Business Contr. 101

Business Contracts 101
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Legal Product Specialists
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[email protected]
Authors
Kip R. Peterson
Messerli & Kramer
1400 Fifth Street Towers
100 South Fifth St.
Minneapolis, MN
Pankaj S. Raval
Law Offices of Pankaj S. Raval
633 W. 5th St., Suite 2600
U.S. Bank Tower
Los Angeles, CA
Allen Sparkman
Sparkman + Foote LLP
2800 Post Oak Blvd., Ste 4100
Houston, TX
Presenters
KIP R. PETERSON is an attorney with Messerli & Kramer, where he serves as both
general counsel and strategic advisor for business clients as they navigate important
legal and business decisions and challenges. With a focus on family-owned and
privately-held businesses, his clients seek his assistance with both day-to-day legal
issues and complex matters. Mr. Peterson has extensive experience in business law and
corporate transactions, including contract law, corporate governance, business sales,
mergers and acquisitions, shareholder disputes, employment law, and related
compliance issues. He blends his knowledge of the law with a business-minded
approach to legal issues and strives to minimize risk and add value wherever possible.
Mr. Peterson earned his undergraduate degree from the University of Minnesota and his
J.D. degree from the University of St. Thomas School of Law.
PANKAJ S. RAVAL, an attorney and entrepreneur, founded the Law Offices of Pankaj
S. Raval after realizing that there was huge room for improvement for how legal and
business services could be provided. His firm is geared toward serving the needs unique
to business owners. Mr. Raval has worked with a variety of startup, and small and
medium sized businesses. Industries served include technology, fashion, entertainment,
personal and retail services, Vape (e-cigarette) manufacturers and distributors, and real
estate, in addition to non-profit organizations. Mr. Raval has served businesses in
foundational and development matters such as entity and corporate formation;
partnership agreements and dissolutions; and trademark, copywriter and intellectual
property disputes. He earned his undergraduate degrees from the University of Arizona,
and his J.D. degree from the University of Arizona Rogers College of Law, where he
also earned a certificate in international business and trade law.
ALLEN SPARKMAN practices law in Denver and Houston as a partner of the law
firm of Sparkman + Foote LLP. He is listed in The Best Lawyers in America for both
Colorado and Texas. Mr. Sparkman speaks regularly on entity selection, estate planning,
asset protection and philanthropic planning topics at accredited continuing legal
education seminars. He is the co-author, with Herrick K. Lidstone, Jr., of Limited
Liability Companies and Partnerships in Colorado (CLE in Colorado, Inc. 2015). Mr.
Sparkman has written numerous published articles, most recently "Will Your Veil be
Pierced? How Strong is Your Entity's Liability Shield? - Piercing the Veil, Alter Ego,
and Other Bases for Holding an Owner Liable for Debts of an Entity," (forthcoming
Hastings Business Law Journal); With Herrick K. Lidstone, Jr., "Pick Your Partner
Versus the United States Bankruptcy Code," (forthcoming Texas Journal of Business
Law); "Through the Looking Glass: Series LLCs in 2015," (forthcoming Business &
Bankruptcy Law Journal); "The Rescission Doctrine: Everything Old is New Again," 4
Am. U. Bus. L. Rev. 183 (2015); "Series LLCs," 53 The REPTL Reporter No. 2 (Real
Presenters (Cont.)
Estate, Probate and Trust Law Section; State Bar of Texas; February, 2015); "Fifth
Circuit Misses Opportunity to Bring Clarity to Series LLC Question," Business Law
Today (April 2014); "Series LLCs in Interstate Commerce" and "Tax Aspects of Series
LLCs," Business Law Today (February 2013); and "The Series LCC: A New Planning
Tool" by Adrienne Randle Bond and Allen Sparkman, 45 Texas Journal of Business
Law (Fall 2012). He practices law in the areas of business, transactions, securities and
tax. Mr. Sparkman earned his A.B. degree, with honors, from Princeton University; and
his J.D. degree, with high honors, from the University of Texas. In 2015, Mr.
Sparkman received a certificate in theology and ministry from Princeton Theological
Seminar. He is a member of the American, Colorado, and Houston bar associations; the
State Bar of Texas; the College of the State Bar of Texas; the Texas Center for Legal
Ethics; the Center for Professional Responsibility; and the Association of Professional
Responsibility Lawyers. For the American Bar Association, Mr. Sparkman is an active
member of the Business Law Section and its committees on Corporate Governance,
LLCs, Partnerships and Unincorporated Associations (chair, Governance
Subcommittee; co-chair, task force on model Series LLC operating agreement); Mergers
and Acquisitions; Middle Market and Small Business (chair, Governance
Subcommittee); Nonprofit Organizations; and Professional Responsibility (chair, State
and Local Liaisons Subcommittee). With the Governance of Private and Family
Controlled Entities Subcommittee of the Corporate Governance Committee; the
Governance Subcommittees of the LLCs, Partnerships and Unincorporated Committee;
and the Small Business Committee have formed a new ABA Task Force that will focus
on the ways all business entities, including (i.e. LLCs, LPs and corporations),
increasingly use contractual provisions to address their governance rules and will
undertake to produce a guidebook on managing contractually-governed of business
entities. He is also a member of the American Bar Association Tax Law Section and
Real Property, Probate and Trust Law Section. Mr. Sparkman is a member of the
Drafting Committee on Series of Unincorporated Business Entities of the National
Conference of Commissioners on Uniform State Laws as an ABA Section advisor, ABA
Business Law Section. He is a past chair of the Business Law Section of the Colorado
Bar Association. Mr. Sparkman is an active member of the Colorado Secretary of State's
Advisory Committee for Business and Commercial Laws and the Legislative Drafting
Committee of the Business Law Section of the Colorado Bar Association. He was the
Colorado reporter for State Limited Partnership Laws and State Limited Liability
Company Laws while those were published by Aspen Law & Business.
Table Of Contents
PowerPoint 1
What Makes a Business Contract? Navigating the 141

Fundementals
Negotiation Essentials: Key Issues to Anticipate 153
Business Contract Provisions: Do They Protect Your 165

Client?
Drafting and Reviewing Common Business Contracts: 197

What You Need to Watch Out For
Contract Ethics 233

Pankaj S. Raval
Carbon Law Group, P.C. | Law Offices of Pankaj S. Raval
Los Angeles, California
What Make A Business Contract:

Navigating the Fundamentals
1
What Makes a Contract?
Six Elements
Offer
Acceptance of the Offer
Consideration
Mutual Assent
Capacity
Express v. Implied Terms

Express Terms
Terms that are stated with specificity either orally or in writing
Ex. You hire a website developer to build a website according to an express agreement that
states when the site is to be completed, what it is supposed to do, and how much you
are going to pay the developer to complete the work.
2
Implied Terms
Implied Terms (avoid when possible)
Terms that are either
Implied in fact
Mutual understanding based on conduct of the parties
Ex. When you go to the doctor there is an implicit understanding that you will receive
medical services and you will pay the doctor for those services
Implied in law
Determined after the fact by courts or arbiters based on performance or non-
performance
Ex. I buy a car and therefore there is an implicit understanding that it should work for
its intended purpose >> implied warranties.
Statutes of Limitations
The maximum time allowed in which a claim or suit may be initiated
Purpose: to facilitate resolution of issues within a “reasonable” length of time
Varies by state
California (Contract)
Written: 4 yrs. §337;
Oral: 2 yrs. Civ. Proc. §339
Collection of Debt on Account - 4 yrs. (book and stated accounts) Civ. Proc. §337
3
Common Law vs. the UCC
Two bodies of law governing contracts
Common Law - services, real estate, insurance, intangible assets, and

employment
Uniform Commercial Code - goods and securities
When the contract covers both UCC and common law, courts look to the
dominant elements
Main difference - acceptance
Common Law
Legal system characterized by case law
Mirror Image Rule - requires that acceptance be the exact mirror image of the
terms of the offer
Any changes to the offer means that acceptance is void
Changes to the offer signifies a rejection and counteroffer
4
Uniform Commercial Code (UCC)
The goal is to allow parties to make the contracts they want but to fill in missing
provisions when necessary.
Impose uniformity and streamlining of routine transactions like the processing of
checks, notes, and other routine commercial paper.
Article 2 - Sales
Firm Offers - stay open for a fixed period
Consideration - Not always required for modifications
Price - Not always required if intent of the parties was to form contract; price can determined later
based on market rates
Services vs. Goods

Services
Intangible
Heterogeneous
Parties are co-producers of the services
Goods
Tangible
Homogenous
Can be stored
Sales of goods don’t always require transfer of ownership
5
Ambiguous Language
A contract term is considered ambiguous if it is reasonably subject to more than
one interpretation.
Unclear what the parties intended
Example:
“Shall” - courts in virtually every English-speaking jurisdiction have held—by

necessity—that shall means may in some contexts, and vice-versa. - Bryan
Garner, Dictionary of Modern Legal Usage
Ambiguous Language
Courts look at a variety of factors to determine the meaning of ambiguous
terms:
Common Usage
Parol evidence
Industry usage
Prior dealings
Reasonableness
Implied meanings
Drafting party
6
Defining Performance Specifics + Timeframe
Performance
What is it?
Be specific
Partial performance
Were the unperformed parts of the agreement material or not?
Specific Performance
Equitable doctrine compelling a party to follow through on an agreement when the money is not a just remedy, e.g., the sale of a
house.
Timeframe
Term is an essential term for most agreements, whether it be ongoing or definite
Time is generally linked to some sort of performance
Negotiation Essentials:
Key Issues to Anticipate
7
Determining the Goal(s)
What does the client want?
Initial client interview
Follow up with additional questions
Provide written work product
Involving Your Client in the Negotiation

Understanding the costs and benefits
Benefits
When to use
When not to use
Setting expectations
Costs
When not to use
Setting Expectations
8
Interest Based Negotiation
Recommended reading:
Fisher, Roger, William Ury, and Bruce Patton. Getting to Yes: Negotiating Agreement Without Giving in. New York,
N.Y: Penguin Books, 1991. Print.
Understanding interests - why it is a party wants what they do
Understanding positions - based on interest(s), what a party wants
Objectively understanding the negotiation
Is agreement possible? What might an agreement look like?
Identify how to be efficient
Understand how to improve the relationship between the parties
The form of communication will determine approach, i.e., email vs. phone vs. in
person
9
Outlining Major Substantive Issues
Use IRAC to put together positions
Issue: term or subject matter
Rule: your or client’s interest
Application: based on interest, what is client’s position on the issue?
Conclusion
Identify bottom lines
Principled Negotiation
1. Analysis - diagnose the situation
1. Planning - additional options and criteria vs. traditional metrics to analyze the
problem
1. Discussion - in-negotiation communication, always look toward an agreement
10
Addressing the Weak Points of Your Case
Anticipate counterarguments
Anticipate counteroffers
Choosing a Style - Cooperative vs. Adversarial
Depends on subject matter and client
Who is the opposing side?
Ground in interests and positions
11
Identifying Important Timelines
Be aware of the statute of limitations on your claim
Procedural dates
Filing dates
ADR dates
Contract dates
Is interest being calculated on any debts owed?
Are there penalties specified in the contract?
Effective Openers
Introduction
Break the ice
Characterize the issues
Interest-based negotiation
Present your (or your client’s) interests
Actively reflect and understand opposing side’s interests
Find common areas to ground all of the shared or unique interests
12
Utilizing the Information Exchange Phase
Understanding the opposing side’s positions
Understanding trial discovery
The Art of Bargaining

Give a little to get a little
Active listening (and demonstrating it too!)
Principled Negotiation (from Getting to Yes, next slide)
13
More on principled negotiation - key tips
Separate the people from the problem or issue
Focus on interests, and not positions
Generate a matrix of possibilities before deciding what to do
Use objective standards to evaluate the results
Practical Tips For Pushing Beyond an Impasse

Use your leverage
Use objective standards
Use objective procedures
Define the hurdle
Exchange more information
Take a break
Carve out issues
Meet and confer with opposing counsel away from clients
Take another look at your position
14
Negotiation Tips to Avoid
Forgetting to involve the client! (ethical and legal duties)
Not addressing material terms or needs of client
Compromising the interests of the parties to hone in on specific positions
“Saving face”
Making threats or stonewalling
Failing to adapt an approach that isn’t working
What To Do When Negotiation Fails

Before the negotiation comes with the BATNA and WATNA
BATNA = Best Alternative to Negotiated Agreement
List of actions your client may take in the event no agreement is reached during the negotiation
Greater BATNA = greater bargaining power
Determine the other side’s BATNA as well to so you have a better idea of your bargaining power
WATNA = Worst Alternative to Negotiated Agreement
List of actions your client can take in the event no agreement is reached
Walk away? Sue? File a complaint with a government agency?
15
Business Contract Provisions:
Do They Protect Your Client?
Kip R. Peterson, Esq.

[email protected]
© Messerli & Kramer
Agenda
1. Four Goals of Better Contract Drafting

2. Basic Contract Law Refresher
3. Anatomy of a Contract
4. Case Study: Asset Purchase Agreement
5. Bonus: Recommended Boilerplate Provisions
16
4 Goals of Better Contract Drafting
FIRST: Understand the purpose of the contract and

think through its life cycle.
What does your client have to do to fully perform?
What does your client expect in return?
Is either party making representations or warranties?
Are there any covenants or conditions to performance by
either party?
What constitutes a breach? What are the damages?
17
SECOND: Be clear, concise and consistent.

Organize the body of the agreement logically.
Avoid ambiguous language.
Use defined terms consistently.
THIRD: Use plain language.

Avoid unnecessary legalese, recognizing that technical
language may still be appropriate.
Use proper grammar and formatting.
The parties should be able to read and understand their
respective rights and obligations.
18
FOURTH: Read and understand every provision of the

contract.
Be skeptical of form documents.
Consider the source, but remain accountable.
Don’t assume language is “one size fits all.”
Basic Contract Law Refresher
19
Elements of a contract
1. Offer
2. Acceptance
3. Consideration
4. Mutual Intent to be Bound
Statute of Frauds
Minn. Stat. § 513.01
No action shall be maintained, in either of the following cases, upon any

agreement, unless such agreement, or some note or memorandum thereof,
expressing the consideration, is in writing, and subscribed by the party charged
therewith:
(1) every agreement that by its terms is not to be performed within one year
from the making thereof;
(2) every special promise to answer for the debt, default or doings of another;
(3) every agreement, promise, or undertaking made upon consideration of
marriage, except mutual promises to marry;
(4) every agreement, promise or undertaking to pay a debt which has been
discharged by bankruptcy or insolvency proceedings.
20
Statute of Frauds
Minn. Stat. § 336.2-201(1)
Except as otherwise provided in this section a contract for the sale of goods for
the price of $500 or more is not enforceable by way of action or defense unless
there is some writing sufficient to indicate that a contract for sale has been
made between the parties and signed by the party against whom enforcement
is sought or by the party's authorized agent or broker. A writing is not
insufficient because it omits or incorrectly states a term agreed upon but the
contract is not enforceable under this paragraph beyond the quantity of goods
shown in such writing.
Breach of Contract
A party’s failure to follow the terms of a contract

constitutes a breach
A breach is “material” when a party substantially
fails to perform a primary purpose of the contract
Examples
Failing to deliver the goods or services
Delivering non-conforming goods or services
Failure to pay as agreed
21
Remedies
Monetary Damages
Expectation/Reliance Damages (Benefit of the Bargain)
Special/Consequential Damages
Punitive Damages
Liquidated Damages
Equitable Relief
Injunction
Specific Performance
Principles of Contract Interpretation
Purpose of Contract
Avoidance of Absurd or Unjust Results
Ambiguity Resolved Against the Drafter
Specific Language Governs over General Language
Course of Dealing
Course of Performance
22
Anatomy of a Contract
Anatomy of a Contract
1. Title
2. Table of Contents
3. Introductory Clause
4. Recitals
5. Body
6. Conclusory Statement
7. Signature Block
8. Schedules/Exhibits
23
Case Study:
Asset Purchase
Agreement
Case Study: Goals and Objectives

Buyer’s Goals
Personal liability to selling shareholders
Broad definition of “purchased assets” (“all of the assets used or useful in
the operation of the Business, including without limitation…”)
Narrow definition of “assumed liabilities” if any
Broad representations and warranties with limited qualifications
Strong post-closing covenants (confidentiality, non-competition, non-
solicitation, etc.) which include all shareholders and affiliates
Broad indemnification with holdback
Unlimited liability (especially as to title, authority, taxes, and other absolute
reps and warranties)
Right of Offset
Integration of documents w/ cross-default
24
Case Study: Goals and Objectives
Seller’s Goals
Maintain corporate shield of liability
Broad assumption of liabilities by Buyer
Cash at closing or security for payment (personal guaranty, blanket security
interest, etc.)
Limited representations and warranties, qualified as to actual knowledge
Narrow indemnification with a limited survival period and basket/cap on
liability
Anti-sandbagging
Limit remedies to actual damages (no right of rescission, special, or
consequential damages)
No right of offset or cross-default
Case Study: Preamble and Recitals

Consider the proper parties to the agreement
When representing the Buyer, include the individual
shareholders of the Seller as parties (especially with respect
to representations, warranties, covenants, and
indemnification obligations)
Verify spelling and state of domicile for all entities
Avoid including substantive terms in the recitals
Remember that recitals generally do not create binding
obligations (see Construction Mortgage Investors Co. v.
Darrell A.F. Development Corp.)
Avoid undue reliance on false statements of consideration
25
Case Study: Terms and Conditions
Defined Terms
Definition of Purchased Assets
Definition of Assumed Liabilities
Excluded Assets/Liabilities
Purchase Price and Payment Terms

Closing
Drop-dead date
Earnest Money
Conditions to Closing
Due Diligence
Financing
Accuracy of reps and warranties
Key Employees
Lease Agreement
Closing Deliverables
26
Post-Closing Covenants and Obligations

Further Assurances
Access to Information
Publicity
Consulting Services
Confidentiality
Non-Competition/Non-Solicitation
Case Study: Reps and Warranties
Joint and several liability where there are shareholder

parties
Limit reliance on “Extra-Contractual Information”
Knowledge qualifiers/Definition of “Knowledge”
Absolute Reps (Organization, Authority, Financials, Taxes,
Litigation, Title, etc.)
Survival
27
Case Study: Indemnification
Survival Period
Scope of Indemnification Obligation
Notice/Failure to Notify
Duty to Respond/Failure to Respond
Duty to Defend
Selection of Legal Counsel
Basket/Cap
Exclusive Remedy
Case Study: Dispute Resolution
Litigation vs. ADR

Governing Law/Rules
Venue
Qualifications of Neutral
Selection of Neutral
Time and Expense
Enforcement
Right to Appeal
Managing Expectations
28
BONUS:
Recommended
“Boilerplate” Provisions
Governing Law
“This Agreement shall be governed by and

construed in accordance with the internal laws of
the State of Minnesota without giving effect to any
choice or conflict of law provision or rule that would
cause the application of laws of any jurisdiction
other than those of the State of Minnesota.”
29
Venue
“Any legal suit, action or proceeding arising out of or based upon

this Agreement or the transactions contemplated hereby must be
instituted in the courts of the State of Minnesota located in
Hennepin County, and each party irrevocably submits to the
exclusive jurisdiction of such courts in any such suit, action or
proceeding. The parties irrevocably and unconditionally submit to
the personal jurisdiction of such courts, waive any objection to
the laying of venue in such courts and agree not to plead or
assert in any such court that any such suit, action or proceeding
has been brought in an inconvenient forum.”
Attorneys’ Fees
“If any legal action or any arbitration or other proceeding is

brought to enforce or interpret this Agreement or any provision
thereof, or because of an alleged breach, default or
misrepresentation in connection with any of the provisions of this
Agreement, the prevailing party in such action or proceeding shall
be entitled to recover from the other party its reasonable
attorneys’ fees and other costs incurred in that proceeding,
including any attorneys’ fees and costs for the collection of any
judgments in favor of the successful or prevailing party, in
addition to any other relief to which it or they may be entitled.”
30
Merger/Integration Clause
“This Agreement constitutes the sole and entire

agreement of the parties to this Agreement with
respect to the subject matter hereof, and
supersede all prior and contemporaneous
understandings and agreements, both written and
oral, with respect to such subject matter.”
Severability
“If any term or provision of this Agreement is invalid, illegal or

unenforceable in any jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other term or provision of
this Agreement or invalidate or render unenforceable such term
or provision in any other jurisdiction. Upon such determination
that any term or provision is invalid, illegal or unenforceable, the
parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that
the transactions contemplated hereby be consummated as
originally contemplated to the greatest extent possible.”
31
Waiver
“Any term or condition of this Agreement may be waived at

any time by the party that is entitled to the benefit thereof,
but no such waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the
party waiving such term or condition. No waiver by any
party of any term or condition of this Agreement, in any one
or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this
Agreement on any future occasion.”
Successors and Assigns
“This Agreement shall be binding upon and shall

inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Neither party may assign its rights or obligations
hereunder without the prior written consent of the
other party, which consent shall not be
unreasonably withheld or delayed. No assignment
shall relieve the assigning party of any of its
obligations hereunder.”
32
Amendment
“This Agreement may only be amended, modified

or supplemented by an agreement in writing signed
by each party hereto.”
Alternative Dispute Resolution
“In the event of a dispute arising out of or relating to this Agreement,

the parties shall first attempt to negotiate in good faith to resolve such
dispute. If the dispute cannot be resolved by good faith negotiation
within thirty (30) days, the parties shall submit any controversy or claim
arising out of or relating to this Agreement, or the making, performance
or interpretation thereof, to be settled by binding private arbitration in
Minneapolis, Minnesota, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association. Judgment upon any
arbitration award may be entered in any court having jurisdiction
thereof and the parties consent to the jurisdiction of the courts of the
State of Minnesota for such purpose.”
33
Rules of Construction
“This Agreement shall be construed without regard

to any presumption or rule requiring construction
or interpretation against the party drafting an
instrument or causing any instrument to be
drafted.”
Counterparts
“This Agreement may be executed in any number

of counterparts, each of which shall be deemed an
original of this Agreement and all of which together
shall constitute one and the same instrument.
Signatures delivered by facsimile transmission or
by electronic delivery of a “.pdf” file shall create a
valid and binding obligation of such party with the
same force and effect as if such facsimile or “.pdf”
signature were an original thereof.”
34
Questions?

[email protected]
35
National Business institute
Allen Sparkman
SPARKMAN + FOOTE LLP
1616 17th St., Ste. 564 2800 Post Oak, Ste. 4100
Denver, CO 80202 Houston, TX 77056
303.396.0230 (voice) 713.401.2922 (voice)
303.748.8173 (cell) 713.859.7957 (cell)
1.720.600.6771 (fax) 1.218.783.6986 (fax)
[email protected] www.sparkmanfoote.com
Asset Purchase Agreements and Stock Purchase

Agreements
Most issues will apply to both asset

purchase agreements and stock purchase
agreements.
SPARKMAN + FOOTE LLP 2
36
Agreements
Many acquisitions begin with a letter of

intent (“LOI”). Both parties will want to insure
that the LOI contains language providing
that there will be no binding agreement
between the parties unless and until the
parties enter into a definitive acquisition
agreement.

Agreements
Speaking generally, sellers will prefer stock

sales and buyers will prefer (and often insist
on) asset sales.
37
Agreements
Buyers prefer asset acquisitions because:

In a stock sale, buyer will acquire all of the assets of
the target but will also acquire all of the target’s
liabilities.
Asset sale allows buyer to obtain cost basis in all
assets acquired.
Asset sale can avoid acquisition of undesired
liabilities.

Agreements
Buyer may cherry pick the contractual obligations

and other liabilities of the target.
Asset sale allows more significant and precise
disclosure.
Asset sale provides opportunity to enter into new
contractual relationships.
38
Agreements
Buyers prefer asset acquisitions because:

Asset sale allows for picking and choosing
employees of target and altering contractual
relationships.
A buyer may not want an asset sale if the
target has valuable contracts that cannot be
assigned.

Agreements
Buyer will insist on seller representations

and warranties to insure that buyer
receives what the buyer has bargained for.
39
Agreements
What if buyer knows that one of the seller’s

representations is false? Can the buyer nevertheless
recover damages for breach of that representation?
This will depend on whether the contract contains an
anti-sandbagging clause and, if not, what the
applicable state law provides. The Private Target
Mergers and Acquisitions Deal Points Study
(hereafter, “Deal Points Study”) reports that 41% of
the deals it reviewed included a provision permitting
sandbagging, that 10% included a prohibition and
that 49% were silent.

Agreements
If the agreement is silent, the law of some states,

e.g., Colorado, would say that buyer could not
recover because, knowing before closing of seller’s
misrepresentation, buyer could not have relied on
seller’s representation. Associates of San Lazaro v.
San Lazaro Park Properties, 864 P.2nd 111 (Colo.
1993) (Buyer discovered inaccuracies due to its own
independent investigation after signing and
consequently did not rely on the seller’s information
at closing and thus waived its warranty claim).
40
Agreements
Delaware courts hold that the warranties and

representations in a purchase and sale agreement
serve an important risk allocation function and that,
accordingly, a seller’s breach of its representations
and warranties constitutes a breach of contract and
does not require the buyer to demonstrate reliance.
Universal Enterprise Group, L.P. v. Duncan
Petroleum Corporation, (Case No. 4948-VCL, Del.
Ch. 2013).

Agreements
State law treatment of sand bagging claims depends

on whether the state law treats breach of a
representation or warranty as a tort or as a breach of
contract. See generally, Charles K. Whitehead,
“Sandbagging: Default Rules and Acquisition
Agreements”, 36 Del. J. Corp. L. 1081 (2011).
41
Agreements
Buyers should resist seller requests to “tax-benefit” any

claims paid by the seller to the Buyer.

Agreements
A common ploy by Sellers is to assert that if the

Seller has to pay a claim made by the Buyer, the
Seller’s payment should be reduced by the tax
benefit the Buyer receives from the payment. The
Deal Points Study reports that 52% of deals
provided for a reduction in the Seller’s liability for the
tax benefit to the Buyer. Moreover, according to the
Deal Points Study, 44% of deals included an
express requirement that the Buyer mitigate losses.
42
Agreements
A mitigation requirement may well include an

obligation to maximize tax benefits. A
representative purchase and sale agreement
contained this simple provision: “For purposes of this
Agreement, any determination of Losses shall be
reduced by any Tax Benefits actually received by
the Indemnified Party.” An obligation on the part of
the Buyer to take tax benefits into account raises
several questions.

Agreements
The Seller’s tax benefit argument is basically that it is

unfair to the Seller to allow the Buyer to receive a gross
indemnification payment and also to be able to enjoy
the tax benefit arising from the circumstances upon
which the Buyer’s indemnification claims are based.
For example, if the Seller has represented that there are
no closing date liabilities other than those disclosed, but
it is later discovered that there was an undisclosed pre-
closing payable of $1,000, the Buyer would have a
breach of representation claim for $1,000.
43
Agreements
If the Seller paid the Buyer a $1,000 indemnification

payment because of this claim, the Seller argues that
the Buyer could also claim an expense deduction on its
income tax return with respect to this pre-closing liability
that would save the Buyer (at the 35% rate) $350 of
federal income tax.

Agreements
The problems include that the Buyer most likely will not
be able to deduct its payment but, instead, will have to
include it as a capital cost of purchasing the Seller’s
assets or equity. There are some provisions in the
regulations under IRC § 461 that appear to allow a
buyer to deduct a liability where the target sells buyer a
trade or business and, as part of the sale, buyer
“expressly assumes” a liability described in IRC §
461(h), but it appears unlikely that a buyer would be
considered to have “expressly assumed” the liability it
pays because of the seller’s misrepresentation.
44
Agreements
Another significant problem is what happens if a dispute

arises between the Buyer and Seller with respect to
whether the Buyer realized a tax benefit and, if so, how
much. Will the Seller be permitted to examine the
Buyer’s income tax returns? Will the Seller be able to
require the Buyer to take a position on its tax return that
may disadvantage the Buyer in some way?

Agreements
Earn-Outs
45
Agreements—Earn-Outs
Assume that some issue causes the parties to consider an

earnout. For example, assume buyer learns that seller has
a very favorable contract for its supply of raw materials that
buyer will not be able to assume. Buyer informs seller that
it is no longer willing to pay the acquisition price that has
been discussed.

After some discussion, seller and buyer agree that buyer

will pay X to seller at closing and will pay an additional .2X
one year later if the receipts of the business increase by
20% or more over the 12 months after closing.
46
Buyer must pay careful attention to how the earn out is structured and
defined. If the earn out is not carefully drafted, buyer may owe the
additional .2X even if the base business purchased from seller does not
increase but the revenues increase substantially because buyer
expands the business. Several years ago, the author served as an
expert witness in a malpractice action brought by the Buyer against his
attorneys for failing to understand that the earnout provision in the
purchase and sale agreement, together with the PSA’s definition of
“affiliate,” caused the amount that the Buyer was required to pay under
the earnout to include earnings of the Buyer’s entire business, not just
the business the Buyer purchased under the PSA.

If buyer then argues that revenues from the “business” acquired

from seller haven’t increased at all, buyer may face a claim from
seller that buyer has breached the implied covenant of good faith
and fair dealing by not continuing the business that seller was
conducting at a level at least equal to that conducted by seller. In
American Capital Acquisition Partners, LLC v. LPL Holdings, Inc.
(Del. Ch. Feb. 3, 2014), the court held that a buyer may have
breached the implied covenant of good faith and fair dealing by
“pivoting” sales away from the target company, making it difficult
for the target company to hit earnout targets.
47
If part of the consideration for the sale of a

business is an earnout, the parties must also
consider what access the seller will have to the
buyer’s financial records to audit compliance with
the earnout. What reports will the buyer be
required to provide the seller?

Agreements—Material Adverse Change Carveouts
Use in Merger and other Acquisition

Agreements. These clauses or modifiers are
variously known as "Material Adverse
Change" "Material Adverse Effect" and
"Material Adverse Event" provisions. They
are often used not only in representations
but also in target company covenants and
as closing conditions of the buyer.
48
As Qualifiers in Post-Signing Covenants. These qualifiers are often

used in covenants concerning operating the Target business after
signing of an acquisition agreement, but before the transaction actually
close. For example, the following provision is an abbreviated version of
the pre-merger closing covenants of Target usually found in merger
agreements. Note that the provision is often much lengthier as it
contains a laundry list" of actions that the Target may not take in the
period between signing and closing. In a merger, this can be lengthy
period if regulatory approvals, such as in the antitrust area, health care,
or other regulated industry are required before the merger can close.

