Roger is preparing to buy all of the stock of FlyNet Inc., a successful C Corpor

Question

Roger is preparing to buy all of the stock of FlyNet Inc., a successful C Corporation that is owned by five individuals. He knows that there are others in the wings ready to make an offer for the stock. He needs to move fast and he needs to be reasonable.

The term sheet for the deal sets the price of the stock at $18 million and lays out other key terms. It also references one fo Roger's real concerns with the deal- a potential dispute over a patented product owned by FlyNet and developed by Walter. The term sheet states that this concern will be appropriately addressed to the mutual satisfaction of all parties in the definitive agreement between the parties.

FlyNet claims that Walter owns no financial interest in FlyNet, that it purchsed the Patent from Walter for $250,000 and that is has documents to support these claims. Rogers preliminary due diligence has confirmed that Walter has a reputation as a trouble maker and has stated to others on various occasions that FlyNet did a number on him when it stole my patent. Three weeks ago, in a drunken stupor Walter called the CEO of FlyNet and ranted that he still owned the Patent because he was never given the 20,000 shares of stock he was promised.

Roger is concerned that a dispute with Walter could surface after the acquisition is closed and Walter discovers that each of the five stockholders of FlyNet walked away with millions from the sale. If FlyNet's ownership of the Patent was lost, Roger would still have an interest in purchasing the stock of FlyNet, but the price would be no more then $15 million.

Describe how Rogers concerns with respect to the Patent may be addressed in drafting the following elements of the stock purchase agreement between the parties: (1) recitals, (2) convenants, (3) representations and warranties, (4) conditions, (5) indemnifications provisions, (6) the legal opinions provided by FlyNet counsel. Which is most effective from Rogers perspective? What options will reduce an overkill risk that may incent the owners of FlyNet to reopen discussions with other interested buyers?

Explanation / Answer

Solution :

Recitals : They set the stage of the contract , providing the basic description , context and structure of the transaction . Recitals are typically declarative statements of facts and intention , but generally are not binding provisions of the contract . They describe the intent of the parties and perhaps offer some history or may not particular unusual aspects of the transaction . A recital may be useful in providing guidance to understanding a complex contract . Recitals may have legal effect , if the parties end up in a dispute or litigation . It is important that Roger includes the dispute with Walter in the Recital which can offer historical background of the transaction .

Convenants : - Covenants are agreements to take or forego action in the future either between signing and closing or after closing .

Representations and warranties : They are statements of fact about a contracting party's business , assets and financial condition , or mixed statements based in fact & law . Representations and warranties provide the buyer of a business with a picture of the sellers business , assets , financial condition and legal status at a certain time , usually as of the date of the agreement and as of the closing of the transaction . It also include representations concerning outstanding litigation , environmental matters , and intellectual property matters (i.e matters concerning patents , copyrights , trademarks that are part of the acquired business) .

Indemnifications provisions : - In this the seller shall indemnify for any losses arising from breach of an intellectual property representation or warranty . The buyer often seeks to ensure that the definition of covered losses is sufficiently broad to cover all costs and expenses that the buyer may be forced to incur as a result of the breach .

The most effective from Rogers perspective is Representations and warranties & Indemnifications provisions .

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