnership Agreements

The preparation and execution of a partnership agreement is critically important whenever there is more than one owner in a business. Linden Law Partners has extensive specialized experience developing, drafting and negotiating partnership agreements for a broad variety of participants across many industries. Please contact us here if we can be of assistance to your business partnership.

Selling Your Business? 3 Steps to Help Prepare

Posted on July 20, 2019December 12, 2024 by lindenlawpart1

Merger and acquisition (M&A) activity is expected to remain robust in 2019. Qualified buyers are still able to access capital for acquisitions at relatively low cost. This, in turn, provides qualified sellers with leverage to command higher sale prices. Sellers who most successfully capitalize on these opportunities tend to be those who are most prepared.

The complete process for a business sale transaction typically ranges from a few months to a year or more. It is never too early for a seller to begin preparing to capitalize on the right opportunity – whether through a deliberate sales process or responding to an unsolicited inquiry from a potential buyer. Below are three steps for potential sellers to position themselves for optimal business sale outcomes.

1) Get Organized

The first step is to get your “business house” in order. A buyer will conduct a comprehensive due diligence investigation on your business and its records to evaluate the strengths and weaknesses. Be proactive in trying to assess your business through the lens of a potential buyer with a reverse due diligence process. Then take steps to position the business in the best light possible and to minimize issues that might negatively affect valuation. Transparency and a clean business will provide a buyer with more confidence about paying a higher purchase price than for a business that has clean-up issues.

A few examples include:

Ensuring that books and records – especially accounting and financial records – are up to date, accurate, complete and use sound accounting principles. There is no faster way to scare off a buyer than to have sloppy, incomplete or questionable accounting and financial records or practices.
Making sure your arrangements with key customers and vendors are memorialized in signed written contracts.
Documenting and clarifying ownership and licensing of intellectual property that is important to the business.
Buttoning up your capitalization table and owner or founder agreements, such as operating agreements, shareholder agreements, voting agreements, buy-sell or similar agreements among owners and investors.
Reviewing your contracts and applicable regulations to identify approvals that might be required from customers, vendors, regulators or other third parties in connection with a sale of the business.

2) Get Educated on the Value of Your Company.

Understanding customary factors that drive enterprise values and sale prices based on your specific business or industry is critical in reasonably assessing potential fair market value. EBITDA or other earnings-based multiples are used for some industries and technologies whereas others may be driven more by top-line revenue figures with less emphasis on profitability, or by other intangible assets, including goodwill. Goodwill assets include brand recognition and reputation, a strong customer base, good relations with employees, customers and vendors, or patents or other proprietary intellectual property. An independent third-party valuation can provide a realistic estimate of what qualified buyers may be willing to pay for the business.

It is best to evaluate opportunities to increase the value of the business before going to market. In order to enhance value, management may want to identify and implement opportunities for revenue and profitability growth, cost reductions and improved operational efficiencies. A seller should also identify and support key employees for retention to help demonstrate to potential buyers that the business will continue to thrive post-sale.

3) Assemble a First-Rate Deal Team.

Sellers sometimes unknowingly hinder optimal sale outcomes by failing to engage qualified advisors or by trying to do too much themselves to save on transaction expenses. For example, a long-time family attorney or CPA whose practice is not focused on sale transactions is much less likely to identify key value drivers for sellers than advisors that specialize in M&A deals. Costs and expenses are important considerations. However, engaging the right experts to assist with your deal typically pays for itself in spades. Having a high-quality team aligned with you can best help you navigate through the complex and time-consuming M&A process to a successful completion and maximized transaction outcome.

Key advisors to consider engaging for advice and assistance before you begin a sale process may include:

Experienced legal counsel with specialization in business sale transactions.
Investment banker or business broker to help value and market the business.
Qualified tax or audit professional(s).
Financial planner to develop a seller’s post-sale wealth management plan.
Human resource professional(s).
Industry expert(s) versed and experienced in the opportunities and challenges of the business.

Conclusion

Selling a business is a specialized and process-driven endeavor. The most successful sellers are prepared from the outset. Some advance planning, refinements and building the right deal team goes a long way in helping sellers achieve their goals. The attorneys at Linden Law Partners have extensive specialized experience helping sellers prepare for, execute and successfully close business sale transactions across a broad spectrum of industries. If you would like to learn more, please contact us here.

Joint Ventures 101

Posted on June 7, 2019December 18, 2024 by lindenlawpart1

A joint ventures (JV) is a business arrangement where two or more parties pool resources for a focused task, project or investment. Each participant is normally independently responsible for contributing toward the costs and labor based on the strategic value each participant brings to the venture, and they also have an agreed upon sharing percentage in any resulting profits of the venture. JVs can be documented in a contract, but generally the venture is its own entity and separate from the other business operations conducted by the participants.

The Joint Ventures Agreement

The legal entity for the joint venture can be a corporation, partnership or LLC, and the choice of entity decision is normally tax driven based on the specific venture activities. Whatever legal form the JV takes, the JV agreement provides the written agreement of the parties regarding division of costs, sharing of profits, and it also sets out the specific services, roles and responsibilities of the participants. The JV agreement should also cover capital contributions, tax matters, competition (where applicable), accounting and financial reporting rights.

We often advise that the participants negotiate the key elements of the JV through the negotiation of an initial term sheet or letter of intent to assure the participants are aligned. See more on letters of intent in our LOI blog here. While our LOI blog discusses LOIs in an M&A context, many of its principles would also apply to an LOI or term sheet for a joint venture.