Target's Actions Pending Merger

Except as otherwise specifically provided in this Agreement, from the
date of this Agreement to the earlier of Effective Time or termination,
Target agrees, to:
(i) conduct its operations only in the ordinary and usual course of
business and consistent with past practices and not take any action
outside of the ordinary course of business as of the Signing Date that
could/would have a material adverse effect on the business of the
Target as conducted as of the Signing Date;
49
(ii) use its commercially reasonable efforts to preserve intact its present
business organization, keep available the services of its present
officers, key employees and consultants and preserve its present
relationships with licensors, licensees, customers, suppliers, key
employees, labor organizations and others having business
relationships with it.

As a closing condition, these qualifiers may be
used to allow a party, usually the buyer, to
terminate the acquisition agreement if a material
adverse change has occurred with respect to a
certain fact about the business between the
Signing Date and the planned Closing Date.
50
As Qualifiers for Representations
The typical representation formulation in an acquisition agreement is
that a representation is true and correct except to the extent that not
being true or correct "would not have a material adverse effect" on the
business of the corporation or the closing of the acquisition transaction.
Below is a basic example of a use of the term "material adverse effect"

that is frequently acceptable to the buyer in a merger agreement Target
representation regarding qualifications to do business:

Foreign Qualifications. The Corporation is qualified
to do business in all jurisdictions in which it is
required to be qualified except to the extent that
not being so qualified would not have a material
adverse effect on the business of the corporation
as presently conducted.
51
Material adverse effect clauses may also be used as gap-fillers with
respect to time periods. For example:
No Material Adverse Change. "Since December 31, 2014, (the end

date for the Corporation's financial statements last delivered to the
Buyer relate) there has not been a Material Adverse Change in the
Corporation's business."

Defining Material Adverse Change. Some acquisition agreements do
not contain a definition for the term "material adverse change." Others
use broadly worded definitions:
"Material Adverse Change" means any event or change that would be

materially adverse to the business, assets, condition (financial or
otherwise), operating results, operations, [or business prospects] of
the Corporation, taken as a whole, or to the ability of Buyer or Target
to consummate timely the transactions contemplated by this
Agreement.
52
Neither of these solutions is particularly helpful to
the Target because they are not sufficiently
detailed although the Target may not be able to
obtain any definition, let alone a more precise one,
depending on Target's negotiating leverage.

A Target will want "Material Adverse Change" definitions to take into
account events and circumstances beyond the reasonable control of
the Target. To help limit its liability, the Target will want to include
various exceptions to what constitutes a material adverse change that
could in tum cause a breach of a representation. These events tend to
be broader in scope than would be covered in a "force majeure"
definition to provide Target with more protections from buyer claims of
a representation breach. Below is a much more detailed and Target-
favorable clause that might help a Target to reduce the likelihood of
liability for the breach of representations qualified by this phrase:
53
Seller Friendly:
"Material Adverse Effect" means any event, occurrence, fact, condition
or change that is, or could reasonably be expected to become,
individually or in the aggregate, materially adverse to the business,
results of operations, condition (financial or otherwise) or assets of the
Target, taken as a whole, or the ability of Target to consummate the
transactions contemplated hereby on a timely basis. "Material Adverse
Effect" does not include any event, occurrence, fact, condition or
change, arising out of or attributable to: (i) general economic or political
conditions; (ii) acts of war (whether or not declared), armed hostilities or
terrorism; (iii) any changes in applicable Laws or accounting rules,
including US GAAP; (iv) conditions generally affecting the industries in
which the Target operates or (v) any natural or man-made disaster or
acts of God.

The highlighted portion of the above-definition illustrates one example

of how the added protections for a Target in clauses (i)-(v) may be
weakened. A Target will want material adverse events to be limited to
those that are ("would") be significantly adverse to the Target. The
highlighted clause broadens what constitutes a Material Adverse Effect
because it deals not only with an actual occurrence being materially
adverse but also covers an actual occurrence that could foreseeably
become materially adverse to the Target. This exposes the Target to a
greater range of events that could result in liability under an acquisition
agreement. If an event occurs that is not materially adverse to the
Target, the inquiry does not end there. The Target is also being held
responsible for events it should know are likely to become "materially
adverse." Determining how much this added phrase will increase the
Target's liability is difficult to assess, but it does broaden Target's
liability exposure to some extent.
54
Knowledge Qualifiers
The Target may request that some representations and warranties be

qualified by the phrase "to the knowledge of Target" or a particular
owner, officer or employee of Target. If the buyer is willing to allow this,
the parties will want to define "knowledge."- is it actual knowledge,
constructive knowledge (such as what is publicly available), or
something else? In evaluating whether a knowledge qualification is
reasonable, a buyer also needs to consider whether the Target has
owners or others who are clearly responsible for different parts of the
business.

Some versions of this qualifier will state "to the Target's knowledge . . .
." and the Target is an entity. If the Target has only a few employees,
this may not matter much.
However, if the Target has even 10 employees, the identity of the

person having knowledge becomes more important. Below is a
possible "Knowledge" definition:
55
“Knowledge" means (a) the actual knowledge of the Person, including

the actual knowledge of any of the officers, directors, managers, or
general partners of the Person; and [(b) that knowledge that a
reasonably prudent businessperson could have obtained in the
management of his business ][after making due inquiry and after
exercising due diligence].

This knowledge qualifier is somewhat Target-friendly as it would limit

knowledge to officers or directors of a Target corporation in connection
with a representation (such as regarding the existence of threatened
litigation). Under some circumstances, this may be too broad to
adequately protect Target. If Target has officers in multiple locations and
has a reasonably large number of employees (perhaps above 250), it is
possible that threatened litigation information may not have been
communicated to the CEO or CFO or someone else in corporate
management who is directly participating in the acquisition process. A
buyer will argue that the knowledge of even a lower level officer should
be imputed to the Target as the Target should have clear reporting
channels for threatened litigation to be brought to the attention of senior
management.
56
After determining whose knowledge is relevant, the level or extent of the

knowledge of the individual or entity should be specified. One of three
levels of knowledge is commonly used:
Actual Knowledge
Constructive Knowledge
Inquiry Knowledge.

When inquiry knowledge is used it is usually in combination with one of

the other two types of knowledge coupled with the knowledge an
individual would have after reasonable investigation or inquiry about the
subject of the representation.
57
Actual Knowledge refers to what an individual is consciously aware of

as of a given date. Constructive Knowledge refers to what an individual
is deemed to be aware of because public filings exist (such as a
litigation complaint or a Uniform Commercial Code Financing
Statement) regarding a particular state of facts or events that are the
subject of the representation. The least Target-friendly level of
knowledge is Inquiry Knowledge because it imposes an affirmative duty
on the individual responsible for the representation to investigate and
determine whether, for example, the corporation is subject to threatened
litigation.

The interplay of whose knowledge and what type of knowledge can be

complex. For example, a Target may limit knowledge to that of the CEO
and CFO, but if the CEO or CFO is subject to an Inquiry Knowledge
standard, the knowledge of lower level officers who report to the CEO or
CFO will likely be imputed to the CEO or CFO.
58
Another construction that is often acceptable to a buyer, but can be

problematic for the Target, is the "to the best of [CEO's/CFO's]
knowledge . . . . " This may seem at first glance to simply mean
whatever the individual is actually aware of at a particular time.
However, the word "best" probably implies some level of duty of inquiry
or investigation.

Indemnification as it Relates to Representations and Warranties—the

Materiality Scrape
Limiting one's indemnification obligations is often an umbrella solution
that will in tum limit liability for breached representations and warranties.
Moreover, a Target who obtains what appear to be significant
concessions (whether through materiality, material adverse change,
knowledge or other qualifiers) limiting its liability for breached
representations may have all that effort undone by a "materiality scrape"
provision. Over the years, "materiality scrape" provisions have become
a more popular tool for buyers to negate many of a Target's perceived
gains in qualifying its representations and warranties with materiality.
59
This is because the "materiality scrape" eliminates the

materiality qualifier from each representation and warranty to determine
if an indemnifiable event (loss, damage) has occurred. A Target can
thus not have breached a representation or warranty because the
materiality threshold has not been crossed, but still be liable under the
indemnity provisions as if the materiality qualifier did not exist, making
the materiality qualifier somewhat illusory as a benefit to the Target.

One possible alternative is for the Target to negotiate higher

deductibles and baskets to avoid payouts for multiple immaterial
breaches of representations and warranties. The Target may also
try to limit the representations and warranties to which the materiality
scrape applies. Below is an example of a materiality scrape provision,
which typically appears in the indemnification section of the acquisition
agreement.
60
Materiality Qualifiers. With respect to determining the

indemnification obligations of Target or any Principal Shareholder in this
Agreement arising from a breach by any of them of a representation or
warranty in this Agreement, all representations and warranties of
Target in this Agreement will be read without reference to materiality,
Material Adverse Effect [or similar monetary and non monetary
qualifications].

Agreements—Drafting “Bad-Conduct” Carve-Outs
For a comprehensive, well-written look at issues arising in this area, see

Glenn D. West, “That Pesky Little Thing Called Fraud: An Examination
of Buyers’ Insistence Upon (and Sellers’ Too Ready Acceptance of)
Undefined “Fraud Carve-Outs” in Acquisition Agreements,” 69 The
Business Lawyer 1049 (August, 2014).
61
LLC and Partnership Agreements
There are a number of important issues that an operating agreement

should address for the benefit and protection of its members. Most, if
not all, of these issues also apply to partnership agreements. These
include:
Partnership laws generally provide that each

general partner has equal rights in
management. This may be varied by agreement,
but there may not be an efficient way to try to
make third parties aware of limitations on a
partner’s rights.
62
Many LLC statutes provide that an LLC must

specify at formation whether it is managed by its
members or will be managed by one or more
managers. The certificate of formation of a
Delaware LLC does not state whether the LLC is
manager-managed or member-managed. Del.
Code Ann. tit. 6, § 18-201 (2012). Moreover, the
Delaware LLC Act states:
Unless otherwise provided in a limited liability company agreement, the

management of a limited liability company shall be vested in its
members in proportion to the then current percentage or other interest
of members in the profits of the limited liability company owned by all of
the members, the decision of members owning more than 50 percent of
the said percentage or other interest in the profits controlling; provided
however, that if a limited liability company agreement provides for the
management, in whole or in part, of a limited liability company by a
manager, the management of the limited liability company, to the extent
so provided, shall be vested in the manager who shall be chosen in the
manner provided in the limited liability company agreement.
Del. Code Ann. tit. 6, § 18-402 (2014).
63
Duties and Waiver. LLC and partnership typically impose duties on the
governing persons of the entity. Governing persons of an entity also will
ordinarily be agents of the entity and will have duties of care and loyalty
under agency law. Statutes often provide standards for when an
agreement may waive or modify duties imposed by statute, and agency
law also permits waiver or modification of its duties, and agency law
standards may differ from the standards in statutes.
The Need to Distinguish Between Waivers of Duty and Elimination

of Liability.
If the parties to an operating agreement want to eliminate or limit

fiduciary duties, they must draft plainly and precisely. In Feeley v.
NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), the Delaware Court of
Chancery held that the following language did not eliminate fiduciary
duties but instead recognized that they existed and eliminated monetary
liability for certain described breaches:
64
Limited Liability of Members. Except as and to the extent required under

the Delaware Act or this Agreement, no Member shall be (i) liable for the
debt, liabilities, contracts or any other obligations of the Company; or (ii)
liable, responsible, accountable in damages or otherwise to the
Company or the other Members for any act or failure to act in
connection with the Company and its business unless the act or
omission is attributed to gross negligence, willful misconduct or fraud or
constitutes a material breach by such Member of any term or provision
of this Agreement or any agreement the Company may have with the
Member.
Feeley is an admonition to drafters who intend to modify or waive

fiduciary duties to take care that the language chosen does in fact
modify or waive duties and not just eliminate monetary liability for
breaches. If only monetary liability is waived, equitable remedies, such
as injunctive relief, rescission, imposition of a constructive trust, etc.
may still be brought to bear.
65
In Kelly v. Blum, 2010 Del. CH. LEXIS 31 (Del. Ch. Feb. 24, 2010). the
LLC agreement before the court was silent on the issue of duties owed
by managers to the LLC and its members, with the exception of
Sections 7.5 and 7.9. In its entirety, Section 7.5, entitled “Duties,” stated
that:
[t]he Board of Managers shall manage the affairs of the Company in a
prudent and businesslike manner and shall devote such time to the
Company affairs as they shall, in their discretion exercised in good faith,
determine is reasonably necessary for the conduct of such affairs.
In relevant part, Section 7.9 stated that
[i]n carrying out their duties hereunder, the Managers shall not be liable
for money damages for breach of fiduciary duty to the Company nor
to any Member for their good faith actions or failure to act . . . but only
for their own willful or fraudulent misconduct or willful breach of their
contractual or fiduciary duties under this Agreement.
66
The court in Kelly held that the language of Sections 7.5 and 7.9 did not
limit or eliminate fiduciary duties. The court explained that Section 7.9
did exculpate the managers from monetary liability for some breaches of
fiduciary duty, but did not exculpate the managers from the willful
breach of duty alleged in this case. The court further stated:
Having been granted great contractual freedom by the LLC Act, drafters
of and parties to an LLC agreement should be expected to provide
parties and anyone interpreting the agreement with clear and
unambiguous provisions when they desire to expand, restrict, or
eliminate the operation of traditional fiduciary duties.
There are additional cases in my paper illustrating poor drafting of

waiver of duty provisions.
67
LLC and Partnership Agreements—Choice of Law
Because the operating agreement of an LLC is a contract, the members

may wish to state that the law of a state other than the state of
organization should govern all or certain matters. Presumably, the
freedom-of-contract language of most state LLC Acts would allow the
selection of another state’s law, at least for matters not governed by a
mandatory provision of the LLC Act of the state of formation. A
corresponding forum selection clause should also be respected.
LLC and Partnership Agreements—Choice of Law
The Delaware LLC Act states that “a limited liability company agreement
that provides for the application of Delaware law shall be governed by
and construed under the laws of the State of Delaware in accordance
with its terms.” It is unclear how this provision might work in practice.
Perhaps the members of, say, a Colorado LLC might desire to insert a
provision providing for the application of the Delaware LLC Act to
complement a provision setting the venue for disputes in the Delaware
courts. The operating agreement of, say, a Colorado LLC presumably
could not effectively provide for the Delaware LLC’s Act provision on
limiting duties to apply because those provisions of the Delaware LLC
Act are less restrictive than the provisions of the LLC Act, which would
continue to apply the LLC. . Del. Code. Ann. tit. 6, § 18-1101(i) (2013).
68
LLC and Partnership Agreements—Amendment
Provisions
Absent an agreement to the contrary, LLC statutes generally require a

unanimous vote to amend an LLC agreement. There may be reasons
that a unanimous vote should be required, such as where there are
specially negotiated provisions that should not be undone except by
agreement of all of the members, or perhaps by a super-majority. As an
example, assume that an operating agreement contains a provision
requiring that a conversion or merger be approved by a three-fourth’s
vote, but permits amendments to the operating agreement by a majority
vote. Is there a potential problem if, on the eve of approving a plan of
conversion for the LLC, a bare majority of the members amends the
operating agreement to change the required vote to approve a
conversion to that of a majority?

Provisions
In Twin Bridges Limited Partnership v. Draper, 2007 Del. Ch. LEXIS

136, at *34 (Del. Ch. Sept. 14, 2007)the court applied the step
transaction doctrine familiar to tax lawyers to the analysis of the legal
consequences of the amendment of a partnership agreement to
eliminate a super-majority voting requirement followed by the partners’
approval (under the amended provision) of the merger of the partnership
into a newly formed limited partnership with a different governing
structure. Although the Delaware Chancery Court treated the two
transactions as one, it upheld the amendment and merger based on its
interpretation of the partnership agreement.
69
Provisions
In Fox v. I-10, LTD., 957 P.2d 1018 (Colo. 1998), the Colorado Supreme
Court upheld the amendment of a limited partnership agreement by
majority vote to increase the contribution obligation of a limited partner
who voted against the amendment.

Provisions
The amendment provisions should also address any other restrictions

the members desire to impose on amendments. For example, unless
foreclosed by a well-drafted provision in the agreement, an LLC
agreement, like other contracts, may be amended by the parties’ course
of conduct. Of course, this author questions whether any agreement that
attempts to restrict amendment by course of conduct can actually do so.
70
Provisions
Protecting a client’s interest by restricting amendment may require

creativity. Assume individuals A and B are the two equal members of
XYZ, LLC. The LLC agreement provides that the LLC will be dissolved
and wound up if either member dies. B dies. A desires to continue the
LLC without dissolution. In the absence of contrary provisions in the
LLC agreement, A can accomplish his desire in substance. At B’s death,
B’s personal representative “may exercise all of the powers of an
assignee or transferee of the member” As an assignee, B’s personal
representative will have no voting or information rights.

Provisions
Accordingly, A, as the sole member, may amend the LLC agreement to

remove the dissolution requirement. Although the LLC would have
dissolved upon B’s death, under many state laws A may reinstate the
LLC as an undissolved entity. The LLC agreement could have
prevented this result if it had provided that B’s personal representative
would automatically be admitted as a member of the LLC effective
immediately upon B’s death or would have voting rights as a member
effectively immediately upon B’s death.
71
LLC and Partnership Agreements—Purpose
Clause
Many lawyers routinely state in the LLC agreements they draft that the
purpose of the LLC is to engage in any lawful business. This may not be
the best of drafting practices. The attorney should consider crafting a
more narrow purpose clause that reflects the actual intended business
of the LLC; otherwise, duties of the members or manager, such as the
duty not to compete with the LLC, may be broader than the parties
imagine. An expansive purpose clause may also result in an
inappropriately broad definition of “ordinary course of business” in the
agency law context.

LLC and Partnership Agreements—Purpose

Clause
If the members desire to limit the LLC’s purpose to engaging in only a

specified business or to limit the LLC to conducting its business only in
a particular state or only in particular cities or counties in that state,
these restrictions should be protected by the amendment provisions of
the LLC agreement, as discussed above. Moreover, to ensure that
those managing the LLC cannot get around the limitations by forming a
subsidiary to conduct another business or to conduct business outside
the permitted areas, the limitation should be placed not just on the LLC
but also on “affiliates” of the LLC, and “affiliates” should be defined to
effectuate the members’ intent.
72
LLC and Partnership Agreements—Rights of
Assignees
The statutory rights of an assignee of a member of an LLC and the

rights of an assignee of a partner of a partnership differ, but seldom are
satisfactory to the assignee. Especially in the case of a deceased
member or partner, or one for whom a guardian or conservator has
been appointed, the members or partners should give some
consideration whether to expand the information rights in those or other
appropriate circumstances.
LLC and Partnership Agreements—Tax Issues
There are many tax issues that a drafter may need or desire to
address.
73
LLC and Partnership Agreements—Exit Strategies
When Should Selling be Considered?

It may seem strange to consider exit strategies at the formation of an
LLC or any other business entity when the parties are at the beginning
of what they hope will be a successful venture and are drafting the
operating agreement or other organizational documents, but doing so
early in the process can avoid many problems later. The best reason to
address exit strategies up front in the process is that the negotiating
parties, the actual or prospective owners, do not then know whether
they will be a buyer or a seller. Consequently, the result is much more
likely to be fair to both sides than the difficulties that may develop when
the positions are drawn and one side is a seller because he or she
wants to depart the business and maximize his or her value, and the
other side wants to remain in the business while minimizing the financial
impact from the departure.
When Should Selling be Considered?

Some might say this is like negotiating a divorce agreement prior to
marriage, but many couples who are about to marry, in recognition of
the uncertainty of life, negotiate a pre-nuptial agreement — an exit
strategy for the marriage.
74
What are Common Triggering Events?
All buy-sell agreements creating an exit strategy for one or more owners
contain at least one common factor — the existence of one or more
triggering events that cause the buy-sell provisions to be exercised.
Depending upon the nature of the business and characteristics of its
owners, different triggering events may be included in the agreement.
Where owners are also employees, termination of employment may be

a triggering event — whether by the employee or by the entity, and
whether with or without cause. A closely-held entity does not want
potentially hostile owners or owners who move to a potentially
competitive business to be voting owners of, or to benefit from the future
success of, the entity in which they no longer have a part.
75
Death, disability, and retirement are usually triggering events for any
buy-sell arrangement. These events have less acrimony associated with
them than termination of employment but the financial issues are
potentially equally significant. In some cases the buy-out can be funded
by properly drafted insurance policies; in other cases insurance may not
be available.
Divorce, charging orders, seizure by creditors, and bankruptcy are

common triggering events in what can be referred to as “involuntary
transfers.” Perhaps the transferor and the other owners desire to remain
associated, but other people (generally creditors or former spouses of
one owner) have an interest in the underlying value. This creates some
complex and potentially difficult issues in a buy-sell agreement and in
the ensuing negotiations with the transferee, be it the bankruptcy
trustee, the creditor, or the ex-spouse — each of whom would like to
maximize the value to be obtained from the transferor or the entity itself.

76
In some cases, the grant of a security interest under Article 9 of the

Uniform Commercial Code may be a triggering event, or perhaps the
grant of the security interest is permissible, but the foreclosure of that
security interest is a triggering event.
Efforts by one or more owners to make a voluntary sale are probably

among the most common triggering events, usually resulting in a right of
first refusal to the entity and a right of second refusal to the remaining
owners. The voluntary sale may result from a third party inquiry or from
the selling owner’s efforts to find a buyer. An agreement can structure
the ramifications of a voluntary transaction in a number of ways and
must consider the financial obligations to ensure the continuing viability
of the entity.
77
In a subset of a voluntary sale, a third-party purchaser may approach

one or more owners with a desire to purchase a controlling interest in
the entity, and this may not be in the interest of the other owners. Where
the third party can acquire financial and management control through a
purchase, it may pay more for this “control.” Where the remaining
owners have the right (or perhaps an obligation) to participate in the
transaction, greater fairness can result, although likely resulting in at
least a perceived lost opportunity by the owners who did not want to sell
in the first place.
In another subset of voluntary sale, consideration should be given to

whether so-called estate planning transfers should be permitted and, if
so, under what conditions.
78
Where owners of a business are themselves one or more entities, a

triggering event may include a “change of control” provision. In this
case, a direct or indirect change of control of the entity-owner would
invoke the buy-sell terms. Without a change of control provision, the
owners of the entity could circumvent the buy-sell agreement by selling
interests in their entity and not in the subject company itself.
A triggering event may also include a dispute between the principal

owners as to the operation of the business or other significant matters
where a resolution cannot be negotiated.
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A triggering event may be the transfer of shares of an S corporation to

an ineligible holder (including the transfer of a membership interest in an
LLC taxed as an S corporation) even where there are no other
restrictions on transfer.
Finally, a triggering event may include an initial public offering or a

merger or acquisition transaction by which the owners have the
opportunity to sell or participate in the continuing business.
80
Ways to Address the Trigger Events. There are many ways to address
the results of a triggering event, and some or all should be considered
for inclusion in the appropriate agreements. These include:
A Right of First Refusal, a Right of Second Refusal, and a Right of First
Offer are usually used in connection with a voluntary transfer. The right
of first refusal generally gives the entity, and the right of second refusal
generally gives the remaining owners, the option to purchase the
voluntary seller’s ownership interests if the owner receives a bona fide
offer and wants to sell.
In a right of first offer, the owner who wants to sell must first obtain a
bona fide offer from a third party and then the remaining owners will
have the option to match the third party offer. If they do not do so, the
owner who wishes to sell may then freely do so for a price at least as
favorable as made in the third-party offer.
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Co-Sale Rights are also known as Tag-Along

Rights. These rights generally are used in connection with the sale to
a third-party of a material ownership interest. Co-sale or tag-along rights
give all or certain owners the right to sell their ownership interest at the
same price and to the same buyer in the event that another owner
receives an offer to purchase its interest. These rights also require the
third-party buyer to purchase the interests of any owner entitled to
participate or to abandon the purchase of the initial ownership interests.
There may be a threshold, providing that the tag-along rights are not
available if the third-party purchaser is not acquiring more than (say) 15
percent in a 12-month period. The tag-along right is generally
negotiated for by the minority owners so they are not excluded or forced
to do business with an unknown third party if a significant or majority
owner receives an offer for its ownership interest.
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Drag-along rights protect the selling owner and the third-party

purchaser who may not want to be in business with the remaining
owners. Drag-along rights require that the remaining owners sell their
ownership interest to the purchaser if a certain percentage of the
owners agree to sell their interest. This obligation prevents a minority of
owners from hindering or preventing a sale of the business that is
desired by a majority of the owners.
Drag-along rights are frequently coupled with the right of first/second

refusal, discussed above. In this context, the rights give the remaining
owners the opportunity to purchase the ownership interest of the owner
who wants to sell to the third party on the terms offered by the third
party or at the agreement price and terms, if more favorable to the
purchaser. Thus, they can join in the sale to the third party (who must be
ready, willing, and able to purchase all ownership interests offered), or
the remaining owners can buy-out the selling owner themselves on
terms negotiated up front or on the third-party contract terms, whichever
is more favorable.
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An agreement can include a “put right,” allowing an owner to “put” his

or her ownership interest back to the company or the other owners for a
defined price (or a price to be determined pursuant to the formula) and
at a defined time or upon the occurrence of a triggering event. A penalty
for the company or the other owners not meeting their repurchase
obligation may include a release of the shareholder offering the put from
some or all of his or her obligations under the buy-sell agreement.
Shotgun rights (also known as “Russian Roulette,” a “Texas Shootout,”

and a “Dutch Auction”) are buy-out mechanisms that are frequently used
to resolve disputes. These approaches are more often used when there
are two 50 percent owners (or perhaps a 60-40 ownership), but can be
used in a larger ownership group.
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A “Shotgun” is included in a buy-sell agreement to avoid a deadlock in

companies owned by two groups of owners. In the event of a deadlock
or if an ownership individual or group decides that he or she does not
want to continue in business with the other owner or group, either owner
may offer to buy the interest of the second owner. The second owner
must either sell at the offered price or buy the first owner’s interest for
the same proportional price. The owners can agree up front to the
purchase terms and payment terms, leaving only the price to be decided
by the shotgun.
A “Texas Shoot-Out” requires each of the parties to send a sealed bid to

an umpire describing the terms of their offer to buy out the interests of
the other party(ies). The umpire opens the sealed bids and decides
which bid is the more favorable. The person who submitted the more
favorable bid (the “winner”) must buy out the other side (the “loser”)
pursuant to the winning bid. Of course, the “more favorable” factors in
the winner’s bid may not be strictly price related, and the agreement
should specify whether cash payment up front is preferable to a higher
purchase price payable over time — and what parameters should be
considered by the umpire in making that decision.
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A “Dutch Auction” is a variation on the Texas shoot-out in that the

bidders submit the minimum price for which they would sell their
ownership interests. The “winner” (the person submitting the higher bid
in the opinion of the umpire) must then purchase the interests of the
“loser” at the price indicated in the loser’s sealed bid.
Mediation, Arbitration, and Litigation may also serve as an acceptable

method for dispute resolution and result in an exit strategy. Especially in
a smaller entity when one person wants to retire, sell property, or move
in a different direction and the other wants to continue in business, the
first person may make allegations of fiduciary duty breaches,
oppression, fraud, and other claims as leverage to force a buy-out.
Given the expense, time delays, aggravation, and emotional impact of
arbitration and litigation, these disputes are frequently settled through
one party buying out the other party.
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Funding a Buy-Out.
Buy-sell provisions involve interesting dynamics when they must be
financed by the individual owners and not by insurance proceeds or the
company. The principal, but contradictory, forces working are:
The owner with money or who has already arranged financing for a
cash purchase may be willing to pay a higher price to buy out the
other(s) from a successful business.
Where one party can run the business and the other party
would have to hire someone else to do so, the person who
can run the business may offer a lower price, knowing that
the other party will have to hire and compensate
management, thus increasing the cost of the business
acquisition.
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If it is known at the outset that one party has and is likely to

continue to have much greater resources than the other
party, shotgun rights often will be unfair because these
procedures would allow the party with greater means to
make an offer known to be less than fair market value but
more than the other party can afford.
Price and Terms Most exit strategies are dependent on the

determination of price and terms for the transaction resulting in the exit.
Perhaps the parties desire to negotiate the price and terms when they
are adverse, with one buying and the other selling. The contractual
shotgun approach works well here, with one person naming the price
and terms, and the other either selling or buying at that price and on
those terms.
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The negotiation of price and terms between an unwilling buyer and a

willing seller may be more difficult and may have to be backed up with
litigation or arbitration threats. In any case, the parties can be helped
when the contract sets forth a mechanism for determining price and
terms. In many cases, however, valuing a privately held business
involves difficulties that may require experts.
Many agreements provide that the parties will

revalue the company on an annual basis. This is
the simplest to draft, but usually the least
successful because the parties seldom actually
make the annual valuation. They frequently do not
revisit the valuation until one person/group is
selling and the other is buying or trying to prevent
the sale.
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Other methods are based on the financial

statements — either a per-share book value or
adjusted book value calculation or a multiple of
revenues, earnings, EBITDA, or some other
measure.
The difficulty with balance sheet calculations is that under generally

accepted accounting principles, balance sheets reflect historical cost of
assets less depreciation and amortization, and (except in limited cases
such as marketable securities) do not reflect fair market value. While the
agreement can be drafted to include certain fair market value or other
adjustments, drafting such provisions can be complex; furthermore, as
the business proceeds in its life, the adjustments considered
appropriate originally may be less appropriate or become inappropriate
as the business matures.
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When they are appropriate measures, multiples of earnings or EBITDA

are generally easy to calculate and may more closely reflect value, but
most small businesses attempt to minimize their tax burden by reducing
or eliminating earnings (which is a factor in EBITDA). This may result in
an unfair valuation. Adjustments can be made such as adding back
owners’ compensation or other factors, but again the drafter is faced
with whether these are appropriate at the present time or will continue to
be appropriate in the future.
Another difficulty with financial statement-based measures is that few

small businesses maintain financial information for purposes other than
preparing tax returns or obtaining loans. These may, or may not, have
been prepared by accountants and therefore may or may not be wholly
accurate and complete, and probably have not been prepared
consistently with generally accepted accounting principles (GAAP) or
other standardized principles. Where the financial information has been
used by business people to manage the business, it should be
acceptable, but in many cases problems are raised in the buy-out
context that were ignored or not material during operations.
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Some other formula may exist that is appropriate

for their business that the parties can agree upon in
the initial agreement. The question will remain
whether the formula remains appropriate as the
business matures.
The parties may agree to hire a business valuation expert at the time of
the purchase or sale. This can be defined closely, including the name of
the appraiser (and method for determining a replacement if the named
appraiser is no longer in business at the future time when needed), or
generally. A business valuation expert can result in significant expense
and should only be employed in a stalemate. As an encouragement to
avoid a stalemate, the costs of the business valuation expert can be
allocated to the party whose final terms were furthest from the price
ultimately determined by the expert.
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Frequently, valuation is based on 100 percent of the entity; in

appropriate cases, the parties should consider the application of a
minority interest discount or a lack of liquidity discount for sales of less
than all of the entity. These discounts, up to 50 to 60 percent, have been
supported by the courts, although the Colorado Supreme Court in
Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353 (Colo. 2003) denied
the availability of discounts in the statutory dissenters’ rights context
where there was no agreement supporting the application of discounts.
Discounts afford the remaining owners a significant advantage when
exercising their rights of first or second refusal because their purchase
price can be substantially less than the third-party offer. Conversely,
discounts disadvantage the selling owner.
The parties should consider payment terms in the initial agreement.

