I have some questions about a California Stock Purchase Agreement. The main thing we wonder is if the contract is typical/standard, or if my cousin Tim should request a few changes in the language/content. Apologies in advance if some of the questions seem silly or if our assumptions are wrong.
Background: The consideration for the sale and purchase of the Shares is “the services previously rendered by the Purchaser to the Company” (a small mom-and-pop S Corp in a small town). Total value of the shares is $7,500. If Tim wants to sell his shares or if certain “Termination Events” happen, the company has the option to repurchase all or any portion of the shares at the Issue Price. This is repeated several times for different situations. No problem there.
First question: In the “Purchase Price” section, it states, “If the Purchase Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors in good faith.” Is this a standard clause, and does it mean that the Board can change the value of the Shares from the Issue Price since the proposed consideration is a non-cash consideration? In short, if Tim sells his Shares back to the Company, will he be paid $7,500 for them, or could the price change?
Next, the contract states that “the Company will make timely distributions of cash to the Purchaser in amounts agreed by the Board to cover her state and federal income tax obligations arising by virtue of the allocation of the Company’s net income to her as shown on the applicable K1 statements.” We assume the “timely distributions of cash” are dividends or equivalent; is this correct? If so, should Tim request a specification for distributions of cash, such as on a quarterly basis, or is the clause fine as is?
Third, a few of the “Termination Events” are confusing. The first is “death or permanent disability of the Purchaser.” He wonders about rights, if any, his family/heirs might have. In “Exception for Certain Family Transfers” it states “anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser’s lifetime or on the Purchaser’s death by will or intestacy to adult members of the Purchaser’s Immediate Family .... shall be exempt from the provisions of this Section.” So it sounds like it is possible for his family to inherit the stock if certain conditions are met. Is this correct? . . .
. . . This seems to be confirmed later in “Successors and Assigns,” where it states, “Subject to the restrictions on transfer herein set forth, this Agreement shall bind and inure to the benefit of the successors, permitted assigns, personal representatives, heirs and legatees to the respective parties.”
One of the“Termination Events” is confusing, and we wonder if it was part of an older document that may have been edited to suit the current use: “the dissolution of a Purchaser’s marriage or legal separation of the Purchaser and her spouse unless, as a condition thereof, the Purchaser acquires ownership of all of the Shares as his separate property.” Does this sound like it belongs here, or should Tim ask to have it removed or edited? For example, it refers to “a Purchaser” (so could be the owners or Tim) and “her spouse.” Is the intent that if Tim divorces or separates, all his Shares stay with him? That makes sense, but the language doesn’t seem clear if that is the meaning.
Thanks for any clarifications.
Background: The consideration for the sale and purchase of the Shares is “the services previously rendered by the Purchaser to the Company” (a small mom-and-pop S Corp in a small town). Total value of the shares is $7,500. If Tim wants to sell his shares or if certain “Termination Events” happen, the company has the option to repurchase all or any portion of the shares at the Issue Price. This is repeated several times for different situations. No problem there.
First question: In the “Purchase Price” section, it states, “If the Purchase Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors in good faith.” Is this a standard clause, and does it mean that the Board can change the value of the Shares from the Issue Price since the proposed consideration is a non-cash consideration? In short, if Tim sells his Shares back to the Company, will he be paid $7,500 for them, or could the price change?
Next, the contract states that “the Company will make timely distributions of cash to the Purchaser in amounts agreed by the Board to cover her state and federal income tax obligations arising by virtue of the allocation of the Company’s net income to her as shown on the applicable K1 statements.” We assume the “timely distributions of cash” are dividends or equivalent; is this correct? If so, should Tim request a specification for distributions of cash, such as on a quarterly basis, or is the clause fine as is?
Third, a few of the “Termination Events” are confusing. The first is “death or permanent disability of the Purchaser.” He wonders about rights, if any, his family/heirs might have. In “Exception for Certain Family Transfers” it states “anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser’s lifetime or on the Purchaser’s death by will or intestacy to adult members of the Purchaser’s Immediate Family .... shall be exempt from the provisions of this Section.” So it sounds like it is possible for his family to inherit the stock if certain conditions are met. Is this correct? . . .
. . . This seems to be confirmed later in “Successors and Assigns,” where it states, “Subject to the restrictions on transfer herein set forth, this Agreement shall bind and inure to the benefit of the successors, permitted assigns, personal representatives, heirs and legatees to the respective parties.”
One of the“Termination Events” is confusing, and we wonder if it was part of an older document that may have been edited to suit the current use: “the dissolution of a Purchaser’s marriage or legal separation of the Purchaser and her spouse unless, as a condition thereof, the Purchaser acquires ownership of all of the Shares as his separate property.” Does this sound like it belongs here, or should Tim ask to have it removed or edited? For example, it refers to “a Purchaser” (so could be the owners or Tim) and “her spouse.” Is the intent that if Tim divorces or separates, all his Shares stay with him? That makes sense, but the language doesn’t seem clear if that is the meaning.
Thanks for any clarifications.