Winding Up a Joint Venture

The JV agreement will generally cover winding up considerations for when the venture goal is achieved, or the venture ceases, fails or otherwise liquidates or dissolves. For example, one of the participants might buy out the interest of the other venture participant(s) or the venture entity could be sold to a third-party buyer. In either instance, the participants would normally have agreed upon liquidation or similar rights, such as whether there are payout preferences or other differences between the interests of the participants in the venture.

Other Joint Venture Considerations

Non-disclosure and confidentiality
Intellectual property of the participants
Budget and budget determination processes
Staffing and resources
Operational considerations and processes

Linden Law Partner’s Experience with Joint Ventures

A joint venture is an important business and legal undertaking, each being unique based on the parties, endeavors and industries involved. Linden Law Partners has specialized experience with joint ventures across a wide spectrum of structures, industries and participants. Feel free to contact us here.

Letter of Intent Considerations

Posted on May 4, 2019February 5, 2025 by lindenlawpart1

Introduction To Letters of Intent

A key component to any successful merger and acquisition (M&A) transaction is the letter of intent (LOI). A thoughtfully negotiated and comprehensive LOI establishes specific and critical deal terms prior to drafting the definitive purchase or merger agreement, rather than engaging in the more arduous process of negotiating deal terms through extensive (and expensive) drafts of those definitive agreements.

An effective LOI establishes whether there really is a “meeting of the minds” between the parties that can survive the rigors of the transaction process. Negotiating a comprehensive LOI at the beginning of an M&A deal substantially improves the likelihood of successfully closing the transaction, is more cost effective for both parties, and makes the drafting process more efficient and better coordinated.

Although most of its provisions are non-binding, the LOI is often considered to be the good faith understanding of the parties and a roadmap for the definitive agreement.

Key Considerations. The following are some key considerations in negotiating and drafting a comprehensive LOI out the outset of an M&A transaction:

1.Structure of Transaction. Analyzing and considering tax consequences on both sides of the transaction are paramount before agreeing to one of the three common M&A structures:

–Merger: a transaction where a surviving company (i.e., the buyer) merges and combines with the seller (i.e., the acquired company) with the seller ceasing to exist post-closing. The buyer also generally assumes by operation of law all the assets and liabilities of the seller, making the indemnification considerations critical for the surviving company in a merger transaction.

–Purchase and Sale of Assets: a transaction where the buyer purchases most or all of the assets and customarily assumes limited specified liabilities of the seller. The buyer can limit its risk of inheriting unwanted and unknown liabilities of the seller through an asset transaction.

–Purchase and Sale of Equity: a transaction where the buyer purchases the equity of the seller from its owners (i.e., stockholders, members, partners, etc.). Like in a merger, the buyer is acquiring the seller in its entirety and effectively absorbing and assuming all of the seller’s liabilities (and also similar to a merger, making the indemnification considerations critical for the buyer in an equity transaction).

Unlike a merger, the seller typically continues to exist and operate in some capacity post-closing in an equity transaction as a subsidiary of the buyer.

2.Purchase Price / Consideration. The price can take different forms, with all cash or part cash and part of the purchase price in the form of an earnout, promissory note, equity in the buyer, and/or a combination of the foregoing. An all cash purchase price provides the most certainty and least risk.

However, a seller may be able to obtain a higher purchase price by agreeing to have some of the purchase price contingent or payable at a later time. Your M&A advisors can help you navigate through the different structures and pros and cons of each.

3.Post-Closing Management. As part of the LOI, consider, negotiate and provide for (if applicable):

-The continuation of the owners, key management, employees, or contractors of the seller with the buyer post-closing.

-The material terms of post-acquisition employment or consulting arrangements anticipated.

4.Due Diligence. Provide for the scope, period and timing of the due diligence necessary for the buyer to adequately evaluate the seller (and for the seller to evaluate the buyer, particularly in instances where a portion of the purchase price will be contingent on post-closing operations of the buyer or equity in the buyer will be issued as part of the purchase price).

5.Other Strategic Considerations. Evaluate and consider obtaining consensus in the LOI regarding:

-Categories of representations and warranties to be given by the seller and, if applicable, the owners of the seller.

-Indemnification liability limitations based on prevailing market terms (which are accessible through market deal study statistics readily available to M&A professionals). These apply if a party breaches the definitive agreement.

-All other major deal points important to either party should be considered for inclusion, such as whether:

-Any material consents or approvals (including regulatory approvals) must be obtained by either party as a condition to closing.

-The buyer will require any non-compete agreements or transition arrangements.

-The buyer will assume any liabilities of the seller.

6.Binding Elements. The LOI is generally non-binding, except for certain specific exceptions that apply prior to a definitive agreement being signed, such as:

-Nondisclosure and confidentiality.

-“No-shop” or exclusivity rights for the buyer that prohibit the seller from negotiating offers from other parties while the LOI is in place.

-Costs and expenses (the expenses incurred as part of the LOI and negotiating the transaction are typically stated in the LOI that each party pays its own expenses).

Key Advisors to Consider as Part of the LOI Evaluation and Negotiation.

-Experienced M&A legal counsel.

-Investment banker, business broker or other experienced M&A advisory professional(s).

-Qualified M&A tax and audit professionals.

Conclusion. The LOI is a critically important aspect in the negotiation and pre-drafting process of an M&A transaction. If evaluated, negotiated and drafted properly, an LOI can effectively establish each party’s expectations of the fundamental deal terms, provide detailed guidance for the drafting of the definitive agreements, and delineate a focused path to close the transaction consistent with each party’s intentions and expectations.

Linden Law Partners has extensive experience developing, negotiating and drafting LOIs for M&A transactions of all structures, sizes, and scopes across a variety of industries. We provide key value driven advice to our clients about LOIs.