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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Recapitalization Agreements were at the center of how the Federal Government recently bailed out banks. From a legal perspective, it is interesting to note how this bailout, or “TARP”, money has been provided. Essentially, the banks that are saddled with “toxic assets” have agreed with the help of the government to come up with a restructuring plan to rearrange their mixture of debt and equity and remove the bad assets off their books. To effectuate these arrangements, the banks have signed complex recapitalization agreements.

Recapitalization is the key method by which a company restructures its mixture of equity and debt. This can be accomplished by exchanging its preferred stock for common stock or bonds, or though other methods. At the end of the day, recapitalization agreements help to lower a company’s debt burden, which can then increase its stock price, free up its liquid capital, and increase shareholder profits. For examples of actual Recapitalization Agreements, check out the documents section of RealDealDocs.com.

RealDealDocs.com is a division of Practice Technologies, Inc. the creators of SmartRules.com.
SmartRules provides step by step guides to local rules and civil procedure for state courts & federal courts throughout the country.

Popularity: 5% [?]