When exercising rights of first or second refusal, the entity and its
remaining owners do not want to encumber the entity’s working capital
or the individual’s financial flexibility. Thus, even when value is left for a
future determination or a contractual formula, agreements may set forth
payment terms. Again, this can benefit the entity and the remaining
owners when exercising their rights of first or second refusal, because
the price and the terms may be more favorable to them than the third
party’s offer. The owners may want to protect the entity by providing that
if the entity is the purchaser, then notwithstanding other payments
terms, the entity will not be required in any year to pay more than a
specified percentage of its net income or cash flow.
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(Of course, where a buy-out in the case of disability or death is financed

by an insurance policy, the insurance policy provides liquidity if sufficient
in amount.) A discussion of the issues raised by the use of insurance to
fund a buy-out is beyond the scope of this presentation. The attorney, if
not knowledgeable himself or herself, should consult with a
knowledgeable professional on such matters as whether the insurance
should be purchased by the entity or by the owners.
Mandatory or Permissive? All or None?
Another consideration for exit strategies is whether the exercise of the

right of first or second refusal is mandatory or permissive. Mandatory
purchases may impact entity working capital or individual financial
flexibility to their detriment unless the terms are quite favorable or the
amount is minimal. On the other hand, if permissive, the entity and the
remaining owners may find themselves in business with the third party
should they choose not to make the purchase or exercise co-sale rights.
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Another consideration for the rights of first and second refusal is

whether they must be exercised on an all-or-none basis, or if the entity
and the remaining owners can exercise them only as to a portion of the
offered ownership interests. Where the agreement provides that the
remaining owners only need to exercise partially, they may have the
ability to terminate the third party’s offer if it is contingent on the entire
interest being obtained. When coupled with the call provisions, however,
it will put the third party in a position of acquiring 100 percent or nothing.
Timing of the Triggering Event.
In some cases, the parties want to delay a triggering event, or the

obligations that flow from a triggering event, for a period of time. This
can be especially important in a start-up company where the owners
want to focus on the business operations for the first few (or many)
years. The disruption of a triggering event and the resultant buy-sell
obligations may be more than they think the business can bear during
that period of time.
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While the law does not like provisions that interfere with the
transferability of personal property (which ownership interests are), the
timing can be affected by various provisions that discourage
transferability. For example, if the parties have agreed to a minority-
interest and lack-of-liquidity discount on the valuation, perhaps the
discount should be 60 percent during the first four years, 50 percent
during the next four years, and 40 percent thereafter. That clearly
encourages people to delay causing a triggering event.
Alternatively or additionally, a premature triggering event may cause the

subject ownership interests to become non-voting. While the transferee
may acquire the economic interests of the voluntary or involuntary
transferor under the terms of the agreement, the transferee would not
have the ability to participate in management or, perhaps, to inspect
records. This may be a devaluing factor in the transferee’s analysis. On
the other hand, this may make a transfer more palatable to the
remaining owners if the transferee becomes a “silent partner” with few
rights beyond his or her economic rights.
Any effort to delay the triggering event or the obligation of the company
to respond to a triggering event should be included in the agreement.
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When is the Effective Date of the Triggering Event’s Impact on Member

Status?
Particularly in the case of triggering events such as one owner having
the right to force a buy-out through a Shotgun procedure, the parties
should consider when a change in owner status will result. Will it be at
closing of the redemption or buy-out of an owner, or will it be when the
buy-out offer is accepted? Failure to address this question clearly in the
LLC agreement can lead to expensive litigation, as evidenced in Waters
v. Bowen Banbury, Denver District Court, Case No. 07 CV 73745, The
Denver Business Journal reported on August 30, 2009, that the jury
awarded plaintiffs $9,000,000 in this case.
Although the damages award was substantially reduced on appeal, the

jury award had serious consequences, including a bankruptcy filing by
the individual defendant. Waters v. DocuVault Group, LLLP, 2012 Colo.
App. LEXIS 365 (Colo. App. March 15, 2012).
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Other Considerations. Where the entity involved is a

partnership or limited liability company, the applicable statutes provide
buy-sell protections. In each case, the ownership interests are divided
into economic interests and management interests. Under the statutes,
unless the operating agreement or partnership agreement provides
otherwise, a partner or LLC member can convey the economic interest,
but the transferee will not become a member of the LLC or a partner of
the partnership without a unanimous vote of the other
members/partners. Unless admitted as a member/partner, the
transferee does not have any voting rights, rights to inspect records, or
other management rights.
Marital issues must be considered. Where one spouse owns a business

with other owners, and the other spouse has no direct interest in the
ownership, he or she still may have rights as a result of the marriage.
Issues may include whether the ownership interest was purchased with
marital assets, or whether there has been appreciation in the value of
the business during the marriage. While these rights can be dealt with in
a pre-nuptial agreement, most marriages are not commenced with a
pre-nuptial agreement. In some cases, it will be appropriate to have
spouses be parties to the buy-sell agreement.
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One important consideration when any third-party purchaser is involved

is whether the third party will be able to accomplish any due diligence
investigation. Many agreements among owners have confidentiality
provisions that by their terms may prevent the owner desiring to sell
from providing any non-public due diligence to a third party interested in
acquiring the ownership interest. The buy-sell agreement can provide
that the company will cooperate with any due diligence by a bona fide
third-party purchaser (subject to appropriate confidentiality agreements),
or the agreement can impose other terms on cooperation, such as
upfront reimbursement of expenses, including officer and employee
time.
Fairness. Underlying much of this discussion is a perception of fairness

and the courts’ general reluctance to approve absolute restraints
against alienation of property.
• Where the requirements are reasonable and reasonably related to the
protection of the business and the interests of the other owners, the
restraints and requirements are more likely to be upheld.
• Where the restraints and requirements treat different persons in the
same situation similarly, they are more likely to be upheld.
• Where the restraints and requirements, even though otherwise
reasonable, are applied in a discriminatory or unfair manner, they are
more likely to be challenged and stricken.
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It is likely that fairness, and the judicial perception of fairness, will be a

significant factor in any case challenging the terms of any buy-sell
agreement or the application of those terms in any specific transaction.
Termination. The parties usually do not intend their buy-sell

arrangements to continue indefinitely. They are frequently structured to
terminate upon the completion by the company of a public offering of its
securities, acquisition of equity interests by persons who are not subject
to the agreement and who hold more than a defined percentage (say,
25 percent), death of parents and a repurchase of the parent’s shares
under the agreement, or other terms. Whatever the goals are for the
parties to the buy-sell arrangement, the drafting attorney should
consider termination of the arrangement in a manner that fits the goals
of the parties at the commencement of the arrangement.
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Amendment. As with the operating agreement itself, amendment

provisions should be considered. Especially in the case of buy-sell
agreements (and whether or not included in the LLC agreement), as the
business matures, triggering events and buy-sell provisions that were
originally appropriate may no longer be appropriate. An agreement
among younger people who plan to work together for a long period of
time may no longer be appropriate as they age. An agreement among
parents and children may no longer be appropriate after the parents’
death or retirement.
While amendment is always possible, the difficulty is that it seldom

occurs. The buy-sell agreement is frequently put out of sight on the
business’s shelf until a triggering event occurs years later. The owners
are focused on the success of their business and have little time or
incentive to revise (or even review) their plans for separation when
things are going well. And the owner who raises the issue is
immediately suspected of being the person getting ready to cause a
triggering event. Finally, the owners or the entity likely paid significant
fees to draft the original agreement and are not interested in spending
additional fees that do not add to the profits of the business.
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This hesitation frequently changes after the buy-

sell agreement has been tested following a
triggering event. Perhaps the agreement worked
well; perhaps it was a disaster. In either case, the
remaining owners can likely identify places where
improvements could be made. That is when buy-
sell agreements are usually considered for
amendment, or it may be terminated as no longer
being necessary.
Because of the unlikelihood of a future amendment

until after the buy-sell agreement has been tested
in the crucible of a dispute, foresight and flexibility
are key concepts for the initial agreement.
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My paper for this presentation includes a chart that

attempts to show how possible buy-sell provisions
advantage the buyer or seller.
Shareholder Agreements
Exit strategies discussed in III.

Shareholder agreement for S corporation should
prohibit transfers to persons who do not qualify as
S corporation shareholders.
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Sales Contracts
Employment Agreements
Should address what happens if there is a change

in control of employer.
Termination for “good reason” provisions should
include one allowing employee to terminate if there
is a material change in the employee’s duties,
compensation, or place of employment.
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Master Agreements and Secondary Agreements
Insurance and indemnification provisions should be

parallel.
Ownership of intellectual property.
Nondisclosure Agreements
Should include requirement to return or provide

certificate of destruction with respect to confidential
information disclosed to a party once the
agreement terminates.
Consider including something like the following:
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The requirements of this Section 4.1 that require

Employee to return Confidential Information shall
not apply to any copy of the Confidential
Information maintained electronically in the
regularly maintained electronic data backup system
of Employee; provided, that any such copy shall
remain subject to the terms of this Section 4.1
whether or not this Agreement has otherwise
terminated.
Non-disclosure agreements now must take into

account the Defend Trade Secrets Act of 2016 (the
“DTSA”). The DTSA became effective May 11,
2016 with the President’s signature. Section
7(a)(3) of the DTSA amended 18 U.S.C. § 1833 to
provide:
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(b)(1) An individual shall not be held criminally or civilly

liable under any Federal or State trade secret law for the
disclosure of a trade secret that—
(A) is made—
(i) in confidence to a Federal, State, or local government
official, either directly or indirectly, or to an attorney; and
(ii) solely for the purpose of reporting or investigating a
suspected violation of law; or
(B) is made in a complaint or other document filed

in a lawsuit or other proceeding, if such filing is
made under seal.
(2) An individual who files a lawsuit for retaliation
by an employer for reporting a suspected violation
of law may disclose the trade secret to the attorney
of the individual and use the trade secret
information in the court proceeding, if the
individual—
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(A) files any document containing the trade secret

under seal; and
(B) does not disclose the trade secret, except
pursuant to a court order.
Non-Compete Agreements
Requirements for validity vary from state to state.

Do not overreach. The more limited in duration and
geographic scope the non-compete is, the more
likely it will be upheld.
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Joint Development Agreements
Joint development agreements may be state law

general partnerships even where parties state in
their agreement that they do not intend to be
subject to partnership tax treatment but rather
desire treatment as co-owners (co-tenants) of the
joint venture property.
Joint development agreements may be state law

general partnerships even where parties state in
their agreement that they do not intend to be
subject to partnership tax treatment but rather
desire treatment as co-owners (co-tenants) of the
joint venture property.
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Joint ventures can be formed as an LLC or LLP

and the operating agreement or partnership
agreement can be the joint venture agreement. If
an LLC is used, as with any LLC, a joint venture
formed as an LLC will be taxed as a partnership
unless it elects to be classified as an association
taxable as a corporation.
Although I.R.C. § 761 permits certain

unincorporated entities to elect not to be subject to
the partnership tax provisions in subchapter K of
the I.R.C., one of the requirements of a valid § 761
election is that the owners of the entity are treated
as co-owners of the entity’s assets. Neither an
LLC nor a RUPA partnership would satisfy this
requirement.
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requirement.

requirement.
111

requirement.

requirement.
112
Where the joint venture is treated as a partnership

for tax purposes, income and losses can be
allocated in accordance with the partnership (joint
venture) agreement. The particular advantage of an
LLC or LLP serving as the vehicle for the joint
venture is a decrease in the participants’ exposure
to the liabilities of the entity while still being able to
treat the LLC or LLP as a partnership for tax
purposes.
So long as the allocations of income, loss, and

other tax benefits have “substantial economic
effect,” they will be recognized for tax purposes. As
a co-tenancy, as contrasted with a tax partnership,
the venturers would not be able to take advantage
of all tax benefits where contributions of cash and
property are disproportionate among the venturers.
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As a co-tenancy, as contrasted with a tax

partnership, the venturers would not be able to take
advantage of all tax benefits where contributions of
cash and property are disproportionate among the
venturers.
In the oil and gas industry, the standard AAPL form of Operating
Agreement (the “AAPL Operating Agreement”) expressly provides that
the co-owners may take the production in kind, and this is the key
provision that causes the form of the AAPL Operating Agreement to be
a co-ownership of property for tax purposes. This authorization to take
production in kind is what allows a partnership (if one is considered to
be created under the AAPL Operating Agreement) to elect under §
761(a) notwithstanding the provisions of RUPA. Moreover, RUPA
provides:
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(a) Joint tenancy, tenancy in common, tenancy by the

entireties, joint property, common property, or part
ownership does not by itself establish a partnership, even if
the co-owners share profits made by the use of the
property.
(b) The sharing of gross returns does not by itself establish
a partnership, even if the persons sharing them have a joint
or common right or interest in property from which the
returns are derived.
Accordingly, the relationship created among the parties to an AAPL

Operating Agreement likely does not create a partnership under CUPA.
The text refers to the Form 610 Model Operating Agreement
promulgated by the American Association of Professional Landmen.
This form bears no relation to an operating agreement for an LLC. In the
oil and gas industry, an operating agreement sets out procedures for the
operation of a group of oil or gas wells. This is the reason that the Texas
LLC Act refers to the governing agreement of a Texas LLC as a
“company agreement.” TEX. BUS. ORG. CODE § 101.001(1).
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Licensing Agreements
The following is a discussion of points that

should be addressed in most licensing
agreements.
What is the property that is being licensed?

Software.
Patent.
Copyright.
Know-how.
Brand name.
Other.
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What rights are being granted?

If a patent, are patent rights only being granted or
also know-how?
Exclusive, coexclusive with licensor, or
nonexclusive?
Term?
Revocable or irrevocable?
Right to grant sublicenses?
Market?
License restrictions.
Field, territory.
Prior licensee’s rights.
Commercial rights retained by licensor.
Reservation of rights.
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Right to grant sublicense.

To any other party.
To a limited number of parties.
To affiliates of licensee.
To third parties preapproved by licensor.
To nominees of licensor.
At specified consideration.
Consideration to be shared with licensor.
Copies of sublicense to be furnished to licensor.
Other conditions.
Territory.
Term of the Agreement.
Improvements. What obligations are there to include future
technology or to have future technology fall under the
reservation of rights to the licensor?
Consideration for the license.
Reports and auditing of accounts.
Reps and warranties.
Infringement.
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Diligence by licensee.
Right of inspection; technical personnel.
Confidentiality.
Export Regulation.
Dispute Resolution.
Termination.
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Contract Ethics
Rules of Professional Conduct.

The American Bar Association has promulgated the Model
Rules of Professional Conduct (the “Model Rules”). Each
state has its own rules which, generally speaking, follow
the Model Rules. Some states, however, have not adopted
all of the Model Rules or may have adopted one or more
rules with variations. This paper will discuss the Model
Rules, but each attorney must remember to check his or
her own state’s version of the rules if a question arises.
Contract Ethics
Attorneys should also be aware that various

governmental agencies have adopted rules of
professional conduct that apply to attorneys
practicing before the agency.
The Model Rules that will most often impact the
practice of an attorney in a transactional practice
are Rule 1.6, Confidentiality of Information, Rule
1.7, Conflict of Interest: Current Clients, and Rule
1.13, Organization as Client.
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Confidential Information of a Client
Clients expect that their lawyer will maintain

their confidences, and Model Rule 1.6
provides the scope of and limitations on this
expectation:
(a) A lawyer shall not reveal information relating to the

representation of a client unless the client gives informed
consent, the disclosure is impliedly authorized in order to
carry out the representation or the disclosure is permitted
by paragraph (b).
(b) A lawyer may reveal information relating to the

representation of a client to the extent the lawyer
reasonably believes necessary:
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(1) to prevent reasonably certain death or substantial bodily harm;

(2) to reveal the client’s intention to commit a crime and the information
necessary to prevent the crime;
(3) to prevent the client from committing a crime or fraud that is
reasonably certain to result in substantial injury to the financial interests
or property of another and in furtherance of which the client has used or
is using the lawyer’s services;
(4) to prevent, mitigate or rectify substantial injury to the financial
interests or property of another that is reasonably certain to result or
has resulted from the client’s commission of a crime or fraud in
furtherance of which the client has used the lawyer’s services;
(5) to secure legal advice about the lawyer’s compliance

with these Rules, other law or a court order;
(6) to establish a claim or defense on behalf of the lawyer
in a controversy between the lawyer and the client, to
establish a defense to a criminal charge or civil claim
against the lawyer based upon conduct in which the client
was involved, or to respond to allegations in any
proceeding concerning the lawyer’s representation of the
client; or
(7) to comply with other law or a court order.
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(c) A lawyer shall make reasonable efforts to prevent the inadvertent or

unauthorized disclosure of, or unauthorized access to, information
relating to the representation of a client.
Comments [18] and [19] specifically address the issues of

confidentiality with respect to electronic communications. First,
Comment [18] repeats the obligation in Rule 1.6(c) requiring that a
lawyer take “reasonable efforts to safeguard information relating to the
representation of a client against unauthorized access by third parties
and inadvertent or unauthorized disclosure.”
The Comment then states that unauthorized access or

inadvertent or unauthorized disclosure “does not
constitute a violation of paragraph (c) if the lawyer has
made reasonable efforts to prevent the access or
disclosure.” Thus any unauthorized access or disclosure
will be judged based on “reasonableness.” According to
the Comment, factors to be considered in determining
reasonableness are considered on a cost-benefit basis,
and include, but are not limited to:
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The sensitivity of the information (with the presumption that the

more sensitive the information, the more protections should be
installed);
The likelihood of disclosure if additional safeguards are not
employed;
The cost of employing additional safeguards;
The difficulty of implementing the safeguards; and
The extent to which the safeguards adversely affect the lawyer’s
ability to represent clients (e.g., by making a device or important
piece of software exceptionally difficult to use).
Comment [19] suggests that a client may

require the lawyer to implement special
security measures or may “give informed
consent to for[e]go security measures that
would otherwise be required by this Rule.”
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A lawyer should also note that Rule 1.6 is not limited to information
obtained from the client or to information that is not already public. Rule
1.6 applies much more broadly to any and all information “relating to
the representation of a client,” regardless of the source of the
information.
The client’s expectations may conflict with the ability of a lawyer to
reveal information without the client’s consent under Rule 1.6.
In many cases, clients have very clear (if erroneous) expectations

about the broad confidentiality of attorney-client communications.
Before the current Model Rules (which derived from the American Bar
Association’s Ethics 2000 work), a lawyer could only reveal information
necessary to prevent the client from committing a crime; once the crime
had been committed, the lawyer’s right to reveal information under
former Model Rule 1.6 disappeared. Clearly the rules as they currently
exist empower the lawyer far beyond the old rules. Notably the rules do
not require attorney disclosure in the circumstances outlined in the rule;
disclosure is instead permissible.
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Model Rule 1.6 applies only to “information relating to the

representation of a client.” If a client for whom the lawyer
has formed many LLCs and drafted many contracts tells
the lawyer that the client is having an affair, arguably, that
is not information related to the lawyer’s representation of
the client. However, the author would wager a large sum
that almost every client will expect the lawyer to maintain
confidence about this information or any other revelation
the client makes to the lawyer.
It is important to note that the focus of Model Rule 1.6(b) as it currently

exists is not the attorney’s client. The focus of Model Rule 1.6(b) is to
protect third parties, and this focus is contrary to the traditional
attorney-client relationship that is still expected by most clients. Good
client relations would suggest that if, for example, a lawyer proposes to
rely on Model Rule 1.6(b)(2) or (3) to disclose a mistake in the draft of
an operating agreement that all parties have approved, which mistake
materially favors the lawyer’s client, the lawyer should first discuss the
mistake with the client and counsel the client on the possible
consequences of failing to correct the mistake. Where the affair that the
client reveals to the lawyer (discussed in the previous paragraph)
results in a crime or a fraud upon other parties, the lawyer may have
certain difficult choices to make.
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Where the attorney becomes aware of one of the matters

that may be subject to permissible disclosure under Rule
1.6(b), the attorney’s interests may diverge from the client
as the attorney considers how to address the issues to his
or her client and whether to make disclosure under Rule
1.6. One of the concerns an attorney in such a position
may have is potential aiding and abetting liability if the
attorney is publicly silent in the face of such knowledge.
Even though the Model Rules state that violation “should not itself give
rise to a cause of action against a lawyer nor should it create any
presumption in such a case that a legal duty has been breached,” it is
likely that plaintiffs will argue that the rules reflect the standard of care
in the community. In 2007, the Colorado Court of Appeals determined
that attorneys could be held liable for aiding and abetting the breach of
fiduciary duties. The Colorado Supreme Court overturned the appellate
court’s decision on other grounds, but specifically left open the issue of
whether an attorney can be held liable for an aiding and abetting the
breach of fiduciary duties. Regardless of civil liability, however, there is
clear precedent that a lawyer may be disciplined for aiding and abetting
a client’s financial crimes.
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Under former Model Rule 1.6, as under the current Rule, a lawyer could
also reveal information to establish a claim or defense on behalf of the
lawyer in a controversy with a client or as required by court order.
Consider the case where an attorney finds out about events in which a
client participated that ultimately prove to have been fraudulent
(although the attorney and the client may disagree with that
characterization at the time). The attorney considers his or her Rule 1.6
obligations and determines not to make the permissive disclosure but
simply resigns. Even though that failure to make permissive disclosure
cannot be subject to a disciplinary proceeding, might it be sufficient for
the attorney to be held responsible for aiding and abetting the client’s
fraud?
In re DeRose, 55 P.3d 126 (Colo. 2002) (Attorney

was convicted of a felony charge of aiding and
abetting when, on behalf of his clients, he engaged
in 11 separate financial transactions structured to
avoid federal financial reporting requirements.
Through his criminal conduct, the attorney violated
C.R.C.P. 251.1(b) and Colo. RPC 8.4(b), and was
therefore disbarred).

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Conflicts of Interest
Model Rule 1.7 addresses conflicts of interest for

current clients. It provides:
(a) Except as provided in paragraph (b), a lawyer shall not represent a
client if the representation involves a concurrent conflict of interest. A
concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another
client; or
(2) there is a significant risk that the representation of one or more
clients will be materially limited by the lawyer’s responsibilities to
another client, a former client or a third person or by a personal interest
of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest

under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to
provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one
client against another client represented by the lawyer in the same
litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing
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The comments to Model Rule 1.7 specifically

contemplate a lawyer acting on behalf of multiple
clients when their interests are generally aligned,
such as helping entrepreneurs to organize and
establish a business entity. In such circumstances,
“[t]he lawyer seeks to resolve potentially adverse
interests by developing the parties’ mutual
interests.”
This situation is further discussed in the Colorado Bar Association
Ethics Committee’s Formal Opinion 68, “Conflicts of Interest; Propriety
of Multiple Representation.” The syllabus to Formal Opinion 68 is quite
clear:
The Committee does not adopt a per se rule prohibiting a lawyer from
representing opposing parties in a transactional matter; however, a
lawyer should proceed very cautiously. Before accepting employment,
the lawyer must determine whether the lawyer can adequately
represent the interests of each party to the transaction. In those
situations in which a lawyer ethically may accept such a role and
agrees to do so, the lawyer must obtain the informed consent of each
client, confirmed in writing. The nature of the disclosures required and
the ability to represent each party adequately will depend on the
situation in question. Under no circumstances should a lawyer
representing multiple parties be considered a mere “scrivener” in a
transaction.
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In many cases, it is preferable for the lawyer to represent one party to
the business transaction or settlement, leaving the other persons
involved, including perhaps the entity-to-be-formed, to retain their own
counsel if they want to do so. Following the formation of the entity and
with the informed consent of the client and others involved, it may be
appropriate for the lawyer to migrate his or her representation to and
enter into a new fee agreement with the entity.
Informed Consent
If the lawyer reasonably believes that other interests will not affect the
representation, and the conflict is consentable, the lawyer may
represent multiple clients if each client gives informed consent
confirmed in writing.
“Informed consent” denotes the agreement by a person to a proposed
course of conduct after the lawyer has communicated adequate
information and explanation about the material risks of and reasonably
available alternatives to the proposed course of conduct.
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Informed Consent
The communication necessary will vary according to the
circumstances. The lawyer ordinarily must
1) Disclose the facts and circumstances giving rise to the conflict;
2) Explain the advantages and disadvantages of the proposed course
of conduct;
3) Discuss other options or alternatives; and
4) In some circumstances, advise the client to seek advice from
independent counsel before commencing the multiple-party
representation.
Informed Consent
The lawyer should disclose that as between commonly represented
clients, the attorney-client privilege does not attach, and if subsequent
litigation develops, the privilege will not protect any communications
between the lawyer and each party. In a joint representation, the lawyer
also should disclose that information obtained from each client will be
shared and that if one client decides that a material matter should not
be shared with the other, or if a dispute otherwise develops, the lawyer
probably will have to withdraw from representing both parties. The likely
effect of such a withdrawal is that each party will incur higher legal
costs than if separate counsel had been secured at the outset of the
transaction. Model Rule 1.7 and cmt. [30].
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Informed Consent
There is a limited potential exception to the general rule that
confidentiality does not apply among commonly represented clients.
Comment [31] to Model Rule 1.7 states, in pertinent part:
In limited circumstances, it may be appropriate for the lawyer to

proceed with the representation when the clients have agreed, after
being properly informed, that the lawyer will keep certain information
confidential. For example, the lawyer may reasonably conclude that
failure to disclose one client’s trade secrets to another client will not
adversely affect representation involving a joint venture between the
clients and agree to keep that information confidential with the informed
consent of both clients.
Informed Consent
For informed consent to be valid, the lawyer must explain the risks and
benefits in sufficient detail. The analysis of the Wisconsin Supreme
Court, although made under a prior version of the Rules of Professional
Conduct, is instructive:
An effective waiver of a conflict or potential conflict of interest which is knowing
and voluntary requires the lawyer to disclose the following: (1) the existence of
all conflicts or potential conflicts in the representation; (2) the nature of the
conflicts or potential conflicts, in relationship to the lawyer’s representation of
the client’s interests; and (3) that the exercise of the lawyer’s independent
professional judgment could be affected by the lawyer’s own interests or those
of another client. On the part of the client, it also requires: (1) an understanding
of the conflicts or potential conflicts and how they could affect the lawyer’s
representation of the client; (2) an understanding of the risks inherent in the
dual representation then under consideration; and (3) the ability to choose
other representation.
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Informed Consent
Valid informed consent to a conflict of interest involves more than just a
statement from the lawyer; it also requires the lawyer to ensure the client
understands the ramifications of the representation. Each client must be aware
of his or her ability to reject the proposed conflicted representation.
Even when the lawyer provides an extensive conflicts of interest disclosure, the
lawyer may be at risk of violating Model Rule 1.7. For example, in People v.
Quiat, the lawyer was suspended for 90 days for representation despite
impermissible conflicts of interest. He had provided a disclosure of the conflicts
in writing, even though under the former version of Rule 1.7 he was not
required to do so. The Colorado Supreme Court upheld the finding that “Quiat’s
conflicts disclosures were ‘totally insufficient,’ in that they did not detail the
potential for conflicts, nor disclose the waiver of attorney-client privilege.”
People v. Quiat, 979 P.2d 1029 (Colo. 1999).
Confirmed in Writing
“Confirmed in writing” denotes either informed consent that is given in writing
by the client or a writing that the lawyer promptly transmits to the client and that
confirms an oral informed consent. If it is not feasible to obtain a
contemporaneous written confirmation at the time the client gives informed
consent, then the lawyer must obtain or transmit it within a reasonable time
thereafter. “Writing” and “written” are defined broadly as “a tangible or
electronic record of a communication or representation, including handwriting,
typewriting, printing, photostating, photography, audio or videorecording and e-
mail. A ‘signed’ writing includes an electronic sound, symbol or process
attached to or logically associated with a writing and executed or adopted by a
person with the intent to sign the writing.”
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Organization as Client
When representing an organization, Model Rule 1.7 recognizes that no LLC,
partnership, corporation, or other business entity has its own voice. The
business entity relies on its constituents for speech and actions. These
constituents may be the board of directors, president, or a junior officer of a
corporation; the manager or agents of the manager of an LLC; or the general
partner (or a general partner) of a partnership. A common theme is that the
persons speaking to the lawyer and acting on behalf of the entity are natural
persons — flesh and blood human beings. In such a case, who does the lawyer
really represent?
In reaching that conclusion, the lawyer must consider Model Rule 1.13, which
provides in pertinent part:
(a) A lawyer employed or retained by an organization represents the
organization acting through its duly authorized constituents.
***
(f) In dealing with an organization’s directors, officers, employees, members,
shareholders or other constituents, a lawyer shall explain the identity of the
client when the lawyer knows or reasonably should know that the organization’s
interests are adverse to those of the constituents with whom the lawyer is
dealing.
(g) A lawyer representing an organization may also represent any of its
directors, officers, employees, members, shareholders or other constituents,
subject to the provisions of Rule 1.7. If the organization’s consent to the dual
representation is required by Rule 1.7, the consent shall be given by an
appropriate official of the organization other than the individual who is to be
represented, or by the shareholders.
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The author knows that a surprising number of lawyers think that Model Rule
1.13 protects them from forming an attorney-client relationship with a
constituent of an entity that the lawyer represents. As Rule 1.13(g) clearly
states, this could not be more incorrect.
There is no question that a lawyer who is representing an entity must receive

direction from one or more humans who are authorized to act on behalf of the
entity. It is also likely that the lawyer will form friendships with some of the
constituents with whom the lawyer is working on behalf of the entity. The
attorney must exercise caution to avoid a situation in which one or more of the
entity’s constituents has reason to believe that the attorney is providing legal
advice to the constituent in the constituent’s personal capacity.
There may be situations where the lawyer is willing to represent the business
organization and one or more constituents. Derivative litigation or class action
litigation is one such area. Another may be where the entity is the target of a
merger or acquisition and the constituents are negotiating employment
agreements, non-competition agreements, or other personal obligations. There
is no per se rule that there can never be joint representation by the same
lawyer, but there are issues that must be addressed and Rule 1.7 to be
considered before the lawyer may do so.
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Potential Issues in Multiple Representation
If the lawyer intends to represent only the new LLC or partnership or some but
not all of the members or partners, and if the lawyer knows or reasonably
should know that an unrepresented member or partner misunderstands the
lawyer’s role, the lawyer should inform that person that the lawyer does not
represent such member or partner. Model Rule 4.3 states:
In dealing on behalf of a client with a person who is not represented by
counsel, a lawyer shall not state or imply that the lawyer is disinterested. When
the lawyer knows or reasonably should know that the unrepresented person
misunderstands the lawyer’s role in the matter, the lawyer shall make
reasonable efforts to correct the misunderstanding. The lawyer shall not give
legal advice to an unrepresented person, other than the advice to secure
counsel, if the lawyer knows or reasonably should know that the interests of
such a person are or have a reasonable possibility of being in conflict with the
interests of the client.

