A Note Purchase Agreement is a contract for the purchase of a type of financial instrument called a “note”, the purchase of which acts as an investment in that company. Upon selling the note, the company receives a significant amount of cash that it can invest into the business. As with any investment arrangement, certain conditions must be met, and the company must provide certain promises, covenants, representations and warranties to the purchaser of the note. The following are key provisions that must be included in a Note Purchase Agreement.

• Definitions - Terms used extensively in the agreement should be defined, terms such as “affiliates”, “capital stock”, “change of control”, “default”, “guarantee”, “organizational documents” and “permitted liens”. An index of defined terms, referring the reader to where they are used, may also be included.
• Purchase and Sale of Notes - This provision should address the details (dollar amount, # of shares, method of delivery) surrounding the purchase and sale of the notes.
• Closing - This provision must cover the details of the closing; most importantly, where and when it will take place.
• Representations and Warranties of the Company - The most important provisions in the agreement are the representations and warranties made by the company to the purchaser of the notes. The company must promise several things, including: (1) that it is an entity duly organized and validly existing and in good standing; (2) that it has “due authorization” to conduct this transaction; (3) that all agreements related to the transaction, other than the notes themselves, are of “binding effect” and enforceable against third parties; (4) that the execution of the financing documents does not contravene or conflict with any of the Company’s organization documents; (5) that the company has previously furnished to the purchasers all important SEC Reports, including its Form 10-K Annual Report and Definitive Proxy Statement; (6) that the sale of the notes constitutes a valid issuance of stock; and (7) that there is no pending litigation against the company except as disclosed.
• Affirmative Covenants - Going forward, as long as the notes remain outstanding, the company must promise to maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in accordance with GAAP. (Generally Accepted Accounting Principles.) The company must also promise to pay all obligations timely, to engage in business of the same general type as they currently conduct, and that it will keep all property useful and necessary in its business in good working order and condition. It must also promise to maintain property damage insurance to protect its assets.
• Negative Covenants - Going forward, as long as the notes remain outstanding, the company must promise that it will not create, incur, assume, or become liable to any debt except for debt assumed for the purpose of financing the cost of acquiring any asset less than a certain amount, nor will it purchase or acquire any assets other than in the ordinary course of business.

In addition to these provisions, provisions covering Events of Default and any Conditions to Closing, and Expenses, Indemnity, Taxes and Right to Perform should also be addressed.

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