A Stock Pledge Agreement documents the pledge of a fixed number of shares of common stock by a shareholder as security for payment of a promissory note. It is important for every stock pledge agreement to contain the following provisions to ensure legal sufficiency:

Recitals. Here the agreement should recite the purpose and general outline of the agreement. It is customary to include the total dollar amount to be advanced, the number of stocks pledged, and the date of the agreement. It may also be important to include how each part will derive “direct and indirect benefits” from the agreement.

The Pledge. It is most critical to define the security interest at issues, namely, the amount and type of shares of stock of the company, owned by the Pledgors, which shall be placed in the name of the Pledgee, represented by the certificates identified in an addendum to the agreement. The stock pledge agreement must also address who shall receive the proceeds of any and all of the foregoing Pledged Collateral. To minimize liability, it is also advisable, from the Pledgor’s point of view, to include the following disclaimer: “The Pledgee hereby expressly confirms and agrees that notwithstanding the pledge of the pledged shares, the pledgee shall have no recourse to or against any pledgor other that as to the pledged shares, and that no pledgor shall be personally liable to the pledgee for any obligation of the company to the pledgee, other than as to the pledged shares.” It may be wise to put said disclaimer in bold.

Representations and Warranties. The Pledgor should promise that he or she owns the shares at issue, and is the legal, record, and beneficial owner of the pledged collateral, clear of any lien, security interest, restriction, option or other charge or encumbrance except for the security interest created by the Stock Pledge Agreement. The Pledgor should also warrant that he or she has made the necessary inquiries of the Company and believes in good faith that the Company fully intends to fulfill its obligations in accordance with the terms of the Transaction Documents.

Voting Rights. The agreement should read that so long as no Event of Default has occurred, then each pledgor shall be entitled to (1) exercise or refrain from exercising any and all voting rights, and (2) receive and retain any and all cash dividends an interest paid in respect of the Pledged Collateral. After the occurrence of any Event of Default, all rights of any and all Pledgors to vote and receive dividends shall be vested in the Pledgee.

Further provisions defining the “Event of Default”, explaining the remedies available upon a default, and addressing boilerplate contract law issues such as governing law, notice, waivers, severability, and indemnity should also be included. For more information, or to view and download actual Stock Pledge Agreements, visit the Agreements section of www.RealDealDocs.com.

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Redemption Agreements are sophisticated legal contracts formed by and between a company, on the one hand, and its investors, on the other hand. There are several critical components to any effective and legally sufficient redemption agreement.

1. Recitals. This section must introduce the characters, tell the story of the relationship between the parties, and describe the events that led to the forming of the agreement. Usually the parties are already contractually related by way of one or more earlier agreements, such as a Securities Purchase Agreement, an Amendment and Exchange Agreement, and/or a Registration Rights Agreement. The Recitals section of the redemption agreement must also describe the overall purpose of the redemption agreement; namely what is being redeemed, from whom is it being redeemed, and on what terms and conditions is it being redeemed.

2. Redemption. Generally it is stock or other equity offering that is being redeemed by the company from the investors upon the occurrence of a certain event, such as the death of the investor, although it can be for other reasons as well. This paragraph of the redemption agreement should address how much notice of the redemption date the company must give to the investor. It must also address the method and time for delivery of the stock, warrants, notes, or whatever is being redeemed, and what, if anything, will be delivered back to the investor in consideration for the exchange. This paragraph will also address the effect of the redemption; any forbearance that may take effect, and any waiver of rights that may be involved. Finally, the redemption paragraph should include a provision addressing any restrictions on transfer or conveyance that is being placed on the investor until the closing date of the redemption agreement.