A common scenario leading to conflict is when some
members or partners contribute capital and others
contribute ideas, services, or management expertise to a
new venture. The parties must agree on the relative value
of each member’s or partner’s contribution to the
enterprise; the lawyer may identify the issues but may not
negotiate for the parties. If the lawyer has relevant
knowledge from experience, the lawyer could appropriately
offer examples of how others have resolved similar
situations.
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In this scenario, Rule 1.1 (Competence) is also implicated.
A lawyer advising the prospective owners and business
partners in this situation must understand and be able to
apply the federal tax rules applicable to partnerships. If the
lawyer does not have this expertise, the lawyer should
associate a competent tax practitioner if the lawyer does
not think he or she can gain the necessary knowledge
through study.
May the Lawyer Represent Only the Entity to be

Formed?
Another issue arises if the lawyer wishes to represent only the new LLC or
partnership. A potential conflict exists since the entity does not exist at the
outset of the representation. As would be true even if the entity already existed,
the lawyer must communicate with some or all of the members or partners, but,
because the entity does not yet exist, the entity itself cannot consent to the
conflict. Some states overcome this problem through the following analysis set
forth in the Wisconsin Supreme Court case of Jesse v. Danforth 485 N.W.2d
63, 67 (Wis. 1992):
[W]here (1) a person retains a lawyer for the purpose of organizing the entity
and (2) the lawyer’s involvement with that person is directly related to that
incorporation and (3) such entity is eventually incorporated, the entity rule
applies retroactively such that the lawyer’s pre-incorporation involvement with
the person is deemed to be representation of the entity, not the person.
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Formed?
Other courts have concluded that a lawyer does maintain an attorney-client
relationship with individual entity members post-formation, contrary to the
principle stated in Jesse.
See, e.g., Franklin v. Callum, 804 A.2d 444, 448 (N.H. 2002) (attorney for
unincorporated solid waste management district represented each member
thereof).

Formed?
A lawyer who wants to represent an entity to be formed should also be mindful
that, since the lawyer is an agent of his or her clients, the lawyer for a non-
existent entity has a non-existent principal. Under agency law, once formed, the
entity will not be able to ratify the lawyer’s prior actions and representation, but
may adopt them. Adoption is similar to ratification but has no relation-back
effect. As a result, the lawyer who acted on behalf of the non-existent (pre-
formation) entity may have continuing liability to third parties who dealt with the
lawyer as the lawyer for the pre-formation entity. Under agency law, this would
be the case even where the lawyer made it clear to the third party that the
entity (the lawyer’s principal) had not yet been formed unless the lawyer
obtained the third party’s agreement to release the lawyer from liability once the
entity is formed and adopts the lawyer’s agreement with the third party.
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Formed?
This rule of agency law further emphasizes the need for the lawyer to be sure
that the principals of the entity to be formed are clear as to whom the lawyer
represents. It also suggests that the lawyer should not be acting on behalf of a
non-existent entity but rather on behalf of at least one principal, with the
possibility of migrating the representation in the future.
For informed consent to be valid, the lawyer must explain the risks and benefits
in sufficient detail. The lawyer must identify current and potential areas of
conflict, adequately determine in the lawyer’s own mind whether those conflicts
are consentable, and then, if they are consentable, obtain informed consent
from each affected client.
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What Makes a Business Contract?
Navigating the Fundementals
Submitted by Pankaj S. Raval
141
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WHAT MAKES A BUSINESS CONTRACT?
NAVIGATING THE FUNDAMENTALS
Lecturer: Pankaj S. Raval, Esq.
What makes a business contract?
Six “elements”
1. Offer – statement creating the power of acceptance in the offeree.

a. Does not have to be in a specific form.
b. To be valid:
i. Must be communicated to offeree.
ii. Must express intent of willingness to enter into contract.
iii. Must be sufficiently definite and certain with regard to
identity of parties, subject matter, price and time and place
of performance.
c. Offer is effective when communication is received by the offeree.
2. Acceptance of the offer.

a. Acceptance must relate to terms of offer (no changes to terms of offer or
counteroffer).
b. Note: Counter-offerors are treated as if it was a new offer.
3. Consideration.
a. To be enforceable, a contract must have sufficient “consideration”, or
something of value given in exchange for a return promise or a
performance; and
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b. The parties must intend to make such an exchange – something that is
bargained for and provided in exchange for a promise or performance.
4. Mutual assent.
5. Capacity.
a. Requirements:
i. Parties must be over the age of majority (18 under most
state laws); and
ii. Have sufficient mental capacity to understand significance
of a contract.
b. Consequence of failure to meet requirements: voidable contract – meaning
that it will be valid (if all other elements are present) unless the
minor/incapacitated person wants to terminate it.
c. Minors Only Exception to requirements: for food, clothing, shelter and
transportation contracts.
6. Legally accepted terms – subject matter is not legally acceptable if it is contrary

to public policy (agreements to commit a crime), immoral (only use of the subject
matter is to violate the law), or if it violates a statute (i.e. gambling contracts).
Statute of Frauds (SOF)
1. Rule: Certain contracts must be (i) memorialized in writing, (ii) signed by the
party to be charged with performance, and (iii) containing sufficient content to
evidence the contract.
2. “MY LEGS” mnemonic for the types of contracts that must comply with SOF.
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a. Marriage contracts (i.e. pre-nuptial contracts).
b. Contracts for more than one year.
c. Contracts for Land.
d. Contracts for an executor (or estate).
e. Contracts for goods worth $500 or more.
f. Contracts for surety.
3. Note: Uniform Commercial Code (applies to goods) vs. common law (applies to
services).
Types of Contracts (Non-exclusive of one another in some cases)
1. Implied contracts exist when no written contract is present, but circumstances

(including conduct) may cause one person to become unjustly enriched as a result
of their actions or an understanding exists.
2. Implied in fact – the common understanding based on the conduct of the parties
serves as a contract.
3. Implied in law (Quasi-contracts) – Court determines whether this type of contract

existed after performance or non-performance as a means to determine whether
one party can collect restitution for a service they performed. Please note that the
circumstances must be such that one person should have a right to do something –
and the other person a responsibility – in spite of a lack of an intention or
agreement for such.
4. Express contracts – one whose terms are specifically stated, either orally or in
writing.
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5. Bilateral contracts – both the offeror and offeree make promises.
6. Unilateral contracts – only one party makes a promise; offeror (one who makes
the promise) expects the offeree to accept the offer by actually performing an act,
not by making a promise to perform the act.
Express vs. Implied Terms
Express Terms – those clearly stated in contract, assuming legality.
Implied Terms.
1. Definition: words or provisions a court assumes were intended to be included in a
contract (terms are not expressly stated).
2. Note: Drafters usually don’t want to rely on a court’s interpretation of a contract
term, but the reality is that you can’t cover for everything.
3. Protects parties from fraud by omission.
4. Each of the potential uses – concluded by court - is based on public policy (to
enable the intention of the contracting parties).
5. Implied by law: statute that directly addresses the issue (commercial transactions
law). Note that the practice of using implied terms is based on court’s ability to
give the right interpretation of certain terms. Some examples:
a. Implied warranty of merchantability (usability) – implied guarantee that
goods or services will serve a reasonable or expected purpose, even if
there isn’t a written or oral contract.
b. Method of acceptance of an offer – where the offer is silent as to the
method of acceptance, the time of acceptance, or the notice of acceptance:
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i. General rule: Start of performance is acceptance.
Starting to perform is treated as an implied promise
to performance.
ii. Exception: Start of performance is not acceptance
of unilateral contract offers (only completed
performance is), even though the start of
performance is an implied promise to perform.
c. Four rules related to delays in the receipt of communications when parties
are at different places.
i. All communications other than acceptance are
effective only when received.
ii. Acceptance is effective when mailed (“mailbox
rule”).
iii. If rejection is mailed before acceptance is mailed,
then neither is effective until received.
iv. Cannot use mailbox rule to meet an option deadline.
d. If seller of goods sends the wrong goods.
i. General rule: acceptance and breach.
ii. Exception for accommodation (i.e. explanation) –
counter offer and no breach.
e. Implied duty of good faith.
Statutes of Limitations
Definition: Most state have adopted statutes (laws) insuring that an injured party files a
cause of action within a reasonable time after the conduct in question; generally, they
specify various time limits within which to file an action.
a. For debts (oral & written).
b. For torts.
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c. For breaches of contract (oral & written).
UCC vs. Common law – the two bodies of general law governing contracts
1. UCC – applies to the sale of goods and securities.
2. Common law – applies to contracts for services, real estate, insurance, intangible
assets, and employment.
3. Note: If a contract is for both sale of goods and for services, the dominant element
in the contract shall control.
4. Biggest difference – acceptance.

a. Common law – mirror image rule, requires acceptance to be an exact
mirror image of the terms of the offer.
b. If there are any changes to terms of offer, no acceptance because offer has
been changed – rejection and counteroffer.
c. UCC – only changes that affect the contract “materially” have an impact.
d. If no conflict in terms and changes only minor, offer is not voided,
focusing primarily on quantity.
5. Another difference – related to modifications of contracts.

a. UCC – contract can be modified without additional consideration.
b. Common law – contract can be modified only with additional
consideration.
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Services vs. Goods
1. Goods.
a. Tangible.
b. Homogeneous.
c. Produced in a factory (without consumer participation, generally).
d. Can be stored.
e. Sales of goods involve some transfer of ownership taking place.
2. Services.
a. Intangible.
b. Heterogeneous.
c. Consumers are co-producers with the services.
d. Sales of services involve no transfer of ownership.
Ambiguous Language
A contract or term is considered to be ambiguous if it is reasonably subject to more than

one interpretation; sometimes, this may mean that it’s unclear as to what the parties
intended.
a. If the parties can’t reasonably discuss what the specifics were, then courts
are imputed to make an interpretation.
b. Typical factors courts use to consider the interpretation:
i. Common usage – common usage of terms or
dictionary meaning.
ii. Parol evidence – oral agreements reached prior to
formal signing of the contract; depending on court,
subject matter, may be introduced at court. The
Parol Evidence Rule states that once parties have
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entered into a contract, and the contract is the full
and complete expression of the parties agreement,
no outside oral or written agreements may be used
to add, change, or contradict the terms of the
contract.
iii. Industry usage – the way a word or phrase may be
used in a particular industry (especially for highly
technical words).
iv. Prior dealings – how have the parties used the term
in the past; this works well for parties that have had
consistent, similar interactions in the past.
v. Reasonableness – used when comparing contract
interpretations, especially be considering the
outcomes of each interpretation.
vi. Implied meanings – court simply fills in the blank.
vii. Drafting party – in many jurisdictions, ambiguous
contracts are construed to be against the drafting
party, because the party that did not write the
contract is given the benefit of the doubt.
Defining Performance Specifics and Timeframe
1. Performance.
a. Full performance – the fulfillment or accomplishment of a promise,
contract, or other obligation according to its terms.
b. Part performance – entails the completion of some part of what either
party to a contract has agreed to do.
c. Note: For sale of goods, the payment or receipt and acceptance of goods
makes an oral sales contract (usually unenforceable because of the statute
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of frauds), enforceable with regard to goods for which payment has been
made and accepted or which have been received and accepted.
d. Specific performance – equitable doctrine compelling party to execute
agreement according to its terms where monetary damages inadequate for
the breach of a contract (typically in sales of land). If for the sale of goods,
courts order specific performance only where goods are unique or other
circumstances.
2. Timeframe.
a. Contract period or term – number of business or calendar days, from a
specified commencement date (starting date) to a specified completion
date (end date).
b. Open-ended contracts - an agreement leaving to one of the parties a
certain amount of discretion to define the scope or precise measure of their
obligations under it or an agreement for an indefinite period of time; may
also be an agreement or contract which does not have an ending date but
which will continue for as long as certain other conditions, identified in
the agreement, exist (typically in the recitals.
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152
Negotiation Essentials: Key Issues to Anticipate
Submitted by Pankaj S. Raval
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NEGOTIATION ESSENTIALS: KEY ISSUES TO ANTICIPATE
Lecturer: Pankaj S. Raval, Esq.
Determining the Goals – What Does the Client Want?
1. Initial client interview.
2. Follow up with questions.
3. Clear communication.
4. Involvement of client in negotiation.

a. When to use.
b. When not to use.
c. Setting expectations.
5. Interest-Based Negotiation (IBN): Grounding Interests<->Positions.
6. Objectively understanding the negotiation (Getting to Yes/GTY)

a. Source: Fisher, Roger, William Ury, and Bruce Patton. Getting to Yes:
Negotiating Agreement Without Giving In. New York, N.Y: Penguin
Books, 1991. Print.
b. Determining whether agreement is possible, and understanding what its
form may look like.
c. Efficiency - do your best to identify all of the major concerns, positions,
and needs of both parties, so as to best match (or at least address) them.
d. Improve the relationship between the parties.
i. Generally, there is some conflict entering the negotiation.
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ii. Seeing the outcome as an improved relationship.
Outlining Major Substantive Issues
1. Use of IRAC format to put together positions.

a. Issue.
b. Rule.
c. Application of Rule to Facts.
d. Conclusion.
2. Based on issues and positions, identifying bottom lines.
3. GTY - Principled negotiation.

i. Analysis: diagnose the situation.
ii. Planning: Come up with additional options and additional criteria than the
traditional metrics to analyze the problem (and come up with unique,
inventive ways to present your information).
iii. Discussion: in-negotiation communication, looking toward an agreement.
Addressing the Weak Points of Your Case
1. Anticipating counterarguments.
2. Anticipating counter-offers.
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Choosing a Style – Cooperative vs. Adversarial
1. Depends on subject matter.
2. May depend on your client.
3. Depends on opposing side.
4. Using Interest-Based Negotiation.
Identifying Important Timelines
1. Statute of Limitations on claim.
2. Procedural dates.
a. Filing dates.
b. Mediation/arbitration/ADR dates.
3. Contract-related dates.
a. Is interest being calculated?
b. Are penalties specified in contract?
Effective Openers
1. Introductions.
2. Breaking the ice.
3. Characterizing the issues.
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4. Using Interest-Based Negotiation.
5. Presenting your interests, actively reflecting and understanding their interests,

finding a common area to ground all of the “shared” and “unique” interests.
Utilizing Information Exchange Phase
1. Discovery.
2. Understanding their positions.
The Art of Bargaining
1. Give a little to get a little.
2. Active listening, and demonstrating it.
3. GTY “Principled Negotiation”.

a. Separating People from the problem.
i. Be perceptive - put yourself in the other person’s shoes to
understand their issues from their perspective.
ii. Claim to understand their positions, but make careful note
of where and how they act or offer inconsistently with their
perception.
iii. Characterize all of your proposals in their interests, based
on their perception.
iv. Understand and be calm through emotional responses
(demonstrate empathy).
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v. Actively listen.
b. Focus on interests, not positions.
i. Interests motivate people, and positions are things to be
decided upon.
ii. Ask for positions to understand what their needs, hopes,
fears, desires may be.
iii. Sometimes, their needs are basic human essentials,
including:
(1) Security.
(2) economic well-being.
(3) sense of belonging.
(4) recognition of existence.
(5) autonomy.
1. Be hard on the problem, soft on the people.
2. Generate a variety of possibilities before deciding what to do.
i. Premature judgment hinders imagination (waiting to
pounce on drawbacks of their proposal does little).
ii. Premature closure makes you more likely to miss a wiser
decision-making process or outcome whereby you select
from a larger range of answers to the issues.
iii. Always characterize the options based on either your, their,
or (preferably) both of your interests.
3. Insist that results be based on some objective standard (or mutually agreed
upon standard).
i. Commit yourself (and mention it often) to reaching a
solution based on principles, and not on arbitrary pressures.
ii. Frame each issue as a joint search for objective criteria.
iii. Stay away from dramatization.
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Practical Tips for Pushing Beyond an Impasse
1. Taking a break.
2. Re-characterizing issues (using Interests <-> Positions).
3. If being stonewalled:
a. Do not push back; sidestep attacks and deflect it against the problem.
b. Try to understand interests behind stubbornness (and even acknowledge it
at the point).
c. Use questions to phrase your statements.
d. At all times, feel free to come back to “Why?”
Negotiation Mistakes to Avoid
1. Forgetting to involve the client!
2. Forgetting material terms, needs of client.
3. From GTY:
a. Positional bargaining - Interests of the parties are compromised for the
sake of honing in on a specific (often arbitrary and spur-of-the-moment)
position.
b. Ego becomes identified with position, with one or more parties looking to
“save face”.
c. In-negotiation threats of walking out, dragging feet, stonewalling (think
about the fact that it increases the costs for both sides!!).
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4. Failing to adapt your approach if it doesn’t work. Don’t be afraid to deviate from
the course in order to continue meeting your (or client’s) interests.
What to do When the Negotiation Fails
1. Prior to negotiation, come up with BATNA and WATNA.

a. BATNA - Best Alternative to Negotiated Agreement.
i. List actions you or client may take in the case that no agreement is
reached during the scheduled negotiation (the best of the lot).
ii. Greater BATNA = greater bargaining power.
iii. Try and understand the other side’s BATNA to get a sense of your
bargaining power.
b. WATNA - Worst Alternative to Negotiated Agreement.
i. List of actions you or client may take in the case that no agreement
is reached during the scheduled negotiation (the worst of the lot).
ii. Worst WATNA = less bargaining power.
iii. Try and understand the other side’s WATNA to get a sense of your
bargaining power.
2. Use your leverage - Understand your leverage and use it. You may have to apply
a little more pressure.
3. Use objective standards - Do not let the outcome of your negotiation be

determined by emotion or your level of contentiousness with the other side.
Instead, look to objective measures such as jury awards or comparable settlements
to support your position.
4. Use objective procedures - If you cannot get everything you want, see if there is
a creative way to give the parties at least a little of what they want.
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5. Define the hurdle - Understand what is REALLY stopping the negotiations from
progressing. Is it only a number or something deeper? Maybe it is a specific
person that can be sidestepped.
6. Exchange more information - Maybe you are missing important information

that will help settle the case or better clarify your position. See if you are missing
something (or maybe the other side does not realize the importance of a specific
point).
7. Take a break - Cooler heads often prevail. Sometimes a breather and walk will
allow everyone to think things through with a clearer mind.
8. Carve out issues - If there are several claims at issue, isolating claims can help
the parties find an agreement on at least some issues, which may create inertia for
more agreement.
9. Take another look at your position - Perhaps you missed something. Maybe
you were too aggressive with your position. Considering the other side’s position
can be helpful.
10. Things fall apart – Sometimes, things fall apart. Understand what that breaking
point is.
11. Scheduling follow-up.
12. Alternative dispute resolution (ADR) – Are mediation or arbitration on the

table?
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13. CYA – Always!
14. Good phrases to keep in mind:

a. Please correct me if I’m wrong…
b. We appreciate what you’ve done for us…
c. Our concern is fairness, resolution, etc. (ground in interests)…
d. Help me understand how this meets your interest of…
e. Let me see if I understand what you’re saying…
f. Can I ask you some questions to affirm some of my facts?
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164
Business Contract Provisions:
Do They Protect Your Client?
Submitted by Kip R. Peterson
165
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BUSINESS CONTRACTS 101
Business Contract Provisions: Do They Protect Your Client?

[email protected]
I. Four Goals of Better Contract Drafting
FIRST: Understand the purpose of the contract and think through its life cycle.
Clients hire lawyers to help identify and mitigate risks. Envision non-performance and default.
What are your client’s remedies? If the parties end up in litigation, will a court interpret the agreement in
your client’s favor?
SECOND: Be clear, concise and consistent.
Clients expect lawyers to be proficient drafters. When drafting contracts, use a logical
organization structure, avoid ambiguities, and use defined terms consistently. Proof-read!
THIRD: Use plain language.
Make sure the parties understand their rights and obligations. Use proper grammar. Avoid
unnecessary legalese.
FOURTH: Read and understand every provision of the contract.
Many contracts are derived from a form document or prior agreement. Especially when
“borrowing” a form, make sure to read and understand every provision. Don’t assume the language is
correct because it came from a more senior lawyer or more prominent law firm.
II. Anatomy of a Contract
a. Title
The title should appear at the top of the first page in all capital letters. The title should generally
describe the substance of the underlying agreement (e.g., Asset Purchase Agreement, Employment
Agreement, etc.).
For longer contracts (more than 15 pages), use of a title page is optional. Where using a title
page, it is recommended to also identify the parties and the date of agreement.
b. Table of Contents
Where a title page is used, also consider using a table of contents. Again, this should be reserved
for longer contracts.
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c. Introductory Clause
The introductory clause, or preamble, serves to identify the title of the agreement (again), the
parties, the nature of their relationship, and the date of agreement. For example:
THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made and entered into
as of November 1, 2016, by and between ABC Corp, a Delaware corporation (“Seller”),
and XYZ, LLC, a Minnesota limited liability company (“Buyer”).
Note, for entity parties, identify the state and form of organization. For individuals, use their full
legal name and middle initial. In all cases, verify proper spelling. Failure to properly identify the parties
could affect enforceability of the underlying agreement.
With respect to the date, consider whether the agreement is effective when signed or if an
effective date is appropriate. However, note that back-dating agreements can, in some instances, result in
civil or even criminal liability. Proceed with caution.
In some agreements, the date appears in the signature block rather than the introductory clause.
In either case, avoid conflicting dates in the introductory clause and signature block.
d. Recitals
The recitals serve to describe the fundamental purpose of the agreement and any relevant
background information. While there is no limit on the number of recitals, recitals are generally not
considered part of the agreement unless specifically incorporated therein. Accordingly, avoid including
substantive points of agreement in the recitals wherever possible and consider including the following
clause in the body of the agreement:
The parties acknowledge and agree that the recitals set forth above are true and
correct in all material respects and are incorporated herein and made a part of this
Agreement as if fully set forth herein.
A recital of consideration is generally used to signal the end of the recitals and the beginning of
the body of the agreement. For example:
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements set forth herein, together with other good and valuable
consideration, the receipt and legal sufficiency of which is hereby acknowledged, the
parties agree as follows:
Inclusion of a “false” recital of consideration is generally unenforceable where consideration is otherwise

lacking, but can be helpful in persuading a court to enforce the parties’ agreement. See, Restatement
(Second) of Contracts, § 218(e).
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e. Body
The body sets forth the operative terms of the parties’ agreement, including their respective rights
and obligations. The body of the agreement is generally organized with the most substantive terms of the
agreement appearing first and the legal “boilerplate” appearing at the end. For example, in a purchase
agreement, a typical order of contractual provisions is: (1) a description of what is being sold, (2) the
purchase price and payment terms, (3) representations and warranties, (4) terms of closing, including any
conditions to closing and closing deliverables, (5) post-closing covenants and obligations, including
indemnification obligations, and (6) miscellaneous terms.
f. Conclusory Statement
The conclusory statement signals the end of the agreement. For example:
IN WITNESS WHEREOF, the parties, through their undersigned duly‐authorized
representatives, have executed this Agreement to be effective as of the date first
written above.
g. Signature Block
Wherever possible, the signature blocks should appear on the same page and, frequently, they
appear altogether on a separate signature page. For entity parties, the signature block should identify the
signatory and the capacity in which they are authorized to sign (e.g., President). If notary blocks are
required, consider a separate signature page (with notary block) for each party.
h. Schedules and Exhibits
Schedules and Exhibits follow the signature page. In general, schedules are used to denote
information that is supplemental to the main agreement. The most common example is disclosure
schedules, which are used to identify exceptions and qualifications to a party’s representations and
warranties. In contrast, exhibits are stand-alone documents or ancillary agreements to be entered into in
connection with the main agreement. For example, in the case of an Asset Purchase Agreement, the
exhibits might include a Bill of Sale, Non-Compete Agreement, and Consulting Agreement.
III. Boilerplate
Every written contract should describe the substantive terms of the parties’ agreement. In
addition, there are numerous “boilerplate” clauses that, although frequently overlooked, are equally
important. These clauses include the following:
 Governing Law and Venue. A governing law or “choice of law” provision specifies that an
agreed upon jurisdiction will govern the enforcement of the contract and the interpretation of its
terms. A venue clause or “forum selection clause” determines the actual place of litigation in the
event that a dispute arises under the contract. It is important to note, the choice of venue does not
have to be the same as the choice of jurisdiction.
 Attorneys’ Fees. The general rule in the U.S.A. is that each party to a dispute must pay his or her
or its own costs and attorneys’ fees, absent statutory or contractual authority to the contrary.
Most frequently in the form of a prevailing party clause, a contract can provide for recovery of
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the prevailing party’s attorney fees and costs from the losing party. Parties should be wary of
one-sided clauses, as courts may hold such provisions unenforceable. However, they may be
appropriate depending on the nature of the underlying agreement (e.g., Non-Compete Agreement,
Non-Disclosure Agreement, or other unilateral agreement).
 Entire Agreement. A “merger” or “entire agreement” clause indicates that the written document
represents the complete and final agreement between the parties with respect to the subject matter
thereof. These provisions are designed to reinforce the Parol Evidence Rule and establish that any
prior negotiations and terms are superseded by the written contract.
 Severability. A severability clause states that should a court deem any provision of the contract
unenforceable, the parties agree that all remaining provisions remain operative and enforceable.
In some cases, the parties go one step further and empower the court to ascertain the intent of the
parties and revise the operative provision to the minimum extent necessary to comport with
applicable law. This is known as the “blue pencil” doctrine.
 Alternative Dispute Resolution. An alternative dispute resolution clause allows the parties to
specify a methodology for resolution of disputes short of litigation such as good-faith negotiation,
mediation, arbitration, or a combination thereof. While there is a common perception that
mediation and arbitration allow for faster and less expensive resolution of disputes, this is not
always the case and, because arbitration rulings typically offer very limited appeal rights, is not
without risk.
 Interpretation. An interpretation clause allows the parties to clarify how the provisions of a
contract should be read and interpreted. Among other issues, parties can specify that a court is not
to apply the general rule of contract construction that ambiguities be resolved in favor of the non-
drafting party. This is particularly appropriate when the parties have negotiated the agreement at
arms-length and engaged in a joint drafting process.
 Counterparts. A counterparts clause allows the parties to sign separate signature pages and to
compile them into a single document. In addition, these clauses frequently permit electronic
signature and provide for enforceability of signatures sent by facsimile or PDF.
IV. Case Study: Asset Purchase Agreement
A sample Asset Purchase Agreement is attached as Exhibit A. We will use this sample
agreement as a guide for a discussion regarding best practices for contract drafting and minimizing risk to
your client. While this agreement is a seller-friendly form with limited representations and warranties, we
will discuss drafting points from both sides of the deal.
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EXHIBIT A
SAMPLE ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
between
XYZ, LLC,
SELLER,
and
ABC ACQUISITIONS, INC.,

BUYER
NOVEMBER 1, 2016
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TABLE OF CONTENTS
ARTICLE I DEFINITIONS ......................................................................................................................... 1

