Small Business Contracts Handbook

The Contract Adviser

Small Business Contracts Handbook (Self-Counsel Press, 2010)
ISBN-10: 1551808560; ISBN-13: 978-1551808567; 314 pages

Click to see the table of contents (pdf file).

Click to see a Summary of Formatting Notes.

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Sale version (discussed below) requires the Company [delete "the right"] to purchase the Shares…”

Chapter 4 – Sale of Goods

Pg. 47 (Attachment [of security interests]) – end of 1st paragraph – replace “second party” with “secured
party”.

Chapter 11 – Sale of Business – Purchase Price and Payment Terms

Pg. 154 – I want to clarify that I only discuss purchase price/payment term provisions for plain-vanilla taxable
book space constraints, I do not discuss the various ways the parties can structure an acquisition as a tax-
deferred reorganization, for example, by having the Purchaser provide its own stock (instead of cash and/or
notes) as the principal or sole form of consideration.

Chapter 12 – Sale of Business – The Closing

Pg. 167 (Resolutions) – I want to clarify that collective shareholder approval by the selling Stockholders
typically is not required for a stock purchase transaction because each selling Stockholder makes its own
decision whether to sell its shares.

Chapter 13 – Sale of Business – Seller’s Representations

Pg. 170 – I want to clarify that “representations” are statements of historical or present facts, versus
“warranties”, which are promised statements of present or future facts. While the terms are used
interchangeably in contracts, the subtle difference can lead to ambiguity. I have decided that in any future
editions of the book, I will have the seller (and the buyer) making “representations” only.

Pg. 184 (No Conflict with Corporate Documents) - I want to clarify that the words “with or without the giving of
notice or the passage of time or both” are meant to capture not just full-blown events of default, but also
“defaults” (A.K.A. “incipient” events of defaults.) Incipient events of default first trigger a notice requirement
and/or cure period, which gives the breaching party the opportunity to cure the default before the default
becomes a full-blown event of default, which triggers the entire gamut of non-breaching party rights and
remedies.

Pg. 205 (Leased Real Property) – The 1st paragraph states “APA Seller or SPA selling Stockholders
represent that [replace "it" with “acquired business”] doesn’t own any real estate…” Technically, in a stock
purchase agreement (SPA), the selling Stockholders make this and many of the other representations not
about themselves, but rather about the Acquired Company. There’s also a typo on the 3rd to last line of the
1st paragraph – “under the leases to be transferred to the [replace "Seller" with "Purchaser]”.

Pg. 207 (Employer Contributions to Benefit Plans) – Technically, in a SPA, the selling Stockholders represent
that the Acquired Company is up-to-date re: all plan contributions, and has established “adequate reserves”.

Chapter 14 – Sale of Business – Buyer’s Representations

Pg. 214 – There is a mistake at the bottom of the page. I meant to say that assets-for-stock and stock-for-
stock deals are beyond the scope of the book. In an asset-for-stock deal, the Seller sells its assets in
exchange for Purchaser stock. In a stock-for-stock deal, the selling Stockholders sell their shares of stock in
the Acquired Company in exchange for Purchaser stock. In either case, the seller becomes an investor in
the Purchaser, and will want extensive representations about the Purchaser, especially if the Purchaser is a
privately-held company (and doesn’t file information-laden periodic reports with the SEC).

Pg. 216 (Buyer’s representation about the Securities Laws) – In the 2nd paragraph, I generally describe a
“public offering” as an “offering made to a large and [replace "diverse" with “disperse”] group of people.”

Chapter 15 – Sale of Business - Covenants

Pg 217 (Access Covenant sample) – “The Seller shall [selling Stockholders [delete "shall use and"] shall
cause the Acquired Company to]…”

Chapter 16 – Sale of Business - Closing Conditions

Pg. 218 (Bring Down Condition sample) – “All representations.. of .. [replace "Acquired Company" with
“selling Stockholders”].” SPA selling Stockholders, not the Acquired Company, make the representations.

Pg. 224 (Compliance with Covenants) – Last paragraph - I state that the Purchaser will have the right to
immediately terminate the agreement as soon as the “covenant or condition is breached”… Technically,
conditions cannot be breached. Therefore, replace with “covenant is breached or condition is not satisfied.”

Chapter 17 –Sale of Business - Indemnity

Pg. 230 (Close, but Recover Post-Closing) – I incorrectly state that the Actual Knowledge Defense is a
provision that says that if the seller makes a misrepresentation [delete "that’s discovered later"], but the
Purchaser knows about the misrepresentation when made but keeps silent, then the seller is off the hook.

Also, I need to clarify that while a party’s failure to fulfill a closing condition entitles the counterparty to “walk
away” from the transaction, it is not by itself a breach of the APA or SPA, unless that party is also bound by a
covenant to perform such act.

Chapter 20 – Loan Agreements - Covenants

Pg. 273 (Notice of Changes Covenant) – I state that “the Borrower can negotiate to include the bracketed
materiality qualifier for [add the following underlined language, which was dropped from the book]
Subsection (c), and a knowledge qualifier for Subsection (a) (“threatened” lawsuits).”

Pg. 285 (Debt/Equity Ratio) – “The Borrower shall maintain at all times a ratio of Debt to Shareholders Equity
of not [replace "less" with “more”] than [insert ratio].”

Chapter 21 – Guaranties

Pg. 294 (Waiver of Borrower Defenses) – In Subsection (a), “the illegality…. of (i) the Guaranteed Obligations
or (ii) any security for or any other guarantee [replace "for" with "of"] the Guaranteed Obligations”.

Pg. 295 (Any Discharge of the Obligations of Borrower) – In the 1st paragraph of my discussion, I state “you
can try to argue that if the Borrower’s liability has been reduced, then so should the [replace "Lender's" with
“Guarantor’s”] under the Guarantee”.

Summary of Critical Corrections and Clarifications

Practical Common Sense Insight about
Contracts and Corporate Transactions