3. Representations and Warranties. The redemption agreement must also include a generic paragraph addressing the Representations and Warranties of both the company and the investor(s). The company must warrant that it is a duly organized, validly existing company in good standing under the laws of the jurisdiction; has all corporate power and authority to execute the agreement; and that the redemption agreement has been duly and validly authorized by the Board of Directors. For their part, the investors must warrant that they are also duly organized and validly existing and in good standing in the jurisdiction, and that they have the requisite power and authority to execute and deliver the agreement and perform the obligations.

4. Conditions to Redemption. This paragraph of the redemption agreement should address any and all conditions to redemption that exist. Often the obligation of the company to follow through on its obligations under the agreement is subject to the satisfaction of some other obligations promised by way of a separate agreement. For instance, in a merger situation, the redemption agreement may only take effect after all of the conditions to the merger have been satisfied or waived. Likewise, the company may make its obligations contingent on the investors performing all of their obligations prior to the redemption date. Finally, the redemption agreement may state that the investors must have made full, true and accurate disclosures in order for the company’s obligations to take legal effect.

5. Termination. Finally, how and when the redemption agreement may be terminated should be addressed. Often the company will want to reserve the right to terminate the agreement if, again in the situation of a merger, the merger agreement is terminated, or if there has been a breach of any representation or warranty by the investor. Likewise, the investor will want to reserve the right to terminate the redemption agreement prior to the redemption date if there has been a breach of any representation, warranty, covenant, or agreement made by the Company.

These are the most important provisions of a redemption agreement. For copies of actual and well-drafted Redemption Agreements, check out the Agreements Section of the RealDealDocs.com website.

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SmartRules provides step by step guides to local rules and civil procedure for state courts & federal courts throughout the country.

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While a Recapitalization Agreement is an important and often used corporate contract, most executives might have trouble explaining what it is! In order to understand a recapitalization agreement, the following issues must be addressed.

1. Recapitalization: What is it? Recapitalization is a restructuring of a company’s mixture of equity and debt for the purpose of making the company’s capital structure more stable. A recapitalization agreement codifies plan in writing and outlines the steps that the company will take to “recapitalize.”

2. Authorization of Shares: Who must authorize them and how much? In a recapitalization agreement the company must authorize the issuance of its preferred stock in an amount that is usually identified in the agreement or in an exhibit to the agreement.

3. What does Tax Free Reorganization mean? Section 368(a)(1)(E) of the Internal Revenue Code of 1986 addresses the tax implications of recapitalization, as do Sections 1.368-2(g) and 1.368-3 of the U.S. Income Tax Regulations. These sections provide for tax incentives for companies that recapitalize.

4. Closing and Delivery: What should be addressed? For the recapitalization to take effect the deal must close and the documents must be signed. Consequently, the agreement will address when and where the closing will take place (usually at a law office). The recapitalization agreement must also address the method by which each party will deliver the stocks.

5. Representations and Warranties of the Stockholders. In this section, the stockholders must make certain promises to the company, known in legal jargon as “representations and warranties.” Namely, each stockholder must warrant that they have the required power to execute the agreement and to carry out its provisions. The stockholder must also acknowledge whether or not the stock has been registered and, most importantly, must acknowledge that he or she bears “economic risk” in taking part in the transaction. From the company’s perspective, it is critical that this language be prominently included in the recapitalization agreement.

6. Representations and Warranties of the Stockholders. Like the stockholders, the companies must make certain promises as well. Namely, the company must warrant that it has the required power and authority to execute and deliver the agreement and to carry out its provisions. As well, the company must warrant that it has been honest in painting the picture of its financial condition.

7. Conditions to Closing. Finally, the recapitalization agreement should address any and all conditions to closing. These conditions usually involve certain performances on the part of the stockholders and the company. Generally the stockholder has an obligation to accept the issuance of the shares from the company. Both parties must also sign any and all related agreements.

These are the most critical provisions of a well-drafted recapitalization agreement. Master these concepts, and you can begin to understand the purpose and general structure of a recapitalization agreement.

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SmartRules provides step by step guides to local rules and civil procedure for state courts & federal courts throughout the country.

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