ARTICLE II PURCHASE AND SALE........................................................................................................ 4
Purchase and Sale ............................................................................................................................ 4
Section 2.02 Excluded Assets ..................................................................................................... 6
Section 2.03 Purchase Price ........................................................................................................ 6
Section 2.04 Allocation of Purchase Price.................................................................................. 7
Section 2.05 Assumption of Liabilities....................................................................................... 7
Section 2.06 Excluded Liabilities ............................................................................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER ................................................ 7
Section 3.01 Organization and Qualification .............................................................................. 8
Section 3.02 Authority ................................................................................................................ 8
Section 3.03 No Conflicts; Consents .......................................................................................... 8
Section 3.04 Legal Proceedings .................................................................................................. 8
Section 3.05 Financial Statements .............................................................................................. 8
Section 3.06 Absence of Certain Changes, Events and Conditions ............................................ 9
Section 3.07 Title to Purchased Assets; Real Property. .............................................................. 9
Section 3.08 Compliance With Laws; Permits. .......................................................................... 9
Section 3.09 Broker’s or Finder’s Fees .................................................................................... 10
Section 3.10 Disclaimer of Warranties ..................................................................................... 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER ............................................... 10
Section 4.01 Organization ........................................................................................................ 10
Section 4.02 Authority .............................................................................................................. 10
Section 4.03 No Conflicts; Consents ........................................................................................ 10
Section 4.04 Legal Proceedings ................................................................................................ 11
Section 4.05 Broker’s or Finder’s Fees .................................................................................... 11
ARTICLE V COVENANTS AND OTHER AGREEMENTS ................................................................... 11
Section 5.01 Employee Matters ................................................................................................ 11
Section 5.02 Books and Records .............................................................................................. 11
Section 5.03 Public Announcements ........................................................................................ 11
Section 5.04 Satisfaction of Excluded Liabilities ..................................................................... 12
Section 5.05 Confidentiality ..................................................................................................... 12
Section 5.06 Transfer Taxes ..................................................................................................... 12
Section 5.07 Further Assurances .............................................................................................. 12
Section 5.08 Lease Agreement ................................................................................................. 12
Section 5.09 Non-Competition and Non-Solicitation ............................................................... 12
ARTICLE VI CONDUCT OF THE BUSINESS PRIOR TO CLOSING .................................................. 13
Section 6.01 Restrictions. ......................................................................................................... 13
Section 6.02 Access to Information .......................................................................................... 13
ARTICLE VII CLOSING; CONDITIONS TO CLOSING; CLOSING DELIVERABLES ...................... 13
Section 7.01 Closing ................................................................................................................. 13
Section 7.02 Conditions to Closing. ......................................................................................... 13
Section 7.03 Deliveries to be Made by Seller at Closing. ........................................................ 14
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Section 7.04 Deliveries to be Made by Buyer at Closing ......................................................... 15
Section 7.05 Termination by Seller .......................................................................................... 15
ARTICLE VIII INDEMNIFICATION ....................................................................................................... 16
Section 8.01 Survival ................................................................................................................ 16
Section 8.02 Indemnification by Seller..................................................................................... 16
Section 8.03 Indemnification By Buyer ................................................................................... 16
Section 8.04 Indemnification Procedures ................................................................................. 17
Section 8.05 Tax Treatment of Indemnification Payments ...................................................... 18
Section 8.06 Exclusive Remedies ............................................................................................. 19
ARTICLE IX MISCELLANEOUS ............................................................................................................ 19
Section 9.01 Expenses .............................................................................................................. 19
Section 9.02 Notices ................................................................................................................. 19
Section 9.03 Interpretation........................................................................................................ 19
Section 9.04 Headings .............................................................................................................. 20
Section 9.05 Severability .......................................................................................................... 20
Section 9.06 Entire Agreement ................................................................................................. 20
Section 9.07 Successors and Assigns ....................................................................................... 20
Section 9.08 No Third-Party Beneficiaries ............................................................................... 20
Section 9.09 Amendment and Modification; Waiver ............................................................... 20
Section 9.10 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. .................... 20
Section 9.11 Counterparts ......................................................................................................... 21
EXHIBITS
Exhibit A – Tangible Personal Property

Exhibit B – Excluded Assets
Exhibit C – Promissory Note
Exhibit D – Guaranty
Exhibit E – Security Agreement
Exhibit F – Allocation Schedule
Exhibit G – Non-Compete Agreement
Exhibit H – Bill of Sale
Exhibit I – Assignment and Assumption Agreement
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (“Agreement”), is made and entered into as of

November 1, 2016 (the “Effective Date”) by and between XYZ, LLC, a Minnesota limited liability
company (“Seller”), and ABC Acquisitions, Inc., a Minnesota corporation (“Buyer”).
RECITALS
WHEREAS, Seller is engaged in the business of __________________________ (collectively,

the “Business”) with its principal place of business located at _________________________________
(the “Business Premises”); and
WHEREAS, Seller desires to sell and assign to Buyer, and Buyer desires to purchase and assume
from Seller, substantially all the assets and certain specified liabilities of the Business, subject to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and for
other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
The following terms used in this Agreement have the meanings set forth in this ARTICLE I:
“Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit,
notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature,
civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
“Affiliate” of a Person means any other Person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with, such Person. The term
“control” (including the terms “controlled by” and “under common control with”) means the possession,
directly or indirectly, of the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or otherwise.
“Agreement” has the meaning set forth in the preamble.
“Assigned Contracts” has the meaning set forth in Section 2.02(d).
“Assignment and Assumption Agreement” has the meaning set forth in Section 7.03(c).
“Assumed Liabilities” has the meaning set forth in Section 2.06.
“Bill of Sale” has the meaning set forth in Section 7.03(a).
“Business” has the meaning set forth in the recitals.
“Business Day” means any day except Saturday, Sunday or any other day on which commercial
banks located in Minneapolis, Minnesota, are authorized or required by Law to be closed for business.
“Business Premises” has the meaning set forth in the recitals.
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“Buyer” has the meaning set forth in the preamble.
“Buyer Indemnitees” has the meaning set forth in Section 8.02.
“Closing” has the meaning set forth in Section 7.01.
“Closing Date” has the meaning set forth Section 7.01.
“Code” means the Internal Revenue Code of 1986, as amended.
“Contracts” means all contracts, leases, deeds, mortgages, licenses, instruments, notes,
commitments, undertakings, indentures, joint ventures and all other agreements, commitments and legally
binding arrangements, whether written or oral.
“Direct Claim” has the meaning set forth in Section 8.04(c).
“Due Diligence Examination” has the meaning set forth in Section 6.02.
“Due Diligence Period” has the meaning set forth in Section 6.02.
“Earnest Money” has the meaning set forth in Section 2.04(a).
“Effective Date” has the meaning set forth in the preamble.
“Employment Agreements” has the meaning set forth in Section 5.01.
“Encumbrance” means any charge, claim, community property interest, pledge, usufruct,
condition, equitable interest, lien (statutory or other), option, security interest, mortgage, easement,
encroachment, right of way, right of first refusal, or restriction of any kind, including any restriction on
use, voting, transfer, receipt of income or exercise of any other attribute of ownership.
“Excluded Assets” has the meaning set forth in Section 2.03.
“Excluded Liabilities” has the meaning set forth in Section 2.07.
“Financial Statements” has the meaning set forth in Section 3.05.
“GAAP” means United States generally accepted accounting principles in effect from time to
time.
“Governmental Authority” means any federal, state, local or foreign government or political
subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any
self-regulated organization or other non-governmental regulatory authority or quasi-governmental
authority (to the extent that the rules, regulations or orders of such organization or authority have the
force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation,
determination or award entered by or with any Governmental Authority.
“Guaranty” has the meaning set forth in Section 2.04(b).
“Indemnitee” has the meaning set forth in Section 8.04.
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“Indemnifying Party” has the meaning set forth in Section 8.04.
“Intellectual Property” has the meaning set forth in Section 2.02(c).
“Intellectual Property Assignments” has the meaning set forth in Section 7.03(c).
“Landlord” has the meaning set forth in Section 5.08.
“Law” means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty,
common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
“Lease Agreement” has the meaning set forth in Section 5.08.
“Losses” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards,
penalties, fines, costs or expenses of whatever kind, including reasonable attorneys’ fees and the cost of
enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers;
provided, however, that “Losses” shall not include punitive damages, except in the case of fraud or to the
extent actually awarded to a Governmental Authority or other third party.
“Material Adverse Effect” means any event, occurrence, condition, fact or change that is, or
could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the
business, results of operations, condition (financial or otherwise) or assets of the Business or (b) the
ability of Seller to consummate the transactions contemplated hereby; provided, however, that “Material
Adverse Effect” shall not include any event, occurrence, fact, condition or change, directly or indirectly,
arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally
affecting the industries in which the Business operates; (iii) any changes in financial, credit or securities
markets in general; (iv) acts of war (whether or not declared), armed hostilities or terrorism, or the
escalation or worsening thereof; (v) acts of god, such as tornadoes, floods, earthquakes and other natural
disasters; (vi) any changes in applicable Laws or accounting rules, including GAAP; or (vii) the public
announcement, pendency or completion of the transactions contemplated by this Agreement.
“Non-Compete Agreement” has the meaning set forth in Section 5.08.
“Ordinary Course of Business” means an action taken by a Person only if such action (i) is
consistent in nature, scope and magnitude with the past practices of such Person and is taken in the
ordinary course of, or incidental to, the normal day-to-day operations of such Person and (ii) does not
require authorization by the board of directors or shareholders or members of such Person and does not
require any other separate or special authorization of any nature.
“Permits” means all permits, licenses, franchises, approvals, authorizations, and consents
required to be obtained from Governmental Authorities.
“Permitted Encumbrances” means (a) liens for Taxes not yet due and payable or being
contested in good faith by appropriate procedures; (b) mechanics’, carriers’, workmen’s, repairmen’s or
other like liens arising or incurred in the Ordinary Course of Business; (c) easements, rights of way,
zoning ordinances and other similar encumbrances affecting real property; (d) liens arising under original
purchase price conditional sales contracts and equipment leases with third parties entered into in the
Ordinary Course of Business; and (e) other imperfections of title or Encumbrances, if any, that have not
had, and would not have, a Material Adverse Effect.
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“Person” means an individual, corporation, partnership, joint venture, limited liability company,
Governmental Authority, unincorporated organization, trust, association or other entity, whether domestic
or foreign.
“Promissory Note” has the meaning set forth Section 2.04.
“Purchase Price” has the meaning set forth in Section 2.04.
“Purchased Assets” has the meaning set forth in Section 2.01.
“Representative” means, with respect to any Person, any and all directors, officers, employees,
consultants, financial advisors, counsel, accountants and other agents of such Person.
“Security Agreement” has the meaning set forth in Section 2.04(c).
“Seller” has the meaning set forth in the preamble.
“Seller Indemnitees” has the meaning set forth in Section 8.03
“Tax Return” means any return, declaration, report, claim for refund, information return or
statement or other document relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
“Taxes” means all federal, state, local, foreign and other income, gross receipts, sales, use,
production, ad valorem, value added, transfer, franchise, registration, profits, license, lease, service,
service use, withholding, payroll, employment, unemployment, estimated, excise, severance,
environmental, stamp, occupation, premium, property (real or personal), real property gains, windfall
profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with
any interest, additions or penalties with respect thereto and any interest in respect of such additions or
penalties.
“Third Party Claim” has the meaning set forth in Section 8.04(a).
“Transaction Documents” means the Promissory Note, Guaranty, Security Agreement, Bill of
Sale, Assignment and Assumption Agreement, Intellectual Property Assignments, Non-Compete
Agreement, and all other documents required in connection herewith or therewith.
ARTICLE II.
PURCHASE AND SALE
Section 2.02 Purchase and Sale. On the terms and subject to the conditions of this
Agreement, at Closing, Seller shall sell to Buyer, and Buyer shall purchase from Seller, free and clear of
all Encumbrances other than Permitted Encumbrances, for the Purchase Price, all of the assets, properties
and rights of Seller, tangible or intangible, wherever located, primarily relating to the Business, other than
the Excluded Assets (collectively, the “Purchased Assets”), including, without limitation, the following:
(a) All machinery, equipment, supplies and other tangible personal property of the Business,
including without limitation, those items of tangible personal property specifically set forth on Exhibit A
and incorporated herein by reference;
(b) All inventory and work in progress;
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(c) All intellectual property used in the operation of the Business (the “Intellectual
Property”), including without limitation, all of Seller’s right, title and interest in:
(i) trademarks, service marks, trade names, brand names, logos, trade dress and
other proprietary indicia of goods and services, whether registered, unregistered or arising by
Law, and all registrations and applications for registration of such trademarks, including intent-to-
use applications, and all issuances, extensions and renewals of such registrations and applications;
(ii) internet domain names (expressly including www.XYZLLC.com), websites, e-

mail addresses, and telephone numbers;
(iii) original works of authorship in any medium of expression, whether or not

published, including but not limited to all copyrights (whether registered, unregistered or arising
by Law), all registrations and applications for registration of such copyrights, and all issuances,
extensions and renewals of such registrations and applications;
(iv) confidential information, formulas, designs, devices, know-how, research and

development, inventions, methods, processes, compositions and other trade secrets, whether or
not patentable; and
(v) patented and patentable designs and inventions, all design, plant and utility
patents, letters patent, utility models, pending patent applications and provisional applications and
all issuances, divisions, continuations, continuations-in-part, reissues, extensions, reexaminations
and renewals of such patents and applications.
(d) Copies of all books and records (including computer records) of Seller relating to the
Business or the Purchased Assets, including books of account, ledgers, general business, financial and
accounting records, price lists, sales records, research and development files, strategic plans, personnel
records of employees of Seller hired by Buyer, customer lists, customer accounts, supplier lists, customer
complaints, mailing lists, promotional and advertising materials, and research and files relating to the
Intellectual Property;
(e) All of Seller’s right, title and interest in Contracts, to the extent such right, title and
interest is transferable, to which Seller is a party that are used or held for use by Seller in the conduct of
the Business the absence of which would have a Material Adverse Effect on the Business or the
Purchased Assets, including without limitation, all contracts, leases, deeds, mortgages, licenses,
instruments, commitments, undertakings and other agreements, commitments and legally binding
arrangements, whether written or oral (the “Assigned Contracts”);
(f) All Permits, to the extent transferable, used in the operation of the Business, the absence
of which would have a Material Adverse Effect on the Business;
(g) All of Seller’s rights under warranties, indemnitees and all similar rights against third
parties to the extent related to any Purchased Assets;
(h) All prepaid expenses, credits, advance payments, security, refunds, and deposits to the
extent related to any of the Purchased Assets, if any;
(i) The goodwill and going concern value of the Business; an
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(j) All corporate names and assumed names and all derivations thereof.
Section 2.03 Excluded Assets. Under the terms of this Agreement, Buyer will not purchase
from Seller, and Purchased Assets shall not include, the following assets (collectively, the “Excluded
Assets”):
(a) All cash and cash equivalents, bank accounts and securities of Seller;
(b) All accounts receivables of the Business arising prior to the Closing Date;
(c) The assets, properties and rights specifically set forth on Exhibit B and incorporated
herein by reference;
(d) Organizational documents, minute books, shareholder records, and tax records, all
employee-related files and records, other than personnel records of employees of Seller or any Affiliate of
Seller hired by Buyer, and any other books and records which Seller or any Affiliate of Seller is
prohibited from disclosing or transferring to Buyer under applicable law and is required by applicable law
to retain;
(e) All insurance policies and all rights to applicable claims and proceeds thereunder; and
(f) The rights which accrue or will accrue to Seller under this Agreement or any of the other
documents or agreements executed in connection herewith, including without limitation, the Transaction
Documents.
Section 2.04 Purchase Price. The aggregate purchase price (the “Purchase Price”) for the
Purchased Assets shall be One Million and 00/100 Dollars ($1,000,000.00 USD). The Purchase Price
accounts for the assumption of Assumed Liabilities. The Purchase Price shall be paid from Buyer to
Seller as follows:
(a) the sum of Fifty Thousand and 00/100 Dollars ($50,000.00 USD) in earnest money (the
“Earnest Money”), payable upon the execution of this Agreement, which amount shall be fully-
refundable to Buyer until the expiration of the Due Diligence Period, but after which the earnest money
shall become non-refundable in the event Buyer fails or refuses to proceed with the Closing for any
reason;
(b) the sum of One Hundred Fifty Thousand and 00/100 Dollars ($150,000.00 USD) in cash
or other immediately available funds at Closing; and
(c) the sum of Eight Hundred Thousand and 00/100 Dollars ($800,000.00 USD) pursuant to
a Promissory Note substantially in the form attached hereto as Exhibit C and incorporated herein by
reference (the “Promissory Note”), pursuant to which Buyer shall pay to Seller (or its assignee) sixty
(60) consecutive monthly installments in the amount of Ten Thousand and 00/100 Dollars ($10,000.00)
each commencing on the first day of the month immediately following the month immediately following
the Closing Date and continuing for a period of 60 months thereafter at which time the entire remaining
balance of principal and interest will be due and payable in full. The Promissory Note shall bear interest
at the rate of five and three-quarter percent (5.75%) per annum and shall be secured by (i) a personal
guaranty from each of Seller’s shareholders substantially in the form attached hereto as Exhibit D and
incorporated herein by reference (the “Guaranty”), and (ii) a Security Agreement substantially in the
form attached hereto as Exhibit E and incorporated herein by reference (the “Security Agreement”),
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pursuant to which Buyer shall grant to Seller (or its assignee) a security interest all of the assets of Buyer,
including without limitation, the Purchased Assets.
Section 2.05 Allocation of Purchase Price. The Purchase Price shall be allocated among the
Purchased Assets in the manner set forth on Exhibit F attached hereto and incorporated herein by
reference (the “Allocation Schedule”). Seller and Buyer agree to file their respective IRS Forms 8594
and all federal, state and local Tax Returns in accordance with the Allocation Schedule.
Section 2.06 Assumption of Liabilities. Subject to the terms and conditions set forth herein,
Buyer shall assume and agree to pay, perform and discharge any and all liabilities and obligations of
Seller arising out of or relating to the Business or the Purchased Assets on or after the closing, other than
the Excluded Liabilities (collectively, the “Assumed Liabilities”), including without limitation the
following:
(a) all trade accounts payable of Seller to third parties in connection with the Business that
remain unpaid as of the Closing Date to the extent that such amounts are disclosed on the Financial
Statements in accordance with GAAP and are not past due or disputed in any way;
(b) all liabilities and obligations of Seller arising under or relating to the Assigned
Contracts;
(c) all liabilities and obligations relating to employee benefits, compensation or other
arrangements with respect to any employee of Seller hired by Buyer as of the Closing Date and which
arise on or after the Closing Date; and
(d) all other liabilities and obligations arising out of or relating to ownership or operation
of the Business and the Purchased Assets from and after the Closing Date.
Section 2.07 Excluded Liabilities. Buyer shall not assume and shall not be responsible to pay,
perform or discharge any of the following liabilities of Seller (collectively, “Excluded Liabilities”):
(a) all liabilities or obligations arising out of or relating to ownership or operation of the
Business and the Purchased Assets prior to the Closing;
(b) all liabilities relating to or arising out of the Excluded Assets;
(c) all liabilities for any Taxes arising with respect to the operation of the Business or
ownership of the Purchased Assets for any taxable period ending on or prior to the Closing Date; and
(d) all liabilities or obligations of Seller relating to or arising out of the employment or
termination of employment of any employee by Seller prior to the Closing Date or workers’
compensation claims of any employee which relate to events occurring prior to the Closing Date.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that the following are true and correct as of the Effective
Date and as of the Closing Date (as if made at the Closing) and shall survive the Closing of this
transaction in accordance with Section 8.01:
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Section 3.01 Organization and Qualification. Seller is a limited liability company duly
organized, validly existing and in good standing under the Laws of State of Minnesota and has all
necessary corporate power and authority to own, operate or lease the properties and assets now owned,
operated or leased by it and to carry on the Business as it has been and is currently conducted. Seller is
duly licensed or qualified to do business and is in good standing in each jurisdiction in which the
ownership of the Purchased Assets or the operation of the Business as currently conducted makes such
licensing or qualification necessary, except where the failure to be so licensed, qualified or in good
standing would not have a Material Adverse Effect.
Section 3.02 Authority. Seller has all necessary corporate power and authority to enter into
this Agreement and each Transaction Document to be executed and delivered by Seller pursuant to this
Agreement and to carry out the transactions contemplated hereby and thereby. The execution, delivery
and performance by Seller of this Agreement and each Transaction Document to which Seller is a party
has been duly and validly authorized and approved by all necessary corporate action on the part of Seller.
This Agreement and each Transaction Document to which Seller is a party constitutes, or when executed
and delivered by Seller will constitute, the legal, valid and binding obligation of Seller, each enforceable
against Seller in accordance with their respective terms, except to the extent that enforcement is limited
by bankruptcy, insolvency, moratorium, conservatorship, receivership or similar laws of general
application affecting creditors’ rights or by the application by a court of equity principles.
Section 3.03 No Conflicts; Consents. The execution, delivery and performance by Seller of
this Agreement and each Transaction Document to which Seller is a party, and the consummation of the
transactions contemplated hereby and thereby, do not and will not:
(a) result in a violation or breach of, or default under, any provision of Seller’s articles of
organization, operating agreement, or similar organizational document;
(b) result in a violation or breach of any provision of any Law or Governmental Order
applicable to Seller, the Business or the Purchased Assets; or
(c) require the consent, notice or other action by any Person under, conflict with, result in a
violation or breach of, constitute a default or an event that, with or without notice or lapse of time or both,
would constitute a default under, result in the acceleration of or create in any party the right to accelerate,
terminate, modify or cancel any Contract to which Seller is a party or by which Seller is bound or to
which any of the properties or assets of Seller are subject (including any Assigned Contract) or any
Permit affecting Seller. No consent, approval, Permit, Governmental Order, declaration or filing with, or
notice to, any Governmental Authority is required by or with respect to Seller in connection with the
execution and delivery of this Agreement and the Transaction Documents to which Seller is a party and
the consummation of the transactions contemplated hereby and thereby.
Section 3.04 Legal Proceedings. There are no Actions pending or, to Seller’s knowledge,
threatened against or by Seller that challenge or seek to prevent, delay or otherwise interfere with the
transactions contemplated hereby or would otherwise have a Material Adverse Effect on the Business or
any of the Purchased Assets.
Section 3.05 Financial Statements. Seller has delivered to Buyer copies of the following
(collectively, the “Financial Statements”): (i) internally prepared financial statements for January
through September 2016, and (ii) internally prepared financial statements as of December 31, 2015, and
December 31, 2014, for the years then ended. The Financial Statements have been prepared in accordance
with GAAP applied on a consistent basis throughout the periods involved and fairly present in all material
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respects the financial condition of Seller as of the respective dates above and the results of the operations
of Seller for the periods indicated above.
Section 3.06 Absence of Certain Changes, Events and Conditions. Since September 30,
2016, other than in the Ordinary Course of Business, there has not been any:
(a) event, occurrence or development that has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(b) material change in any method of accounting or accounting practices of Seller, except as
required by GAAP or as disclosed in the Financial Statements or the notes thereto;
(c) material change in Seller’s cash management practices and its policies, practices and
procedures with respect to collection of accounts receivable, establishment of reserves for uncollectible
accounts, accrual of accounts receivable, inventory control, prepayment of expenses, payment of trade
accounts payable, accrual of other expenses, deferral of revenue and acceptance of customer deposits;
(d) any purchase, sale, license, transfer, assignment or other disposition, or any agreement or
other arrangement for the purchase, sale, license, transfer, assignment or other disposition, of any part of
the Purchased Assets, other than purchases and sales in the Ordinary Course of Business;
(e) any damage, destruction or loss, whether or not covered by insurance, in excess of
$25,000 per single occurrence;
(f) cancellation of any debts, discharge of any Encumbrance or payment of any Liability
shown or reflected in the Financial Statements or the notes thereto, other than in the Ordinary Course of
Business;
(g) acceleration, termination, material modification to or cancellation of any Contract

(including, but not limited to, any Assigned Contract), other than in the Ordinary Course of Business;
(h) any material change in any business policies, including without limitation, advertising,
distributing, marketing, pricing, purchasing, personnel, sales, returns, budget or product acquisition or
sale policies; or
(i) any agreement to do any of the foregoing, or any action or omission that would result in
any of the foregoing.
Section 3.07 Title to Purchased Assets; Real Property.
(a) Seller has good and valid title to, or a valid leasehold interest in, all of the Purchased
Assets, free and clear of Encumbrances except for Permitted Encumbrances.
(b) Seller does not own any real property.
Section 3.08 Compliance With Laws; Permits.
(a) Seller is in compliance with all Laws applicable to the conduct of the Business as
currently conducted or the ownership and use of the Purchased Assets.
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(b) All Permits required for Seller to conduct the Business as currently conducted or for the
ownership and use of the Purchased Assets have been obtained, are valid and in full force and effect, and,
to Seller’s knowledge, are fully and freely transferable to Buyer.
Section 3.09 Broker’s or Finder’s Fees. No broker, finder or investment banker is or will be
entitled to any brokerage, finder’s or other fee or commission from any of the parties hereto in connection
with the transactions contemplated in this Agreement or any other Transaction Document based upon
arrangements made by or on behalf of Seller.
Section 3.10 Disclaimer of Warranties. Except as expressly set forth in this Agreement, any
of the Transaction Documents, or any of the schedules or exhibits hereto or thereto, the Business and the
Purchased Assets are being sold “AS IS, WHERE IS” without representation or warranty of any kind,
whether express or implied, and including without limitation, warranties of merchantability or fitness for
a particular purpose.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the following are true and correct as of the Effective
Date and as of the Closing Date (as if made at the Closing) and shall survive the Closing of this
transaction in accordance with Section 8.01:
Section 4.01 Organization. Buyer is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Minnesota.
Section 4.02 Authority. Buyer has all necessary corporate power and authority to enter into
this Agreement and the Transaction Documents to which it is a party and to carry out the transactions
contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the
Transaction Documents to which Buyer is a party have been duly and validly authorized and approved by
all necessary action on the part of Buyer, and no other action on the part of Buyer is required in
connection therewith. This Agreement and the Transaction Documents to which Buyer is a party
constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of
Buyer, enforceable against Buyer accordance with its terms, except to the extent that enforcement is
limited by bankruptcy, insolvency, moratorium, conservatorship, receivership or similar laws of general
application affecting creditors’ rights or by the application by a court of equity principles.
Section 4.03 No Conflicts; Consents. The execution, delivery and performance by Buyer of
this Agreement and the Transaction Documents to which Buyer is a party, and the consummation of the
transactions contemplated hereby and thereby, do not and will not:
(a) result in a violation or breach of, or default under, any provision of the articles of
organization, operating agreement or other organizational documents of Buyer;
(b) result in a violation or breach of any provision of any Law or Governmental Order
applicable to Buyer; or
(c) require the consent, notice or other action by any Person under any Contract to which
Buyer is a party which has not already been obtained. No consent, approval, Permit, Governmental Order,
declaration or filing with, or notice to, any Governmental Authority is required by or with respect to
Buyer in connection with the execution and delivery of this Agreement and the Transaction Documents to
which Buyer is a party and the consummation of the transactions contemplated hereby and thereby.
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Section 4.04 Legal Proceedings. There are no Actions pending or, to Buyer’s knowledge,
threatened against or by Buyer or any Affiliate of Buyer that challenge or seek to prevent, delay or
otherwise interfere with the transactions contemplated hereby.
Section 4.05 Broker’s or Finder’s Fees. No broker, finder or investment banker is entitled to
any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by
this Agreement or any other Transaction Document based upon arrangements made by or on behalf of
Buyer or any Affiliate of Buyer.
ARTICLE V.
COVENANTS AND OTHER AGREEMENTS
Section 5.01 Employee Matters. Buyer and Seller agree that Buyer may offer employment to
some or all employees of the Business as of the Closing Date, with substantially similar compensation
and other benefits as were in effect prior to the Closing Date, and Seller agrees to use its reasonable best
efforts to facilitate the transition of those employees to Buyer.
Section 5.02 Books and Records. From and after the Closing Date, subject to the reasonable
confidentiality precautions of the party whose information is being accessed, each party will, during
normal business hours and upon reasonable notice from any requesting party:
(a) cause such requesting party and such requesting party’s Representatives to have
reasonable access to the books and records of such party related to the Business and the Purchased Assets,
and to the personnel responsible for preparing and maintaining such books and records, if available, in
each case to the extent necessary to
(i) defend or pursue any Action;
(ii) defend or pursue indemnification matters hereunder;
(iii) prepare or audit financial statements;
(iv) prepare or file Tax Returns; or
(v) address other Tax, accounting, financial or legal matters or respond to any
investigation or other inquiry by or under the control of any Governmental Authority.
(b) permit such requesting party and such requesting party’s Representatives to make
copies of such books and records for the foregoing purposes, at such requesting party’s expense; and
(c) maintain and preserve such party’s books and records at such party’s expense. If
requested by the disclosing party, the requesting party will provide reasonable substantiation of such
requesting party’s purpose for such access to show that such access is for one or more of the foregoing
permitted purposes.
Section 5.03 Public Announcements. Neither party shall make any public announcements in
respect of this Agreement or any of the Transaction Documents, or the transactions contemplated hereby
or thereby, or otherwise communicate with any news media without the prior written consent of the other
party (which shall not be unreasonably withheld or delayed). Each of the parties will cooperate in issuing,
promptly after Closing, a joint press release (with mutually agreed upon text) that announces the parties’
entry into this Agreement and the transactions contemplated herein generally.
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Section 5.04 Satisfaction of Excluded Liabilities. From and after the Closing Date, at
Seller’s expense, Seller will satisfy all Excluded Liabilities in the Ordinary Course of Business in a
manner that is not detrimental in any material respect to the Business, the Purchased Assets, or any of the
relationships of the Business (including with lessors, employees, Governmental Authorities, licensors,
customers, and suppliers).
Section 5.05 Confidentiality. From and after the Closing, Seller and its Affiliates shall hold,
and shall use its reasonable best efforts to cause its or their respective Representatives to hold, in
confidence any and all information, whether written or oral, concerning the Business, except to the extent
that Seller can show that such information:
(a) is generally available to and known by the public through no fault of Seller, any of its
Affiliates or their respective Representatives; or
(b) is lawfully acquired by Seller, any of its Affiliates or their respective Representatives
from and after the Closing from sources which are not prohibited from disclosing such information by a
legal, contractual or fiduciary obligation.
(c) If Seller or any of its Affiliates or their respective Representatives are compelled to disclose any
information by judicial or administrative process or by other requirements of Law, Seller shall promptly
notify Buyer in writing and shall disclose only that portion of such information which Seller is advised
by its counsel in writing is legally required to be disclosed; provided, that Seller shall use reasonable
best efforts to obtain an appropriate protective order or other reasonable assurance that confidential
treatment will be accorded such information.
Section 5.06 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration, value
added and other such Taxes and fees (including any penalties and interest) incurred in connection with
this Agreement and the other Transaction Documents shall be borne and paid by Seller when due. Seller
shall, at its own expense, timely file any Tax Return or other document with respect to such Taxes or fees
(and Buyer shall cooperate with respect thereto as necessary).
Section 5.07 Further Assurances. From and after the Closing, each of the parties hereto
shall, and shall cause their respective Affiliates to, execute and deliver such additional documents,
instruments, conveyances and assurances and take such further actions as may be reasonably required to
carry out the provisions hereof and give effect to the transactions contemplated by this Agreement.
Section 5.08 Lease Agreement. At Closing, Buyer shall enter into a lease agreement (the
“Lease Agreement”) with _____________ (“Landlord”) pursuant to which Buyer will lease the
Business Premises from Landlord for the sum of $10,000.00 per month gross rent for a term of three (3)
years. As a condition of the Lease Agreement, Buyer shall obtain a full release of any and all liabilities of
Seller, or any personal guarantor of Seller, with respect to Seller’s lease of the Business Premises.
Section 5.09 Non-Competition and Non-Solicitation. For a period of three (3) years from
and after the Closing Date, Seller and its Affiliates shall not, anywhere within the States of Minnesota and
Wisconsin, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be
connected in any manner with the ownership, management, operation, or control of any business that
competes, directly or indirectly, with the Business. Seller shall execute and deliver at Closing, and shall
cause each of its shareholders to execute and deliver at Closing, a written agreement containing these and
other customary terms and conditions in the form attached hereto as Exhibit G and incorporated herein
by reference (the “Non-Compete Agreement”).
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ARTICLE VI.
CONDUCT OF THE BUSINESS PRIOR TO CLOSING
Section 6.01 Restrictions. Seller covenants and warrants, during the period from the
Effective Date to the Closing Date (except as Buyer otherwise has consented in writing), the following:
(a) the Business will be conducted only in the usual and ordinary manner, consistent with
past practice;
(b) Seller will maintain its properties and other assets in good working condition (normal
wear and tear excepted); and
(c) Seller will use its best efforts to preserve and maintain the Business, keep available to
Buyer the services of the present employees of the Business, and not impair relationships with suppliers
or customers of the Business.
Section 6.02 Access to Information. For a period of thirty (30) days from and after the
Effective Date (the “Due Diligence Period”), Seller shall give to Buyer and its attorneys, accountants or
other authorized representatives, full access to all of the property, books, contracts, commitments and
records relating to the Business and the Purchased Assets and shall furnish to Buyer during such period
such information concerning the Business and the Purchased Assets as Buyer may reasonably request.
Seller understands and agrees that Buyer will be involved in a due diligence examination of the Business
(the “Due Diligence Examination”) and that the satisfactory completion of such Due Diligence
Examination prior to the expiration of the Due Diligence Period will be a pre-condition to any obligation
of the Buyer to complete the transactions contemplated in this Agreement; provided, Buyer acknowledges
and agrees that the Earnest Money shall become non-refundable and shall be retained by Seller in the
event Buyer fails or refuses to proceed with the Closing for any reason following the expiration of the
Due Diligence Period.
ARTICLE VII.
CLOSING; CONDITIONS TO CLOSING; CLOSING DELIVERABLES
Section 7.01 Closing. Subject to the terms and conditions of this Agreement, the purchase and
sale of the Purchased Assets contemplated hereby shall take place at a closing (the “Closing”) to be held
at 10:00 a.m., Central Standard Time, at the offices of Messerli & Kramer, P.A., 100 South Fifth Street,
Suite 1400, Minneapolis, Minnesota 55402, on such date as Sellers and Buyer may mutually agree upon
(the “Closing Date”); provided, this Agreement shall be voidable at the option of either party in the event
Closing has not occurred by December 31, 2016. By agreement of the parties hereto, the Closing may
take place by electronic or similar remote exchange of documents and signature pages.
Section 7.02 Conditions to Closing.
(a) The obligation of Buyer to proceed on the Closing Date shall be subject to the
satisfaction, at or prior to the Closing, of all of the following conditions:
(i) the representations and warranties of Seller herein shall be true in all material
respects on the Closing Date with the same effect as though made at such time;
(ii) Seller shall have performed all material obligations and complied with all material
covenants and conditions required of Seller prior to or as of the Closing Date, to Buyer’s
reasonable satisfaction;
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(iii) Buyer is satisfied, in Buyer’s reasonable discretion, with the results of the Due
Diligence Examination; and
(iv) All of the documents required in Section 7.03 shall have been executed and
delivered by Seller, as applicable.
(b) The obligation of Seller to proceed on the Closing Date shall be subject to the
satisfaction, at or prior to the Closing, of all of the following conditions:
(i) the representations and warranties of Buyer herein shall be true in all material
respects on the Closing Date with the same effect as though made at such time;
(ii) Buyer shall have entered into the Lease Agreement as of the Closing Date; and
(iii) All of the documents required in Section 7.04 shall have been executed and
delivered.
Section 7.03 Deliveries to be Made by Seller at Closing.At the Closing, Seller shall deliver
to Buyer:
(a) a bill of sale in the form of Exhibit H attached hereto and incorporated herein by
reference (the “Bill of Sale”), incorporated herein by reference, duly executed by Seller;
(b) the Security Agreement, duly executed by Seller;
(c) an assignment and assumption agreement in the form of Exhibit I attached hereto and
incorporated herein by reference (the “Assignment and Assumption Agreement”), incorporated herein
by reference, duly executed by Seller;
(d) documents of assignment and transfer (the “Intellectual Property Assignments”), duly
executed by Seller, transferring all of Seller’s right, title and interest in and to any of Intellectual Property
to Buyer;
(e) the Non-Compete Agreement, duly executed by Seller;
(f) a certificate, dated as of the Closing Date and signed by a duly authorized officer of
Seller, certifying:
(i) that attached thereto are a true, correct and complete copy of the organizational
documents of Seller, in each case as are then in full force and effect;
(ii) that attached thereto are a true, correct and complete copy of all resolutions of the
members of Seller, in each case duly authorizing the execution, delivery and performance of this
Agreement, each of the Transaction Documents to which Seller is a party, and the consummation
of the transactions contemplated herein and therein, and that all such resolutions are in full force
and effect; and
(iii) the names and signatures of the officers of Seller authorized to sign this
Agreement, the Transaction Documents and other documents and instruments to be delivered
pursuant to this Agreement;
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(g) a good standing certificate for Seller from the secretary of state or similar Governmental
Authority of the jurisdictions under the Laws in which Seller is organized and qualified; and
(h) such other documents, certificates or instruments as Buyer reasonably requests and are
reasonably necessary to consummate the transactions contemplated by this Agreement.
Section 7.04 Deliveries to be Made by Buyer at Closing. At the Closing, Buyer shall deliver
to Seller:
(a) that portion of the Purchase Price due and payable at Closing pursuant to Section 2.04(a);
(b) the Promissory Note, duly executed by Buyer;
(c) the Guaranty, duly executed by each of Seller’s shareholders, jointly and severally;
(d) the Security Agreement, duly executed by Buyer;
(e) the Assignment and Assumption Agreement, duly executed by Buyer;
(f) the Intellectual Property Assignments, duly executed by Buyer;
(g) the Non-Compete Agreement, duly executed by Buyer;
(h) a certificate, dated as of the Closing Date and signed by a duly authorized officer of
Buyer, certifying:
(i) that attached thereto are a true, correct and complete copy of the organizational
documents of Buyer, in each case as are then in full force and effect;
(ii) that attached thereto are a true, correct and complete copy of all resolutions of the
members of Buyer duly authorizing the execution, delivery and performance of this Agreement,
each of the Transaction Documents to which Buyer is a party, and the other documents to be
delivered pursuant to this Agreement, and the consummation of the transactions contemplated
herein and therein, and that all such resolutions are in full force and effect;
(iii) certifying the names and signatures of the officers of Buyer authorized to sign this
Agreement, the Buyer Transaction Documents and the other documents and instruments to be
delivered pursuant to this Agreement; and
(i) a good standing certificate for Buyer from the secretary of state or similar Governmental
Authority of the jurisdictions under the Laws in which Seller is organized and qualified; and
(j) Such other documents, certificates or instruments as Seller reasonably requests and are
reasonably necessary to consummate the transactions contemplated by this Agreement.
Section 7.05 Termination by Seller. This Agreement may be terminated by Seller if the
conditions precedent set forth in Section 7.02(b) have not been fulfilled as of the Closing Date, in which
case Seller shall be entitled to retain the Earnest Money.
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ARTICLE VIII.
INDEMNIFICATION
Section 8.01 Survival. Subject to the limitations and other provisions of this Agreement, the
representations and warranties contained herein shall survive the Closing for a period of twelve (12)
months. Notwithstanding the foregoing, any claims asserted in good faith with reasonable specificity (to
the extent known at such time) and in writing by notice from the non-breaching party to the breaching
party prior to the expiration date of the applicable survival period shall not thereafter be barred by the
expiration of such survival period and such claims shall survive until finally resolved.
Section 8.02 Indemnification by Seller. Subject to the other terms and conditions of this
ARTICLE VIII, Seller shall indemnify and defend each of the Buyer and its Affiliates and their
respective Representatives (collectively, the “Buyer Indemnitees”) against, and shall hold each of them
harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or
sustained by, or imposed upon, the Buyer Indemnitees based upon, arising out of, with respect to or by
reason of:
(a) any inaccuracy in or breach of any of the representations or warranties of Seller contained
in this Agreement or in any certificate or instrument delivered by or on behalf of Seller pursuant to this
Agreement;
(b) any nonfulfillment or breach of any covenant, agreement or obligation to be performed

by Seller under this Agreement or any Transaction Document or any certificate furnished by Seller
pursuant to this Agreement or any Transaction Document;
(c) operation and ownership of the Business and the Purchased Assets prior to the Closing
Date, other than the Assumed Liabilities;
(d) any Excluded Liabilities;
(e) any Excluded Assets; and
(f) all actions, suits, proceedings, demands, assessments or judgments (including all
reasonable attorney fees and expenses) incident to any of the foregoing.
Section 8.03 Indemnification By Buyer. Subject to the other terms and conditions of this
ARTICLE VIII, Buyer shall indemnify and defend each of Seller and its Affiliates and their respective
Representatives (collectively, the “Seller Indemnitees”) against, and shall hold each of them harmless
from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained
by, or imposed upon, Seller Indemnitees based upon, arising out of, with respect to or by reason of:
(a) any inaccuracy in or breach of any of the representations or warranties of Buyer

contained in this Agreement or any Transaction Document or in any certificate or instrument delivered by
or on behalf of Buyer pursuant to this Agreement or any Transaction Document; or
(b) any nonfulfillment or breach of any covenant, agreement or obligation to be performed

by Buyer under this Agreement or any certificate furnished by Buyer pursuant to this Agreement;
(c) any of the Assumed Liabilities;
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(d) operation and ownership of the Business and the Purchased Assets from and after the
Closing Date, other than the Excluded Liabilities; and
(e) all actions, suits proceedings, demands, assessments or judgments (including all
reasonable attorney fees and expenses) incident to any of the foregoing.
Section 8.04 Indemnification Procedures. The party making a claim under this ARTICLE
VIII is referred to as the “Indemnitee,” and the party against whom such claims are asserted under this
ARTICLE VIII is referred to as the “Indemnifying Party”.
(a) Third Party Claims. If any Indemnitee receives notice of the assertion or
commencement of any Action made or brought by any Person who is not a party to this Agreement or an
Affiliate of a party to this Agreement or a Representative of the foregoing (a “Third Party Claim”)
against such Indemnitee with respect to which the Indemnifying Party is obligated to provide
indemnification under this Agreement, the Indemnitee shall give the Indemnifying Party reasonably
prompt written notice thereof, but in any event not later than 30 calendar days after receipt of such notice
of such Third Party Claim. The failure to give such prompt written notice shall not, however, relieve the
Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying
Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnitee shall describe the
Third Party Claim in reasonable detail, shall include copies of all material written evidence thereof and
shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be
sustained by the Indemnitee. The Indemnifying Party shall have the right to participate in, or by giving
written notice to the Indemnitee, to assume the defense of any Third Party Claim at the Indemnifying
Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnitee shall cooperate in good
faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third Party
Claim, subject to Section 8.04(b), it shall have the right to take such action as it deems necessary to
avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the
name and on behalf of the Indemnitee. The Indemnitee shall have the right to participate in the defense of
any Third Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the
defense thereof. The fees and disbursements of such counsel shall be at the expense of the Indemnitee;
provided, that if in the reasonable opinion of counsel to the Indemnitee:
(i) there are legal defenses available to an Indemnitee that are different from or
additional to those available to the Indemnifying Party;
(ii) there exists a conflict of interest between the Indemnifying Party and the
Indemnitee that cannot be waived;
(iii) the Claim relates to or arises in connection with any criminal or quasi-criminal
proceeding, action, indictment, allegation or investigation; or
(iv) the Indemnitee reasonably believes an adverse determination with respect to the
action, lawsuit, investigation, proceeding or other claim giving rise to such Claim for
indemnification would be materially detrimental to or materially injure the Indemnitee’s
reputation or future business prospects; the Indemnifying Party shall be liable for the reasonable
fees and expenses of counsel to the Indemnitee in each jurisdiction for which the Indemnitee
determines counsel is required. If the Indemnifying Party elects not to compromise or defend
such Third Party Claim, fails to promptly notify the Indemnitee in writing of its election to defend
as provided in this Agreement, or fails to diligently prosecute the defense of such Third Party
Claim, the Indemnitee may, subject to Section 8.04(b), pay, compromise, defend such Third Party
Claim and seek indemnification for any and all Losses based upon, arising from or relating to
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such Third Party Claim. Seller and Buyer shall cooperate with each other in all reasonable
respects in connection with the defense of any Third Party Claim, including making available
(subject to the provisions of Section 5.02) records relating to such Third Party Claim and
furnishing, without expense (other than reimbursement of actual out-of-pocket expenses) to the
defending party, management employees of the non-defending party as may be reasonably
necessary for the preparation of the defense of such Third Party Claim.
(b) Settlement of Third Party Claims. Notwithstanding any other provision of this
Agreement, the Indemnifying Party shall not enter into settlement of any Third Party Claim without the
prior written consent of the Indemnitee, except as provided in this Section 8.04(b). If a firm offer is made
to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation
on the part of the Indemnitee and provides, in customary form, for the unconditional release of each
Indemnitee from all liabilities and obligations in connection with such Third Party Claim and the
Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written
notice to that effect to the Indemnitee. If the Indemnitee fails to consent to such firm offer within ten (10)
days after its receipt of such notice, the Indemnitee may continue to contest or defend such Third Party
Claim and in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim
shall not exceed the amount of such settlement offer. If the Indemnitee fails to consent to such firm offer
and also fails to assume defense of such Third Party Claim, the Indemnifying Party may settle the Third
Party Claim upon the terms set forth in such firm offer to settle such Third Party Claim. If the Indemnitee
has assumed the defense pursuant to Section 8.04(a), it shall not agree to any settlement without the
written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or
delayed)Direct Claims. Any Action by an Indemnitee on account of a Loss which does not result from a
Third Party Claim (a “Direct Claim”) shall be asserted by the Indemnitee giving the Indemnifying Party
reasonably prompt written notice thereof, but in any event not later than thirty (30) days after the
Indemnitee becomes aware of such Direct Claim. The failure to give such prompt written notice shall not,
however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent
that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the
Indemnitee shall describe the Direct Claim in reasonable detail, shall include copies of all material written
evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has
been or may be sustained by the Indemnitee. The Indemnifying Party shall have thirty (30) days after its
receipt of such notice to respond in writing to such Direct Claim. The Indemnitee shall allow the
Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give
rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct
Claim and the Indemnitee shall assist the Indemnifying Party’s investigation by giving such information
and assistance (including access to Seller’s premises and personnel and the right to examine and copy any
accounts, documents or records) as the Indemnifying Party or any of its professional advisors may
reasonably request. If the Indemnifying Party does not so respond within such 30 day period, the
Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnitee shall be
free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the
provisions of this Agreement.Cooperation. Upon a reasonable request by the Indemnifying Party, each
Indemnitee seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult
with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying
Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or
expenses associated with taking such actions shall be included as Losses hereunder.
Section 8.05 Tax Treatment of Indemnification Payments. All indemnification payments

made under this Agreement shall be treated by the parties as an adjustment to the Purchase Price for Tax
purposes, unless otherwise required by Law.
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Section 8.06 Exclusive Remedies. The parties acknowledge and agree that their sole and
exclusive remedy with respect to any and all claims (other than claims arising from fraud, criminal
activity or willful misconduct on the part of a party hereto in connection with the transactions
contemplated by this Agreement) for any breach of any representation, warranty, covenant, agreement or
obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant
to the indemnification provisions set forth in this ARTICLE VIII. Nothing in this Section 8.06 shall
limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled or to
seek any remedy on account of any Person’s fraudulent, criminal or intentional misconduct.
ARTICLE IX.
MISCELLANEOUS
Section 9.01 Expenses. Except as otherwise expressly provided herein, all costs and expenses,
including, without limitation, fees and disbursements of counsel, financial advisors and accountants,
incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses, whether or not the Closing shall have occurred.
Section 9.02 Notices. All notices, requests, consents, claims, demands, waivers and other
communications hereunder shall be in writing and shall be deemed to have been given
(a) when delivered by hand (with written confirmation of receipt);
(b) when received by the addressee if sent by a nationally recognized overnight courier
(receipt requested);
(c) on the date sent by e-mail of a .pdf document (with confirmation of transmission) if sent
during normal business hours of the recipient, and on the next Business Day if sent after normal business
hours of the recipient; or
(d) on the third day after the date mailed, by certified or registered mail, return receipt
requested, postage prepaid. Such communications must be sent to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a notice given in accordance with
this Section):
If to Seller: XYZ, LLC
With a copy to Messerli & Kramer P.A.

(which does not constitute notice): 100 South Fifth Street, Suite 1400
Minneapolis, MN 55402
Attention: Kip R. Peterson, Esq.
If to Buyer: ABC Acquisitions, Inc.
Section 9.03 Interpretation. For purposes of this Agreement, (a) the words “include,”
“includes” and “including” shall be deemed to be followed by the words “without limitation”; (b) the
word “or” is not exclusive; and (c) the words “herein,” “hereof,” “hereby,” “hereto” and “hereunder” refer
to this Agreement as a whole. This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting an instrument or causing any
192
instrument to be drafted. The schedules and exhibits referred to herein shall be construed with, and as an
integral part of, this Agreement to the same extent as if they were fully set forth herein.
Section 9.04 Headings. The headings in this Agreement are for reference only and shall not
affect the interpretation of this Agreement.
Section 9.05 Severability. If any term or provision of this Agreement is invalid, illegal or
unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other
term or provision of this Agreement or invalidate or render unenforceable such term or provision in any
other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or
unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby be consummated as originally contemplated to the greatest extent
possible.
Section 9.06 Entire Agreement. This Agreement, together with Transaction Documents and
the schedules and documents delivered pursuant to and specified in this Agreement or the Transaction
Documents, constitute the sole and entire agreement of the parties to this Agreement with respect to the
subject matter contained herein and therein, and supersede all prior and contemporaneous understandings
and agreements, both written and oral, with respect to such subject matter. In the event of any
inconsistency between this Agreement and any of the Transaction Documents, or any schedule or exhibit
to this Agreement or any of the Transaction Documents, this Agreement will control.
Section 9.07 Successors and Assigns. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and permitted assigns. Neither party
may assign its rights or obligations hereunder without the prior written consent of the other party, which
consent shall not be unreasonably withheld or delayed. No assignment shall relieve the assigning party of
any of its obligations hereunder.
Section 9.08 No Third-Party Beneficiaries. Except as provided in ARTICLE VIII, this

Agreement is for the sole benefit of the parties hereto and their respective successors and permitted
assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or
entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
Section 9.09 Amendment and Modification; Waiver. This Agreement may only be
amended, modified or supplemented by an agreement in writing signed by each party hereto. No waiver
by any party of any of the provisions hereof shall be effective unless explicitly set forth in writing and
signed by the party so waiving. No waiver by any party shall operate or be construed as a waiver in
respect of any failure, breach or default not expressly identified by such written waiver, whether of a
similar or different character, and whether occurring before or after that waiver. No failure to exercise, or
delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be
construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.
Section 9.10 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.This

Agreement shall be governed by and construed in accordance with the internal laws of the State of
Minnesota without giving effect to any choice or conflict of law provision or rule that would cause the
application of Laws of any jurisdiction other than those of the State of Minnesota.
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(b) ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED
UPON THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MUST BE INSTITUTED IN THE
FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE
OF MINNESOTA IN EACH CASE LOCATED IN THE CITY OF MINNEAPOLIS AND COUNTY OF
HENNEPIN, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE
OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY’S
ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT,
ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT. THE PARTIES
IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF
VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND
IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY

WHICH MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION
DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND,
THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING
OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY TO THIS
AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A
LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER,
(C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.10(c).
Section 9.11 Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall be deemed to be one and the same agreement.
A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission
shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
194
IN WITNESS WHEREOF, the parties, through the undersigned duly authorized representatives,
have executed this Agreement as of the Effective Date.
SELLER:
XYZ, LLC
By:
Its:
BUYER:
ABC ACQUISITIONS, INC.
By:
Its:
[Signature Page to Asset Purchase Agreement]
195
196
Drafting and Reviewing Common Business
Contracts: What You Need to Watch Out For
Submitted by Allen Sparkman
197
198
Drafting and Reviewing Common Business Contracts: What You Need to Watch Out For
I. Asset Purchase Agreements and Stock Purchase Agreements

A. Most issues will apply to both asset purchase agreements and stock purchase
agreements.
B. Many acquisitions begin with a letter of intent (“LOI”). Both parties will want to
insure that the LOI contains language providing that there will be no binding
agreement between the parties unless and until the parties enter into a definitive
acquisition agreement.
C. Speaking generally, sellers will prefer stock sales and buyers will prefer (and
often insist on) asset sales.
D. Buyers prefer asset acquisitions because:
x In a stock sale, buyer will acquire all of the assets of the target but will
also acquire all of the target’s liabilities.
x Asset sale allows buyer to obtain cost basis in all assets acquired.
x Asset sale can avoid acquisition of undesired liabilities.
x Buyer may cherry pick the contractual obligations and other liabilities of
the target.
x Asset sale allows more significant and precise disclosure.
x Asset sale provides opportunity to enter into new contractual
relationships.
x Asset sale allows for picking and choosing employees of target and
altering contractual relationships.
E. A buyer may not want an asset sale if the target has valuable contracts that cannot
be assigned.
F. Buyer will insist on seller representations and warranties to insure that buyer
receives what the buyer has bargained for.
1. What if buyer knows that one of the seller’s representations is false? Can
the buyer nevertheless recover damages for breach of that
representation? This will depend on whether the contract contains an
anti-sandbagging clause and, if not, what the applicable state law
provides. The Private Target Mergers and Acquisitions Deal Points
Study (hereafter, “Deal Points Study”) 1 reports that 41% of the deals it
reviewed included a provision permitting sandbagging, that 10%
included a prohibition and that 49% were silent. If the agreement is
silent, the law of some states, e.g., Colorado, would say that buyer could
1
A Project of the M & A Market Trends Subcommittee of the Mergers and Acquisitions Committee of the Business
Law Section of the American Bar Association (including transactions completed in 2012) (December 31, 2013).
199
not recover because, knowing before closing of seller’s
misrepresentation, buyer could not have relied on seller’s representation.
Associates of San Lazaro v. San Lazaro Park Properties, 864 P.2nd 111
(Colo. 1993) (Buyer discovered inaccuracies due to its own independent
investigation after signing and consequently did not rely on the seller’s
information at closing and thus waived its warranty claim). Delaware
courts hold that the warranties and representations in a purchase and sale
agreement serve an important risk allocation function and that,
accordingly, a seller’s breach of its representations and warranties
constitutes a breach of contract and does not require the buyer to
demonstrate reliance. Universal Enterprise Group, L.P. v. Duncan
Petroleum Corporation, (Case No. 4948-VCL, Del. Ch. 2013). State
law treatment of sand bagging claims depends on whether the state law
treats breach of a representation or warranty as a tort or as a breach of
contract. See generally, Charles K. Whitehead, “Sandbagging: Default
Rules and Acquisition Agreements”, 36 Del. J. Corp. L. 1081 (2011).
2. Buyers should resist seller requests to “tax-benefit” any claims
paid by the seller to the Buyer.
3. A common ploy by Sellers is to assert that if the Seller has to pay a
claim made by the Buyer, the Seller’s payment should be reduced by the
tax benefit the Buyer receives from the payment. The Deal Points Study
reports that 52% of deals provided for a reduction in the Seller’s liability
for the tax benefit to the Buyer. Moreover, according to the Deal Points
Study, 44% of deals included an express requirement that the Buyer
mitigate losses. A mitigation requirement may well include an
obligation to maximize tax benefits.2 A representative purchase and sale
agreement contained this simple provision: “For purposes of this
Agreement, any determination of Losses shall be reduced by any Tax
Benefits actually received by the Indemnified Party.” An obligation on
the part of the Buyer to take tax benefits into account raises several
questions.
4. The Seller’s tax benefit argument is basically that it is unfair to the

Seller to allow the Buyer to receive a gross indemnification payment and
also to be able to enjoy the tax benefit arising from the circumstances
upon which the Buyer’s indemnification claims are based. For example,
if the Seller has represented that there are no closing date liabilities other
than those disclosed, but it is later discovered that there was an
2
John F. Corrigan and E. Hans Lundsten, “Buyer Beware: Reduced Indemnity on Account of Supposed (Mythical?)
Tax benefits,” XVII Deal Points: The Newsletter of the Mergers and Acquisitions Committee, Issue 1 (Winter 2013)
200
undisclosed pre-closing payable of $1,000, the Buyer would have a
breach of representation claim for $1,000. If the Seller paid the Buyer a
$1,000 indemnification payment because of this claim, the Seller argues
that the Buyer could also claim an expense deduction on its income tax
return with respect to this pre-closing liability that would save the Buyer
(at the 35% rate) $350 of federal income tax.3
5. The problems include that the Buyer most likely will not be able to
deduct its payment but, instead, will have to include it as a capital cost
of purchasing the Seller’s assets or equity. There are some provisions in
the regulations under IRC § 461 that appear to allow a buyer to deduct a
liability where the target sells buyer a trade or business and, as part of
the sale, buyer “expressly assumes” a liability described in IRC §
461(h) 4, but it appears unlikely that a buyer would be considered to have
“expressly assumed” the liability it pays because of the seller’s
misrepresentation. Another significant problem is what happens if a
dispute arises between the Buyer and Seller with respect to whether the
Buyer realized a tax benefit and, if so, how much. Will the Seller be
permitted to examine the Buyer’s income tax returns? Will the Seller be
able to require the Buyer to take a position on its tax return that may
disadvantage the Buyer in some way?
G. Earn-outs.
1. Assume that some issue causes the parties to consider an earnout. For
example, assume buyer learns that seller has a very favorable contract
for its supply of raw materials that buyer will not be able to assume.
Buyer informs seller that it is no longer willing to pay the acquisition
price that has been discussed.
2. After some discussion, seller and buyer agree that buyer will pay X to
seller at closing and will pay an additional .2X one year later if the
receipts of the business increase by 20% or more over the 12 months
after closing.
3. Buyer must pay careful attention to how the earn out is structured and
defined. If the earn out is not carefully drafted, buyer may owe the
additional .2X even if the base business purchased from seller does not
increase but the revenues increase substantially because buyer expands
the business. Several years ago, the author served as an expert witness
in a malpractice action brought by the Buyer against his attorneys for
failing to understand that the earnout provision in the purchase and sale
3
Id.
4
Treas. Reg. § 1.461-4(d)(5).
201
agreement, together with the PSA’s definition of “affiliate,” caused the
amount that the Buyer was required to pay under the earnout to include
earnings of the Buyer’s entire business, not just the business the Buyer
purchased under the PSA.
4. If buyer then argues that revenues from the “business” acquired from
seller haven’t increased at all, buyer may face a claim from seller that
buyer has breached the implied covenant of good faith and fair dealing
by not continuing the business that seller was conducting at a level at
least equal to that conducted by seller. In American Capital Acquisition
Partners, LLC v. LPL Holdings, Inc. (Del. Ch. Feb. 3, 2014), the court
held that a buyer may have breached the implied covenant of good faith
and fair dealing by “pivoting” sales away from the target company,
making it difficult for the target company to hit earnout targets. 5
5. If part of the consideration for the sale of a business is an earnout, the
parties must also consider what access the seller will have to the buyer’s
financial records to audit compliance with the earnout. What reports
will the buyer be required to provide the seller?
H. Material Adverse Change Carve-outs to Reps and Warranties
1. Use in Merger and other Acquisition Agreements. These clauses or

modifiers are variously known as "Material Adverse Change" "Material
Adverse Effect" and "Material Adverse Event" provisions. They are
often used not only in representations but also in target company
covenants and as closing conditions of the buyer.
2. As Qualifiers in Post-Signing Covenants. These qualifiers are often used

in covenants concerning operating the Target business after signing of
an acquisition agreement, but before the transaction actually close. For
example, the following provision is an abbreviated version of the pre-
merger closing covenants of Target usually found in merger agreements.
Note that the provision is often much lengthier as it contains a laundry
list" of actions that the Target may not take in the period between
signing and closing. In a merger, this can be lengthy period if regulatory
approvals, such as in the antitrust area, health care, or other regulated
industry are required before the merger can close.
3. Target's Actions Pending Merger
5
Discussed in XIX Deal Points: The Newsletter of the Mergers and Acquisitions Committee, Issue 2 (Spring 2014)
15
202
Except as otherwise specifically provided in this Agreement, from the date of this
Agreement to the earlier of Effective Time or termination, Target agrees, to:
(i) conduct its operations only in the ordinary and usual
course of business and consistent with past practices and
not take any action outside of the ordinary course of
business as of the Signing Date that could/would have a
material adverse effect on the business of the Target as
conducted as of the Signing Date;
(ii) use its commercially reasonable efforts to preserve
intact its present business organization, keep available the
services of its present officers, key employees and
consultants and preserve its present relationships with
licensors, licensees, customers, suppliers, key employees,
labor organizations and others having business relationships
with it.
As a closing condition, these qualifiers may be used to allow a party, usually the buyer, to
terminate the acquisition agreement if a material adverse change has occurred with respect to a
certain fact about the business between the Signing Date and the planned Closing Date.
4. As Qualifiers for Representations

The typical representation formulation in an acquisition agreement is that a representation
is true and correct except to the extent that not being true or correct "would not have a material
adverse effect" on the business of the corporation or the closing of the acquisition transaction.
Below is a basic example of a use of the term "material adverse effect" that is frequently
acceptable to the buyer in a merger agreement Target representation regarding qualifications to
do business:
x. Foreign Qualifications. The Corporation is qualified to do
business in all jurisdictions in which it is required to be qualified
except to the extent that not being so qualified would not have a
material adverse effect on the business of the corporation as
presently conducted.
Material adverse effect clauses may also be used as gap-fillers with respect to time
periods. For example:
y. No Material Adverse Change. "Since December 31, 2014, (the

end date for the Corporation's financial statements last delivered to
the Buyer relate) there has not been a Material Adverse Change in
the Corporation's business."
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5. Defining Material Adverse Change. Some acquisition agreements
do not contain a definition for the term "material adverse change." Others
use broadly worded definitions:
"Material Adverse Change" means any event or change that would

be materially adverse to the business, assets, condition (financial or
otherwise), operating results, operations, [or business prospects]
of the Corporation, taken as a whole, or to the ability of Buyer or
Target to consummate timely the transactions contemplated by
this Agreement.
Neither of these solutions is particularly helpful to the Target because they are not
sufficiently detailed although the Target may not be able to obtain any definition, let alone a
more precise one, depending on Target's negotiating leverage.
A Target will want "Material Adverse Change" definitions to take into account events
and circumstances beyond the reasonable control of the Target. To help limit its liability, the
Target will want to include various exceptions to what constitutes a material adverse change that
could in tum cause a breach of a representation. These events tend to be broader in scope than
would be covered in a "force majeure" definition to provide Target with more protections from
buyer claims of a representation breach. Below is a much more detailed and Target-favorable
clause that might help a Target to reduce the likelihood of liability for the breach of
representations qualified by this phrase:
Seller Friendly:
"Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or
could reasonably be expected to become, individually or in the aggregate, materially adverse to
the business, results of operations, condition (financial or otherwise) or assets of the Target,
taken as a whole, or the ability of Target to consummate the transactions contemplated hereby on
a timely basis. "Material Adverse Effect" does not include any event, occurrence, fact, condition
or change, arising out of or attributable to: (i) general economic or political conditions; (ii) acts
of war (whether or not declared), armed hostilities or terrorism; (iii) any changes in applicable
Laws or accounting rules, including US GAAP; (iv) conditions generally affecting the industries
in which the Target operates or (v) any natural or man-made disaster or acts of God.
The highlighted portion of the above-definition illustrates one example of how the added
protections for a Target in clauses (i)-(v) may be weakened. A Target will want material adverse
events to be limited to those that are ("would") be significantly adverse to the Target. The
highlighted clause broadens what constitutes a Material Adverse Effect because it deals not only
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with an actual occurrence being materially adverse but also covers an actual occurrence that
could foreseeably become materially adverse to the Target. This exposes the Target to a greater
range of events that could result in liability under an acquisition agreement. If an event occurs
that is not materially adverse to the Target, the inquiry does not end there. The Target is also
being held responsible for events it should know are likely to become "materially adverse."
Determining how much this added phrase will increase the Target's liability is difficult to assess,
but it does broaden Target's liability exposure to some extent.
6. Knowledge Qualifiers
The Target may request that some representations and warranties be qualified by the
phrase "to the knowledge of Target" or a particular owner, officer or employee of Target. If the
buyer is willing to allow this, the parties will want to define "knowledge."- is it actual
knowledge, constructive knowledge (such as what is publicly available), or something else? In
evaluating whether a knowledge qualification is reasonable, a buyer also needs to consider
whether the Target has owners or others who are clearly responsible for different parts of the
business.
Some versions of this qualifier will state "to the Target's knowledge . . . ." and the Target
is an entity. If the Target has only a few employees, this may not matter much.
However, if the Target has even 10 employees, the identity of the person having
knowledge becomes more important. Below is a possible "Knowledge" definition:
“Knowledge" means (a) the actual knowledge of the
Person, including the actual knowledge of any of the
officers, directors, managers, or general partners of the
Person; and [(b) that knowledge that a reasonably
prudent businessperson could have obtained in the
management of his business ][after making due inquiry
and after exercising due diligence].
This knowledge qualifier is somewhat Target-friendly as it would limit knowledge to

officers or directors of a Target corporation in connection with a representation (such as
regarding the existence of threatened litigation). Under some circumstances, this may be too
broad to adequately protect Target. If Target has officers in multiple locations and has a
reasonably large number of employees (perhaps above 250), it is possible that threatened
litigation information may not have been communicated to the CEO or CFO or someone else in
corporate management who is directly participating in the acquisition process. A buyer will
argue that the knowledge of even a lower level officer should be imputed to the Target as the
Target should have clear reporting channels for threatened litigation to be brought to the
attention of senior management.
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After determining whose knowledge is relevant, the level or extent of the knowledge of
the individual or entity should be specified. One of three levels of knowledge is commonly used:
• Actual Knowledge
• Constructive Knowledge
• Inquiry Knowledge.
When inquiry knowledge is used it is usually in combination with one of the other two
types of knowledge coupled with the knowledge an individual would have after reasonable
investigation or inquiry about the subject of the representation.
Actual Knowledge refers to what an individual is consciously aware of as of a given date.

Constructive Knowledge refers to what an individual is deemed to be aware of because public
filings exist (such as a litigation complaint or a Uniform Commercial Code Financing Statement)
regarding a particular state of facts or events that are the subject of the representation. The least
Target-friendly level of knowledge is Inquiry Knowledge because it imposes an affirmative duty
on the individual responsible for the representation to investigate and determine whether, for
example, the corporation is subject to threatened litigation.
The interplay of whose knowledge and what type of knowledge can be complex. For
example, a Target may limit knowledge to that of the CEO and CFO, but if the CEO or CFO is
subject to an Inquiry Knowledge standard, the knowledge of lower level officers who report to
the CEO or CFO will likely be imputed to the CEO or CFO.
Another construction that is often acceptable to a buyer, but can be problematic for the
Target, is the "to the best of [CEO's/CFO's] knowledge . . . . " This may seem at first glance to
simply mean whatever the individual is actually aware of at a particular time. However, the word
"best" probably implies some level of duty of inquiry or investigation.
7. Indemnification as it Relates to Representations and Warranties—the

Materiality Scrape
Limiting one's indemnification obligations is often an umbrella solution that will in tum
limit liability for breached representations and warranties. Moreover, a Target who obtains what
appear to be significant concessions (whether through materiality, material adverse change,
knowledge or other qualifiers) limiting its liability for breached representations may have all that
effort undone by a "materiality scrape" provision. Over the years, "materiality scrape" provisions
have become a more popular tool for buyers to negate many of a Target's perceived gains in
qualifying its representations and warranties with materiality. This is because the
"materiality scrape" eliminates the materiality qualifier from each representation and warranty to
determine if an indemnifiable event (loss, damage) has occurred. A Target can thus not have
breached a representation or warranty because the materiality threshold has not been crossed, but
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still be liable under the indemnity provisions as if the materiality qualifier did not exist, making
the materiality qualifier somewhat illusory as a benefit to the Target.
One possible alternative is for the Target to negotiate higher deductibles and baskets to
avoid payouts for multiple immaterial breaches of representations and warranties. The Target
may also try to limit the representations and warranties to which the materiality scrape applies.
Below is an example of a materiality scrape provision, which typically appears in the
indemnification section of the acquisition agreement.
x. Materiality Qualifiers. With respect to determining the indemnification obligations

of Target or any Principal Shareholder in this Agreement arising from a breach by any of them of
a representation or warranty in this Agreement, all representations and warranties of Target in
this Agreement will be read without reference to materiality, Material Adverse Effect [or
similar monetary and non-monetary qualifications].
8. Drafting “Bad-Conduct” Carve-Outs
For a comprehensive, well-written look at issues arising in this area, see Glenn D. West,
“That Pesky Little Thing Called Fraud: An Examination of Buyers’ Insistence Upon (and
Sellers’ Too Ready Acceptance of) Undefined “Fraud Carve-Outs” in Acquisition Agreements,”
69 The Business Lawyer 1049 (August, 2014).
II. LLC Operating Agreements and Partnership Agreements
There are a number of important issues that an LLC agreement should address for the
benefit and protection of its members. Most, if not all, of these issues also apply to
partnership agreements. These include:
A. Management Structure.
1. Partnership laws generally provide that each general partner has equal rights in
management. This may be varied by agreement, but there may not be an efficient
way to try to make third parties aware of limitations on a partner’s rights.
2. Many LLC statutes provide that an LLC must specify at formation whether it is
managed by its members or will be managed by one or more managers. The
certificate of formation of a Delaware LLC does not state whether the LLC is
manager-managed or member-managed. Del. Code Ann. tit. 6, § 18-201 (2012).
Moreover, the Delaware LLC Act states:
Unless otherwise provided in a limited liability company agreement, the
management of a limited liability company shall be vested in its members
in proportion to the then current percentage or other interest of members in
the profits of the limited liability company owned by all of the members,
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the decision of members owning more than 50 percent of the said
percentage or other interest in the profits controlling; provided however,
that if a limited liability company agreement provides for the
management, in whole or in part, of a limited liability company by a
manager, the management of the limited liability company, to the extent
so provided, shall be vested in the manager who shall be chosen in the
manner provided in the limited liability company agreement.
Del. Code Ann. tit. 6, § 18-402 (2014).
B. Duties and Waiver. LLC and partnership agreements typically impose duties on the
governing persons of the entity. Governing persons of an entity also will ordinarily be
agents of the entity and will have duties of care and loyalty under agency law.
Statutes often provide standards for when an agreement may waive or modify duties
imposed by statute, and agency law also permits waiver or modification of its duties,
and agency law standards may differ from the standards in statutes.
C. The Need to Distinguish Between Waivers of Duty and Elimination of Liability.
If the parties to an operating agreement want to eliminate or limit fiduciary duties, they
must draft plainly and precisely. In Feeley v. NHAOCG, LLC, 6 the Delaware Court of Chancery
held that the following language did not eliminate fiduciary duties but instead recognized that
they existed and eliminated monetary liability for certain described breaches:
Limited Liability of Members. Except as and to the extent required

under the Delaware Act or this Agreement, no Member shall be (i)
liable for the debt, liabilities, contracts or any other obligations of
the Company; or (ii) liable, responsible, accountable in damages or
otherwise to the Company or the other Members for any act or
failure to act in connection with the Company and its business
unless the act or omission is attributed to gross negligence, willful
misconduct or fraud or constitutes a material breach by such
Member of any term or provision of this Agreement or any
agreement the Company may have with the Member.
Feeley is an admonition to drafters who intend to modify or waive fiduciary duties to take
care that the language chosen does in fact modify or waive duties and not just eliminate
monetary liability for breaches. If only monetary liability is waived, equitable remedies, such as
injunctive relief, rescission, imposition of a constructive trust, etc. may still be brought to bear. 7
6
Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012).
7
62 A.3d at 664.
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In Kelly v. Blum, 8 the LLC agreement before the court was silent on the issue of duties
owed by managers to the LLC and its members, with the exception of Sections 7.5 and 7.9. In
its entirety, Section 7.5, entitled “Duties,” stated that
[t]he Board of Managers shall manage the affairs of the Company

in a prudent and businesslike manner and shall devote such time to
the Company affairs as they shall, in their discretion exercised in
good faith, determine is reasonably necessary for the conduct of
such affairs.
In relevant part, Section 7.9 stated that
[i]n carrying out their duties hereunder, the Managers shall not be
liable for money damages for breach of fiduciary duty to the
Company nor to any Member for their good faith actions or
failure to act . . . but only for their own willful or fraudulent
misconduct or willful breach of their contractual or fiduciary
duties under this Agreement. 9
The court in Kelly held that the language of Sections 7.5 and 7.9 did not limit or eliminate
fiduciary duties. The court explained that Section 7.9 did exculpate the managers from monetary
liability for some breaches of fiduciary duty, but did not exculpate the managers from the willful
breach of duty alleged in this case. The court further stated:
Having been granted great contractual freedom by the LLC Act,

drafters of and parties to an LLC agreement should be expected to
provide parties and anyone interpreting the agreement with clear
and unambiguous provisions when they desire to expand, restrict,
or eliminate the operation of traditional fiduciary duties.10
The following two cases illustrate examples of poor drafting of exculpatory provisions.
In Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, 11 Section 6.1(b) of the
company agreement stated that “the Members shall have the same duties and obligations to each
8
2010 Del. CH. LEXIS 31 (Del. Ch. Feb. 24, 2010).
9
Id. at *46-47 (emphasis original).
10
Id. at *45-46 n. 70. This statement by the court is reminiscent of the 2006 statement by then Vice Chancellor
Strine of the Delaware Court of Chancery: “With the contractual freedom granted by the LLC Act comes the duty to
scriven with precision.” Willie Gary LLC v. James & Jackson, LLC, 2006 Del. Ch. LEXIS 3, at *5, 2006 WL 75309,
at *2 (Del. Ch. Jan. 10, 2006), aff’d, 906 A.2d 76 (Del. Super. Ct. 2006).
11
2009 WL 1124451 (Del. Ch. April 20, 2009).
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other that members of a limited liability company formed under the Delaware Act have to each
other. Section 6.2 of the company agreement provided that “Except for any duties imposed by
this Agreement . . . each Member shall owe no duty of any kind towards the Company or the
other Members in performing its duties and exercising its rights hereunder or otherwise.” For
purposes of ruling on defendants’ motion to dismiss, the court adopted plaintiff’s resolution of
the seeming conflict between Section 6.1(b) and Section 6.2 by concluding that Section 6.1(b)
meant that the members had default fiduciary duties and that Section 6.2, because by its terms it
did not apply to “any duties imposed by this agreement,” only eliminated duties that were not
traditional fiduciary duties or were otherwise not expressly contemplated by the company
agreement.
Kahn v. Portnoy 12 considered an LLC company agreement that provided that the
“authority, powers, functions and duties (including fiduciary duties)” of its board of directors
will be identical to those of a board of directors of a business corporation organized under the
Delaware General Corporation Law, unless otherwise specifically provided for in the company
agreement. The court found the provision of the company agreement that addressed interested
director transactions was ambiguous and, for purposes of the motion to dismiss before it,
interpreted that provision in favor of the plaintiff.
The court then addressed the exculpatory provisions in the company agreement:
The LLC Agreement contains two provisions that exculpate TA directors

from personal liability for monetary damages. Both of these provisions
contain exceptions for certain conduct that is not exculpated, and the two
provisions define these exceptions differently.
Section 10.2(a) eliminates personal director liability for money damages
for a breach of fiduciary duty except:
(i) for any breach of such director’s duty of loyalty to the Company or the
Shareholders as modified by this Agreement, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing
violation of law, or (iii) for any transaction from which such director
derived an improper personal benefit.
Section 10.2(b), which apples “[notwithstanding anything to the contrary”
in the LLC Agreement, eliminates liability for monetary damages for any
“Indemnitee,” which is defined to include directors, unless there has been
a final judgment that the person “acted in bad faith or engaged in fraud,
willful misconduct or, in the case of a criminal matter, acted with
knowledge that the Indemnitee’s conduct was unlawful.”
12
2008 WL 5197164 (Del. Ch. (December 11, 2008).
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It is unclear to the Court why the LLC Agreement includes two different,
and arguably conflicting, provisions exculpating directors from personal
liability for money damages. After much deliberation, I have been unable
to explain these provisions as anything other than poor drafting or a
strategy of “if one exculpatory provision is good, then two must be better.”
D. Choice of Law. Because the operating agreement of an LLC is a contract, the

members may wish to state that the law of a state other than the state of organization
should govern all or certain matters. Presumably, the freedom-of-contract language of
most state LLC Acts would allow the selection of another state’s law, at least for
matters not governed by a mandatory provision of the LLC Act of the state of
formation. A corresponding forum selection clause should also be respected. 13
The Delaware LLC Act states that “a limited liability company agreement that
provides for the application of Delaware law shall be governed by and construed
under the laws of the State of Delaware in accordance with its terms.” 14 It is unclear
how this provision might work in practice. Perhaps the members of, say, a Colorado
LLC might desire to insert a provision providing for the application of the Delaware
LLC Act to complement a provision setting the venue for disputes in the Delaware
courts. The operating agreement of a Colorado LLC presumably could not effectively
provide for the Delaware LLC’s Act provision on limiting duties to apply because
those provisions of the Delaware LLC Act are less restrictive than the provisions of
the LLC Act, which would continue to apply the LLC. 15
E. Amendment Provisions. Absent an agreement to the contrary, the LLC Act requires
a unanimous vote to amend an operating agreement.16 There may be reasons that a
unanimous vote should be required, such as where there are specially negotiated
provisions that should not be undone except by agreement of all of the members, or
perhaps by a super-majority. As an example, assume that an operating agreement
contains a provision requiring that a conversion or merger be approved by a three-
fourth’s vote, but permits amendments to the operating agreement by a majority vote.
Is there a potential problem if, on the eve of approving a plan of conversion for the
13 Richard T. Franch, Lawrence S. Schaner, & Anders C. Wick, “Choice of Law and Choice of Forum are Both
Crucial,” Nat’l L.J. (Feb. 11, 2002).
14. Del. Code. Ann. tit. 6, § 18-1101(i) (2013).

15
If the parties desire the maximum possible protection from fiduciary duty issues, the drafting attorney should
consider recommending that the LLC be formed in Delaware.
16
C.R.S. § 7-80-401(2)(b).
14
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LLC, a bare majority of the members amends the operating agreement to change the
required vote to approve a conversion to that of a majority?
In Twin Bridges Limited Partnership v. Draper, 17 the court applied the step
transaction doctrine familiar to tax lawyers to the analysis of the legal consequences
of the amendment of a partnership agreement to eliminate a super-majority voting
requirement followed by the partners’ approval (under the amended provision) of the
merger of the partnership into a newly formed limited partnership with a different
governing structure. Although the Delaware Chancery Court treated the two
transactions as one, it upheld the amendment and merger based on its interpretation of
the partnership agreement. In Fox v. I-10, LTD., 18 the Colorado Supreme Court
upheld the amendment of a limited partnership agreement by majority vote to
increase the contribution obligation of a limited partner who voted against the
amendment.
The amendment provisions should also address any other restrictions the members
desire to impose on amendments. For example, unless foreclosed by a well-drafted
provision in the agreement, an LLC agreement, like other contracts, may be amended
by the parties’ course of conduct. Of course, this author questions whether any
agreement that attempts to restrict amendment by course of conduct can actually do
so. Protecting a client’s interest by restricting amendment may require creativity.
Assume individuals A and B are the two equal members of XYZ, LLC. The LLC
agreement provides that the LLC will be dissolved and wound up if either member
dies. B dies. A desires to continue the LLC without dissolution. In the absence of
contrary provisions in the LLC agreement, A can accomplish his desire in substance.
At B’s death, B’s personal representative “may exercise all of the powers of an
assignee or transferee of the member” 19 As an assignee, B’s personal representative
will have no voting or information rights. Accordingly, A, as the sole member, may
amend the LLC agreement to remove the dissolution requirement. Although the LLC
would have dissolved upon B’s death, 20 In Colorado, A may reinstate the LLC as an
undissolved entity pursuant to part 10 of Article 90 of the Colorado Revised Statues.
The LLC agreement could have prevented this result if it had provided that B’s
personal representative would automatically be admitted as a member of the LLC
17
Twin Bridges Ltd. P’ship v. Draper, 2007 Del. Ch. LEXIS 136, at *34 (Del. Ch. Sept. 14, 2007).
18
Fox v. I-10, LTD., 957 P.2d 1018 (Colo. 1998).
19
C.R.S. §7-80-704(1).
20
C.R.S. § 7-80-801(1)(b).
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effective immediately upon B’s death or would have voting rights as a member
effectively immediately upon B’s death.
F. Purpose of the LLC. Many lawyers routinely state in the LLC agreements they draft
that the purpose of the LLC is to engage in any lawful business. This may not be the
best of drafting practices. The attorney should consider crafting a more narrow
purpose clause that reflects the actual intended business of the LLC; otherwise, duties
of the members or manager, such as the duty not to compete with the LLC, 21 may be
broader than the parties imagine. An expansive purpose clause may also result in an
inappropriately broad definition of “ordinary course of business” in the agency law
context.
If the members desire to limit the LLC’s purpose to engaging in only a specified
business or to limit the LLC to conducting its business only in a particular state or
only in particular cities or counties in that state, these restrictions should be protected
by the amendment provisions of the LLC agreement, as discussed above. Moreover,
to ensure that those managing the LLC cannot get around the limitations by forming a
subsidiary to conduct another business or to conduct business outside the permitted
areas, the limitation should be placed not just on the LLC but also on “affiliates” of
the LLC, and “affiliates” should be defined to effectuate the members’ intent.
G. Rights of Assignees. The statutory rights of an assignee of a member of an LLC and

the rights of an assignee of a partner of a partnership differ, but seldom are
satisfactory to the assignee. Especially in the case of a deceased member or partner,
or one for whom a guardian or conservator has been appointed, the members or
partners should give some consideration whether to expand the information rights in
those or other appropriate circumstances.
H. Tax Matters. There are many tax issues that a drafter may need or desire to address.
III. Exit Strategies 22
A. When Should Selling be Considered?
It may seem strange to consider exit strategies at the formation of an LLC or any
other business entity when the parties are at the beginning of what they hope will be a
successful venture and are drafting the LLC agreement or other organizational
21
C.R.S. § 7-80-404.
22
Article III of this paper is based on a portion of Chapter 3 of Herrick K. Lidstone, Jr. and Allen Sparkman
USING LIMITED LIABILITY COMPANIES, PARTNERSHIPS, AND LIMITED PARTNERSHIPS IN COLORADO (CLE in
Colorado, Inc. 2015).
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documents, but doing so early in the process can avoid many problems later. 23 The
best reason to address exit strategies up front in the process is that the negotiating
parties, the actual or prospective owners, do not then know whether they will be a
buyer or a seller. Consequently, the result is much more likely to be fair to both sides
than the difficulties that may develop when the positions are drawn and one side is a
seller because he or she wants to depart the business and maximize his or her value,
and the other side wants to remain in the business while minimizing the financial
impact from the departure.
B. What are Common Triggering Events?
All buy-sell agreements creating an exit strategy for one or more owners contain at
least one common factor — the existence of one or more triggering events that cause
the buy-sell provisions to be exercised. Depending upon the nature of the business
and characteristics of its owners, different triggering events may be included in the
agreement.
1. Where owners are also employees, termination of employment may be a

triggering event — whether by the employee or by the entity, and whether with or
without cause. A closely-held entity does not want potentially hostile owners or
owners who move to a potentially competitive business to be voting owners of, or
to benefit from the future success of, the entity in which they no longer have a
part.
2. Death, disability, and retirement are usually triggering events for any buy-sell
arrangement. These events have less acrimony associated with them than
termination of employment but the financial issues are potentially equally
significant. In some cases the buy-out can be funded by properly drafted
insurance policies; in other cases insurance may not be available.
3. Divorce, charging orders, seizure by creditors, and bankruptcy are common

triggering events in what can be referred to as “involuntary transfers.” Perhaps the
transferor and the other owners desire to remain associated, but other people
(generally creditors or former spouses of one owner) have an interest in the
underlying value. This creates some complex and potentially difficult issues in a
buy-sell agreement and in the ensuing negotiations with the transferee, be it the
23
Some might say this is like negotiating a divorce agreement prior to marriage, but many couples who are about to
marry, in recognition of the uncertainty of life, negotiate a pre-nuptial agreement — an exit strategy for the
marriage.
17
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bankruptcy trustee, the creditor, or the ex-spouse — each of whom would like to
maximize the value to be obtained from the transferor or the entity itself.
4. In some cases, the grant of a security interest under Article 9 of the Uniform
Commercial Code may be a triggering event, or perhaps the grant of the security
interest is permissible, but the foreclosure of that security interest is a triggering
event.
5. Efforts by one or more owners to make a voluntary sale are probably among
the most common triggering events, usually resulting in a right of first refusal to
the entity and a right of second refusal to the remaining owners. The voluntary
sale may result from a third party inquiry or from the selling owner’s efforts to
find a buyer. An agreement can structure the ramifications of a voluntary
transaction in a number of ways and must consider the financial obligations to
ensure the continuing viability of the entity.
(1) In a subset of a voluntary sale, a third-party purchaser may approach
one or more owners with a desire to purchase a controlling interest in the
entity, and this may not be in the interest of the other owners. Where the
third party can acquire financial and management control through a
purchase, it may pay more for this “control.” Where the remaining owners
have the right (or perhaps an obligation) to participate in the transaction,
greater fairness can result, although likely resulting in at least a perceived
lost opportunity by the owners who did not want to sell in the first place.
(2) In another subset of voluntary sale, consideration should be given to
whether so-called estate planning transfers should be permitted and, if so,
under what conditions.
6. Where owners of a business are themselves one or more entities, a triggering

event may include a “change of control” provision. In this case, a direct or
indirect change of control of the entity-owner would invoke the buy-sell terms.
Without a change of control provision, the owners of the entity could circumvent
the buy-sell agreement by selling interests in their entity and not in the subject
company itself.
7. A triggering event may also include a dispute between the principal owners as
to the operation of the business or other significant matters where a resolution
cannot be negotiated.
8. A triggering event may be the transfer of shares of an S corporation to an

ineligible holder (including the transfer of a membership interest in an LLC taxed
as an S corporation) even where there are no other restrictions on transfer.
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9. Finally, a triggering event may include an initial public offering or a merger or
acquisition transaction by which the owners have the opportunity to sell or
participate in the continuing business.
C. Ways to Address the Trigger Events. There are many ways to address the results of
a triggering event, and some or all should be considered for inclusion in the
appropriate agreements. These include:
1. A Right of First Refusal, a Right of Second Refusal, and a Right of First

Offer are usually used in connection with a voluntary transfer. The right of first
refusal generally gives the entity, and the right of second refusal generally gives
the remaining owners, the option to purchase the voluntary seller’s ownership
interests if the owner receives a bona fide offer and wants to sell. The price and
terms at which the sale is to take place may be the offer price from the third party,
or it may be a price and terms established by the agreement if more favorable to
the purchaser. In a right of first offer, the owner who wants to sell must first
obtain a bona fide offer from a third party and then the remaining owners will
have the option to match the third party offer. If they do not do so, the owner who
wishes to sell may then freely do so for a price at least as favorable as made in the
third-party offer.
2. Co-Sale Rights are also known as Tag-Along Rights. These rights generally are
used in connection with the sale to a third-party of a material ownership interest.
Co-sale or tag-along rights give all or certain owners the right to sell their
ownership interest at the same price and to the same buyer in the event that
another owner receives an offer to purchase its interest. These rights also require
the third-party buyer to purchase the interests of any owner entitled to participate
or to abandon the purchase of the initial ownership interests. There may be a
threshold, providing that the tag-along rights are not available if the third-party
purchaser is not acquiring more than (say) 15 percent in a 12-month period. The
tag-along right is generally negotiated for by the minority owners so they are not
excluded or forced to do business with an unknown third party if a significant or
majority owner receives an offer for its ownership interest.
3. Drag-along rights protect the selling owner and the third-party purchaser who
may not want to be in business with the remaining owners. Drag-along rights
require that the remaining owners sell their ownership interest to the purchaser if
a certain percentage of the owners agree to sell their interest. This obligation
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prevents a minority of owners from hindering or preventing a sale of the business
that is desired by a majority of the owners.
4. Drag-along rights are frequently coupled with the right of first/second refusal,
discussed above. In this context, the rights give the remaining owners the
opportunity to purchase the ownership interest of the owner who wants to sell to
the third party on the terms offered by the third party or at the agreement price
and terms, if more favorable to the purchaser. Thus, they can join in the sale to the
third party (who must be ready, willing, and able to purchase all ownership
interests offered), or the remaining owners can buy-out the selling owner
themselves on terms negotiated up front or on the third-party contract terms,
whichever is more favorable.
5. An agreement can include a “put right,” allowing an owner to “put” his or her
ownership interest back to the company or the other owners for a defined price (or
a price to be determined pursuant to the formula) and at a defined time or upon
the occurrence of a triggering event. A penalty for the company or the other
owners not meeting their repurchase obligation may include a release of the
shareholder offering the put from some or all of his or her obligations under the
buy-sell agreement.
6. Shotgun rights (also known as “Russian Roulette,” a “Texas Shootout,” and a

“Dutch Auction”) are buy-out mechanisms that are frequently used to resolve
disputes. These approaches are more often used when there are two 50 percent
owners (or perhaps a 60-40 ownership), but can be used in a larger ownership
group.
(1) A “Shotgun” is included in a buy-sell agreement to avoid a deadlock in

companies owned by two groups of owners. In the event of a deadlock or if an
ownership individual or group decides that he or she does not want to continue in
business with the other owner or group, either owner may offer to buy the interest
of the second owner. The second owner must either sell at the offered price or buy
the first owner’s interest for the same proportional price. The owners can agree up
front to the purchase terms and payment terms, leaving only the price to be
decided by the shotgun.
(2) A “Texas Shoot-Out” requires each of the parties to send a sealed bid to an
umpire describing the terms of their offer to buy out the interests of the other
party(ies). The umpire opens the sealed bids and decides which bid is the more
favorable. The person who submitted the more favorable bid (the “winner”) must
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buy out the other side (the “loser”) pursuant to the winning bid. Of course, the
“more favorable” factors in the winner’s bid may not be strictly price related, and
the agreement should specify whether cash payment up front is preferable to a
higher purchase price payable over time — and what parameters should be
considered by the umpire in making that decision.
(3) A “Dutch Auction” is a variation on the Texas shoot-out in that the bidders
submit the minimum price for which they would sell their ownership interests.
The “winner” (the person submitting the higher bid in the opinion of the umpire)
must then purchase the interests of the “loser” at the price indicated in the loser’s
sealed bid.
7. Mediation, Arbitration, and Litigation may also serve as an acceptable method

for dispute resolution and result in an exit strategy. Especially in a smaller entity
when one person wants to retire, sell property, or move in a different direction and
the other wants to continue in business, the first person may make allegations of
fiduciary duty breaches, oppression, fraud, and other claims as leverage to force a
buy-out. Given the expense, time delays, aggravation, and emotional impact of
arbitration and litigation, these disputes are frequently settled through one party
buying out the other party.
D. Funding a Buy-Out.
Buy-sell provisions involve interesting dynamics when they must be financed by the
individual owners and not by insurance proceeds or the company. The principal, but
contradictory, forces working are:
• The owner with money or who has already arranged financing for a cash purchase
may be willing to pay a higher price to buy out the other(s) from a successful
business.
• Where one party can run the business and the other party would have to hire
someone else to do so, the person who can run the business may offer a lower price,
knowing that the other party will have to hire and compensate management, thus
increasing the cost of the business acquisition.
• If it is known at the outset that one party has and is likely to continue to have much
greater resources than the other party, shotgun rights often will be unfair because
these procedures would allow the party with greater means to make an offer known to
be less than fair market value but more than the other party can afford.
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E. Price and Terms
1. Most exit strategies are dependent on the determination of price and
terms for the transaction resulting in the exit. Perhaps the parties desire
to negotiate the price and terms when they are adverse, with one buying
and the other selling. The contractual shotgun approach works well here,
with one person naming the price and terms, and the other either selling
or buying at that price and on those terms. The negotiation of price and
terms between an unwilling buyer and a willing seller may be more
difficult and may have to be backed up with litigation or arbitration
threats. In any case, the parties can be helped when the contract sets
forth a mechanism for determining price and terms. In many cases,
however, valuing a privately held business involves difficulties that may
require experts.
2. Many agreements provide that the parties will revalue the company on
an annual basis. This is the simplest to draft, but usually the least
successful because the parties seldom actually make the annual
valuation. They frequently do not revisit the valuation until one
person/group is selling and the other is buying or trying to prevent the
sale.
3. Other methods are based on the financial statements — either a per-share

book value or adjusted book value calculation or a multiple of revenues,
earnings, EBITDA, 24 or some other measure.
4. The difficulty with balance sheet calculations is that under generally

accepted accounting principles, balance sheets reflect historical cost of
assets less depreciation and amortization, and (except in limited cases
such as marketable securities) do not reflect fair market value. While the
agreement can be drafted to include certain fair market value or other
adjustments, drafting such provisions can be complex; furthermore, as
the business proceeds in its life, the adjustments considered appropriate
originally may be less appropriate or become inappropriate as the
business matures.
5. When they are appropriate measures, multiples of earnings or EBITDA

are generally easy to calculate and may more closely reflect value, but
24
EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortization.”
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most small businesses attempt to minimize their tax burden by reducing
or eliminating earnings (which is a factor in EBITDA). This may result
in an unfair valuation. Adjustments can be made such as adding back
owners’ compensation or other factors, but again the drafter is faced
with whether these are appropriate at the present time or will continue to
be appropriate in the future.
6. Another difficulty with financial statement-based measures is that few

small businesses maintain financial information for purposes other than
preparing tax returns or obtaining loans. These may, or may not, have
been prepared by accountants and therefore may or may not be wholly
accurate and complete, and probably have not been prepared consistently
with generally accepted accounting principles (GAAP) or other
standardized principles. Where the financial information has been used
by business people to manage the business, it should be acceptable, but
in many cases problems are raised in the buy-out context that were
ignored or not material during operations.
7. Some other formula may exist that is appropriate for their business that
the parties can agree upon in the initial agreement. The question will
remain whether the formula remains appropriate as the business matures.
8. The parties may agree to hire a business valuation expert at the time of
the purchase or sale. This can be defined closely, including the name of
the appraiser (and method for determining a replacement if the named
appraiser is no longer in business at the future time when needed), or
generally. A business valuation expert can result in significant expense
and should only be employed in a stalemate. As an encouragement to
avoid a stalemate, the costs of the business valuation expert can be
allocated to the party whose final terms were furthest from the price
ultimately determined by the expert.
9. Frequently, valuation is based on 100 percent of the entity; in

appropriate cases, the parties should consider the application of a
minority interest discount or a lack of liquidity discount for sales of less
than all of the entity. These discounts, up to 50 to 60 percent, have been
supported by the courts, although the Colorado Supreme Court denied
the availability of discounts in the statutory dissenters’ rights context
where there was no agreement supporting the application of discounts. 25
25
Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353 (Colo. 2003).
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Discounts afford the remaining owners a significant advantage when
exercising their rights of first or second refusal because their purchase
price can be substantially less than the third-party offer. Conversely,
discounts disadvantage the selling owner.
10. The parties should consider payment terms in the initial agreement.
When exercising rights of first or second refusal, the entity and its
remaining owners do not want to encumber the entity’s working capital
or the individual’s financial flexibility. Thus, even when value is left for
a future determination or a contractual formula, agreements may set
forth payment terms. Again, this can benefit the entity and the remaining
owners when exercising their rights of first or second refusal, because
the price and the terms may be more favorable to them than the third
party’s offer. The owners may want to protect the entity by providing
that if the entity is the purchaser, then notwithstanding other payments
terms, the entity will not be required in any year to pay more than a
specified percentage of its net income or cash flow. (Of course, where a
buy-out in the case of disability or death is financed by an insurance
policy, the insurance policy provides liquidity if sufficient in amount.) A
discussion of the issues raised by the use of insurance to fund a buy-out
is beyond the scope of this paper. The attorney, if not knowledgeable
himself or herself, should consult with a knowledgeable professional on
such matters as whether the insurance should be purchased by the entity
or by the owners.
F. Mandatory or Permissive? All or None?
Another consideration for exit strategies is whether the exercise of the

right of first or second refusal is mandatory or permissive. Mandatory purchases
may impact entity working capital or individual financial flexibility to their
detriment unless the terms are quite favorable or the amount is minimal. On the
other hand, if permissive, the entity and the remaining owners may find
themselves in business with the third party should they choose not to make the
purchase or exercise co-sale rights.
Another consideration for the rights of first and second refusal is whether
they must be exercised on an all-or-none basis, or if the entity and the remaining
owners can exercise them only as to a portion of the offered ownership interests.
Where the agreement provides that the remaining owners only need to exercise
partially, they may have the ability to terminate the third party’s offer if it is
contingent on the entire interest being obtained. When coupled with the call
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provisions, however, it will put the third party in a position of acquiring 100
percent or nothing.
G. Timing of the Triggering Event.
In some cases, the parties want to delay a triggering event, or the

obligations that flow from a triggering event, for a period of time. This can be
especially important in a start-up company where the owners want to focus on the
business operations for the first few (or many) years. The disruption of a
triggering event and the resultant buy-sell obligations may be more than they
think the business can bear during that period of time.
While the law does not like provisions that interfere with the
transferability of personal property (which ownership interests are), the timing
can be affected by various provisions that discourage transferability. For example,
if the parties have agreed to a minority-interest and lack-of-liquidity discount on
the valuation, perhaps the discount should be 60 percent during the first four
years, 50 percent during the next four years, and 40 percent thereafter. That
clearly encourages people to delay causing a triggering event.
Alternatively or additionally, a premature triggering event may cause the

subject ownership interests to become non-voting. While the transferee may
acquire the economic interests of the voluntary or involuntary transferor under the
terms of the agreement, the transferee would not have the ability to participate in
management or, perhaps, to inspect records. This may be a devaluing factor in the
transferee’s analysis. On the other hand, this may make a transfer more palatable
to the remaining owners if the transferee becomes a “silent partner” with few
rights beyond his or her economic rights.
Any effort to delay the triggering event or the obligation of the company
to respond to a triggering event should be included in the agreement.
H. When is the Effective Date of the Triggering Event’s Impact on Member Status?
Particularly in the case of triggering events such as one owner having the right to
force a buy-out through a Shotgun procedure, the parties should consider when a
change in owner status will result. Will it be at closing of the redemption or buy-out
of an owner, or will it be when the buy-out offer is accepted? Failure to address this
question clearly in the LLC agreement can lead to expensive litigation, as evidenced
in Waters v. Bowen Banbury 26 The Denver Business Journal reported on August 30,
26
Waters v. Bowen Banbury, Denver District Court, Case No. 07 CV 7375.
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2009, that the jury awarded plaintiffs $9,000,000 in this case. Although the damages
award was substantially reduced on appeal, 27 the jury award had serious
consequences, including a bankruptcy filing by the individual defendant.
I. Other Considerations.
1. Where the entity involved is a partnership or limited liability company,
the applicable statutes provide buy-sell protections. In each case, the
ownership interests are divided into economic interests and management
interests. Under the statutes, unless the operating agreement or
partnership agreement provides otherwise, a partner or LLC member can
convey the economic interest, but the transferee will not become a
member of the LLC or a partner of the partnership without a unanimous
vote of the other members/partners. Unless admitted as a
member/partner, the transferee does not have any voting rights, rights to
inspect records, or other management rights.
J. Marital issues must be considered. Where one spouse owns a business with
other owners, and the other spouse has no direct interest in the ownership, he or
she still may have rights as a result of the marriage. Issues may include whether
the ownership interest was purchased with marital assets, or whether there has
been appreciation in the value of the business during the marriage. While these
rights can be dealt with in a pre-nuptial agreement, most marriages are not
commenced with a pre-nuptial agreement. In some cases, it will be appropriate
to have spouses be parties to the buy-sell agreement.
K. One important consideration when any third-party purchaser is involved is

whether the third party will be able to accomplish any due diligence
investigation. Many agreements among owners have confidentiality provisions
that by their terms may prevent the owner desiring to sell from providing any
non-public due diligence to a third party interested in acquiring the ownership
interest. The buy-sell agreement can provide that the company will cooperate
with any due diligence by a bona fide third-party purchaser (subject to
appropriate confidentiality agreements), or the agreement can impose other
terms on cooperation, such as upfront reimbursement of expenses, including
officer and employee time.
27
Waters v. DocuVault Group, LLLP, 2012 Colo. App. LEXIS 365 (Colo. App. March 15, 2012).
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L. Fairness. Underlying much of this discussion is a perception of fairness and the
courts’ general reluctance to approve absolute restraints against alienation of
property.
ͻWhere the requirements are reasonable and reasonably related to the

protection of the business and the interests of the other owners, the
restraints and requirements are more likely to be upheld.
• Where the restraints and requirements treat different persons in the same
situation similarly, they are more likely to be upheld.
• Where the restraints and requirements, even though otherwise

reasonable, are applied in a discriminatory or unfair manner, they are more
likely to be challenged and stricken.
It is likely that fairness, and the judicial perception of fairness, will be a

significant factor in any case challenging the terms of any buy-sell agreement or
the application of those terms in any specific transaction.
M. Termination. The parties usually do not intend their buy-sell arrangements to

continue indefinitely. They are frequently structured to terminate upon the
completion by the company of a public offering of its securities, acquisition of
equity interests by persons who are not subject to the agreement and who hold
more than a defined percentage (say, 25 percent), death of parents and a
repurchase of the parent’s shares under the agreement, or other terms. Whatever
the goals are for the parties to the buy-sell arrangement, the drafting attorney
should consider termination of the arrangement in a manner that fits the goals of
the parties at the commencement of the arrangement.
N. Amendment. As with the operating agreement itself, amendment provisions

should be considered. Especially in the case of buy-sell agreements (and
whether or not included in the LLC agreement), as the business matures,
triggering events and buy-sell provisions that were originally appropriate may
no longer be appropriate. An agreement among younger people who plan to
work together for a long period of time may no longer be appropriate as they
age. An agreement among parents and children may no longer be appropriate
after the parents’ death or retirement.
1. While amendment is always possible, the difficulty is that it seldom occurs.

The buy-sell agreement is frequently put out of sight on the business’s shelf
until a triggering event occurs years later. The owners are focused on the
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success of their business and have little time or incentive to revise (or even
review) their plans for separation when things are going well. And the
owner who raises the issue is immediately suspected of being the person
getting ready to cause a triggering event. Finally, the owners or the entity
likely paid significant fees to draft the original agreement and are not
interested in spending additional fees that do not add to the profits of the
business.
2. This hesitation frequently changes after the buy-sell agreement has been
tested following a triggering event. Perhaps the agreement worked well;
perhaps it was a disaster. In either case, the remaining owners can likely
identify places where improvements could be made. That is when buy-sell
agreements are usually considered for amendment, or it may be terminated
as no longer being necessary.
3. Because of the unlikelihood of a future amendment until after the buy-sell

agreement has been tested in the crucible of a dispute, foresight and
flexibility are key concepts for the initial agreement.
O. Conclusion. Like a pre-nuptial agreement in the case of a marriage, a pre-

negotiated buy-sell agreement can anticipate and resolve a number of business
issues that may occur in the future. As discussed above, it is much easier to
negotiate these buy-sell arrangements when each of the negotiators has a rosy-
eyed view of the future and does not know who will be a buyer or a seller. On
the other hand, there may be reasons not to negotiate a deal up front where the
parties want to tie themselves together for an indefinite period of time. That
does not mean that there is no buy-sell arrangement, it simply means that they
need to negotiate the terms at a later time, using the leverage then available.
That leverage is frequently litigation for fiduciary duty breaches, oppression, or
other divisive claims between former friends and colleagues. With the great
variety of triggering events, price calculations, and other factors to be
considered, it is important for the parties involved to understand the people and
the “key issues” that the owners believe may result in a buy-sell obligation.
P. Where is the Buy-Sell Advantage?

Certain terms that can be included in a buy-sell agreement or buy-sell provisions in an
operating agreement, partnership agreement, or other organizational documents may be
perceived as being advantageous to the remaining owners or to the owner desiring to sell.
x Where advantageous to the owner desiring to sell, the terms in question may have a
positive impact on the price a third-party would be willing to pay.
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x Where advantageous to the remaining owners, the impact will probably adversely
affect the price a third party would be willing to pay.
It is important to note that the mere existence of the buy-sell agreement regardless of its
terms itself is advantageous to the remaining owners and disadvantageous to the selling owner
since any such agreement creates one more hurdle to the sale.
The following chart summarizes the terms discussed above as being advantageous to the
seller or to the remaining owners and could be considered by the parties in negotiating the terms
of any buy-sell arrangement.
Advantageous to Remaining Owners Advantageous to Selling Owner
Ability to complete a transaction

without causing a triggering event
Triggering events are advantageous to
(such as an estate planning transfer or
remaining owners
change of control transaction if not
“triggering events”)
Rights of first and second refusal Where the remaining owners do not
require the selling owner to present a have the option to purchase on the
bona fide offer before consideration, agreement price and terms if more
and the ability to use the agreement favorable, but have to match the third
price and terms if more favorable party offer
Allowing the remaining owners to Requiring the remaining owners to

purchase only a portion of the purchase all of the ownership interests
ownership interests the selling owner the selling owner proposes to sell to the
proposes to sell to the third party third party, or none of them
Co-sale or tag-along rights allow the

remaining owners to sell on the same
Drag-along rights allow the third party
price and terms and increases the
purchaser to become the sole owner
financial commitment of the third-
party purchaser
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Advantageous to Remaining Owners Advantageous to Selling Owner
Put rights by which the selling owner

No put rights, but retaining the selling (and terminated or retired
owner notwithstanding termination of employee/owner) has the option of
employment or other triggering event, forcing the company or the other
perhaps subject to a call right owners to purchase the ownership
interests.
No discounts, but full percentage of

Marketability and lack of liquidity
entity fair value (which is likely the
discounts
default rule absent an agreement)
Permissive right to exercise right of Mandatory obligation to purchase the

first or second refusal leaves the ownership interests benefits the selling
option with the remaining owners owner
Few limitations to third-party buyer due

Strict limitations to due diligence diligence and requirement for
cooperation
Treatment of involuntary transfers as Involuntary transfers are either not

a triggering event addressed or are addressed favorably
Partnership or LLC structure where

Corporate structure where shares
owner consent is required to grant
transferred include economic rights and
voting or management rights to
the right to vote
transferee
Where the prospective purchaser is an

accredited investor or qualified
Securities laws restrictions institutional buyer, or extremely
knowledgeable about the business in
question
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IV. Shareholder Agreements
A. Exit strategies discussed in III.
B. Shareholder agreement for S corporation should prohibit transfers to persons who
do not qualify as S corporation shareholders.
V. Sales Contracts
VI. Employment Agreements
A. Should address what happens if there is a change in control of employer.

B. Termination for “good reason” provisions should include one allowing employee
to terminate if there is a material change in the employee’s duties, compensation,
or place of employment.
VII. Master Agreements and Secondary Agreements

A. Insurance and indemnification provisions should be parallel.
B. Ownership of intellectual property.
VIII. Nondisclosure Agreements

A. Should include requirement to return or provide certificate of destruction with
respect to confidential information disclosed to a party once the agreement
terminates.
B. Consider including something like the following:
The requirements of this Section 4.1 that require Employee to return Confidential
Information shall not apply to any copy of the Confidential Information
maintained electronically in the regularly maintained electronic data backup
system of Employee; provided, that any such copy shall remain subject to the
terms of this Section 4.1 whether or not this Agreement has otherwise terminated.
C. Non-disclosure agreements now must take into account the Defend Trade Secrets
Act of 2016 (the “DTSA”). 28 The DTSA became effective May 11, 2016 with the
President’s signature. Section 7(a)(3) of the DTSA amended 18 U.S.C. § 1833 to
provide:
28
. Public Law 114-153.
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(b)(1) An individual shall not be held criminally or civilly liable under
any Federal or State trade secret law for the disclosure of a trade secret
that—
(A) is made—
(i) in confidence to a Federal, State, or local government official, either
directly or indirectly, or to an attorney; and
(ii) solely for the purpose of reporting or investigating a suspected
violation of law; or
(B) is made in a complaint or other document filed in a lawsuit or other
proceeding, if such filing is made under seal.
(2) An individual who files a lawsuit for retaliation by an employer for
reporting a suspected violation of law may disclose the trade secret to the
attorney of the individual and use the trade secret information in the court
proceeding, if the individual—
(A) files any document containing the trade secret under seal; and
(B) does not disclose the trade secret, except pursuant to a court order.
IX. Non-Compete Agreements

A. Requirements for validity vary from state to state.
B. Do not overreach. The more limited in duration and geographic scope the non-
compete is, the more likely it will be upheld.
X. Joint Development Agreements
A. Joint development agreements may be state law general partnerships even where
parties state in their agreement that they do not intend to be subject to partnership
tax treatment but rather desire treatment as co-owners (co-tenants) of the joint
venture property.
B. Joint ventures can be formed as an LLC or LLP and the operating agreement or
partnership agreement can be the joint venture agreement. If an LLC is used, as
with any LLC, a joint venture formed as an LLC will be taxed as a partnership
unless it elects to be classified as an association taxable as a corporation.
Although I.R.C. § 761 permits certain unincorporated entities to elect not to be
subject to the partnership tax provisions in subchapter K of the I.R.C., one of the
requirements of a valid § 761 election is that the owners of the entity are treated
as co-owners of the entity’s assets. Neither an LLC nor a RUPA partnership
would satisfy this requirement. Where the joint venture is treated as a partnership
for tax purposes, income and losses can be allocated in accordance with the
partnership (joint venture) agreement. The particular advantage of an LLC or LLP
serving as the vehicle for the joint venture is a decrease in the participants’
exposure to the liabilities of the entity while still being able to treat the LLC or
LLP as a partnership for tax purposes. So long as the allocations of income, loss,
and other tax benefits have “substantial economic effect,” they will be recognized
for tax purposes. As a co-tenancy, as contrasted with a tax partnership, the
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venturers would not be able to take advantage of all tax benefits where
contributions of cash and property are disproportionate among the venturers.
C. In the oil and gas industry, the standard AAPL form of Operating Agreement (the
“AAPL Operating Agreement”) 29 expressly provides that the co-owners may take
the production in kind, and this is the key provision that causes the form of the
AAPL Operating Agreement to be a co-ownership of property for tax purposes.
This authorization to take production in kind is what allows a partnership (if one
is considered to be created under the AAPL Operating Agreement) to elect under
§ 761(a) notwithstanding the provisions of RUPA. Moreover, RUPA provides:
(a) Joint tenancy, tenancy in common, tenancy by the entireties,

joint property, common property, or part ownership does not by
itself establish a partnership, even if the co-owners share profits
made by the use of the property.
(b) The sharing of gross returns does not by itself establish a
partnership, even if the persons sharing them have a joint or
common right or interest in property from which the returns are
derived. 30
Accordingly, the relationship created among the parties to an AAPL Operating

Agreement likely does not create a partnership under CUPA.
XI. Licensing Agreements The following is a discussion of points that should be

addressed in most licensing agreements.
A. What is the property that is being licensed?

1. Software.
2. Patent.
3. Copyright.
4. Know-how.
5. Brand name.
6. Other.
B. What rights are being granted?
29
. The text refers to the Form 610 Model Operating Agreement promulgated by the American Association of
Professional Landmen. This form bears no relation to an operating agreement for an LLC. In the oil and gas
industry, an operating agreement sets out procedures for the operation of a group of oil or gas wells. This is the
reason that the Texas LLC Act refers to the governing agreement of a Texas LLC as a “company agreement.” TEX.
BUS. ORG. CODE § 101.001(1).
30
Revised Uniform Partnership Act § 202(3)(a), (b).
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1. If a patent, are patent rights only being granted or also know-how?
2. Exclusive, coexclusive with licensor, or nonexclusive?
3. Term?
4. Revocable or irrevocable?
5. Right to grant sublicenses?
6. Market?
C. License restrictions.
1. Field, territory.
2. Prior licensee’s rights.
3. Commercial rights retained by licensor.
D. Reservation of rights.
E. Right to grant sublicense.
1. To any other party.
2. To a limited number of parties.
3. To affiliates of licensee.
4. To third parties preapproved by licensor.
5. To nominees of licensor.
6. At specified consideration.
7. Consideration to be shared with licensor.
8. Copies of sublicense to be furnished to licensor.
9. Other conditions.
F. Territory.
G. Term of the Agreement.
H. Improvements. What obligations are there to include future technology or to have
future technology fall under the reservation of rights to the licensor?
I. Consideration for the license.
J. Reports and auditing of accounts.
K. Reps and warranties.
L. Infringement.
M. Diligence by licensee.
N. Right of inspection; technical personnel.
O. Confidentiality.
P. Export Regulation.
Q. Dispute Resolution.
R. Termination.
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Contract Ethics
Submitted by Allen Sparkman
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Contract Ethics 31
I. Rules of Professional Conduct.

A. The American Bar Association has promulgated the Model Rules of Professional
Conduct (the “Model Rules”). Each state has its own rules which, generally
speaking, follow the Model Rules. Some states, however, have not adopted all of
the Model Rules or may have adopted one or more rules with variations. This
paper will discuss the Model Rules, but each attorney must remember to check his
or her own state’s version of the rules if a question arises.
B. Attorneys should also be aware that various governmental agencies have adopted
rules of professional conduct that apply to attorneys practicing before the agency.
C. The Model Rules that will most often impact the practice of an attorney in a
transactional practice are Rule 1.6, Confidentiality of Information, Rule 1.7,
Conflict of Interest: Current Clients, and Rule 1.13, Organization as Client.
II. Confidential Information of a Client
Clients expect that their lawyer will maintain their confidences, and Model Rule 1.6
provides the scope of and limitations on this expectation:
(a) A lawyer shall not reveal information relating to the representation of a client
unless the client gives informed consent, the disclosure is impliedly authorized in
order to carry out the representation or the disclosure is permitted by paragraph
(b).
(b) A lawyer may reveal information relating to the representation of a client to

the extent the lawyer reasonably believes necessary:
(1) to prevent reasonably certain death or substantial bodily harm;
(2) to reveal the client’s intention to commit a crime and the information
necessary to prevent the crime;
(3) to prevent the client from committing a crime or fraud that is
reasonably certain to result in substantial injury to the financial interests or
property of another and in furtherance of which the client has used or is
using the lawyer’s services;
(4) to prevent, mitigate or rectify substantial injury to the financial
interests or property of another that is reasonably certain to result or has
resulted from the client’s commission of a crime or fraud in furtherance of
which the client has used the lawyer’s services;
(5) to secure legal advice about the lawyer’s compliance with these Rules, other
law or a court order;
31
Much of the remaining portion of this paper is based on Chapter 17 of Herrick K. Lidstone, Jr. and Allen
Sparkman USING LIMITED LIABILITY COMPANIES, PARTNERSHIPS, AND LIMITED PARTNERSHIPS IN COLORADO (CLE
in Colorado, Inc. 2015).
235
(6) to establish a claim or defense on behalf of the lawyer in a controversy
between the lawyer and the client, to establish a defense to a criminal
charge or civil claim against the lawyer based upon conduct in which the
client was involved, or to respond to allegations in any proceeding
concerning the lawyer’s representation of the client; or
(7) to comply with other law or a court order.
(c) A lawyer shall make reasonable efforts to prevent the inadvertent or

unauthorized disclosure of, or unauthorized access to, information relating to the
representation of a client.
Comments [18] and [19] specifically address the issues of confidentiality with respect to
electronic communications. First, Comment [18] repeats the obligation in Rule 1.6(c) requiring
that a lawyer take “reasonable efforts to safeguard information relating to the representation of a
client against unauthorized access by third parties and inadvertent or unauthorized disclosure.”
The Comment then states that unauthorized access or inadvertent or unauthorized disclosure
“does not constitute a violation of paragraph (c) if the lawyer has made reasonable efforts to
prevent the access or disclosure.” Thus any unauthorized access or disclosure will be judged
based on “reasonableness.” According to the Comment, factors to be considered in determining
reasonableness are considered on a cost-benefit basis, and include, but are not limited to:
1. The sensitivity of the information (with the presumption that the more
sensitive the information, the more protections should be installed);
2. The likelihood of disclosure if additional safeguards are not employed;
3. The cost of employing additional safeguards;
4. The difficulty of implementing the safeguards; and
5. The extent to which the safeguards adversely affect the lawyer’s ability to
represent clients (e.g., by making a device or important piece of software
exceptionally difficult to use).
Comment [19] suggests that a client may require the lawyer to implement special security
measures or may “give informed consent to for[e]go security measures that would otherwise be
required by this Rule.”
A lawyer should also note that Rule 1.6 is not limited to information obtained from the
client or to information that is not already public. Rule 1.6 applies much more broadly to any and
all information “relating to the representation of a client,” regardless of the source of the
information.
236
The client’s expectations may conflict with the ability of a lawyer to reveal information
without the client’s consent under Rule 1.6. In many cases, clients have very clear (if erroneous)
expectations about the broad confidentiality of attorney-client communications. Before the
current Model Rules (which derived from the American Bar Association’s Ethics 2000 work), a
lawyer could only reveal information necessary to prevent the client from committing a crime;
once the crime had been committed, the lawyer’s right to reveal information under former Model
Rule 1.6 disappeared. 32 Clearly the rules as they currently exist empower the lawyer far beyond
the old rules. Notably the rules do not require attorney disclosure in the circumstances outlined in
the rule; disclosure is instead permissible.
Model Rule 1.6 applies only to “information relating to the representation of a client.” If
a client for whom the lawyer has formed many LLCs and drafted many contracts tells the lawyer
that the client is having an affair, arguably, that is not information related to the lawyer’s
representation of the client. However, the author would wager a large sum that almost every
client will expect the lawyer to maintain confidence about this information or any other
revelation the client makes to the lawyer.
It is important to note that the focus of Model Rule 1.6(b) as it currently exists is not the
attorney’s client. The focus of Model Rule 1.6(b) is to protect third parties, and this focus is
contrary to the traditional attorney-client relationship that is still expected by most clients. Good
client relations would suggest that if, for example, a lawyer proposes to rely on Model Rule
1.6(b)(2) or (3) to disclose a mistake in the draft of an operating agreement that all parties have
approved, which mistake materially favors the lawyer’s client, the lawyer should first discuss the
mistake with the client and counsel the client on the possible consequences of failing to correct
the mistake. Where the affair that the client reveals to the lawyer (discussed in the previous
paragraph) results in a crime or a fraud upon other parties, the lawyer may have certain difficult
choices to make.
Where the attorney becomes aware of one of the matters that may be subject to
permissible disclosure under Rule 1.6(b), the attorney’s interests may diverge from the client as
the attorney considers how to address the issues to his or her client and whether to make
disclosure under Rule 1.6. One of the concerns an attorney in such a position may have is
potential aiding and abetting liability if the attorney is publicly silent in the face of such
knowledge. 33
32
Under former Model Rule 1.6, as under the current Rule, a lawyer could also reveal information to establish a
claim or defense on behalf of the lawyer in a controversy with a client or as required by court order.
33
Consider the case where an attorney finds out about events in which a client participated that ultimately prove to
have been fraudulent (although the attorney and the client may disagree with that characterization at the time). The
attorney considers his or her Rule 1.6 obligations and determines not to make the permissive disclosure but simply
resigns. Even though that failure to make permissive disclosure cannot be subject to a disciplinary proceeding, might
it be sufficient for the attorney to be held responsible for aiding and abetting the client’s fraud?
237
Even though the Model Rules state that violation “should not itself give rise to a cause of
action against a lawyer nor should it create any presumption in such a case that a legal duty has
been breached,” 34 it is likely that plaintiffs will argue that the rules reflect the standard of care in
the community. In 2007, the Colorado Court of Appeals determined that attorneys could be held
liable for aiding and abetting the breach of fiduciary duties. The Colorado Supreme Court
overturned the appellate court’s decision on other grounds, but specifically left open the issue of
whether an attorney can be held liable for an aiding and abetting the breach of fiduciary duties. 35
Regardless of civil liability, however, there is clear precedent that a lawyer may be disciplined
for aiding and abetting a client’s financial crimes. 36
III. Conflicts of Interest
Model Rule 1.7 addresses conflicts of interest for current clients. It provides:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest. A concurrent conflict of
interest exists if:
(1) the representation of one client will be directly adverse to another

client; or
(2) there is a significant risk that the representation of one or more clients
will be materially limited by the lawyer’s responsibilities to another client,
a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under

paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide
competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
34
Model Rule Scope [20].
35
Alexander v. Anstine, 152 P.3d 497 (Colo. 2007).
36
In re DeRose, 55 P.3d 126 (Colo. 2002) (Attorney was convicted of a felony charge of aiding and abetting when,
on behalf of his clients, he engaged in 11 separate financial transactions structured to avoid federal financial
reporting requirements. Through his criminal conduct, the attorney violated C.R.C.P. 251.1(b) and Colo. RPC
8.4(b), and was therefore disbarred).
238
(3) the representation does not involve the assertion of a claim by one
client against another client represented by the lawyer in the same
litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing. 37
The comments to Model Rule 1.7 specifically contemplate a lawyer acting on behalf of
multiple clients when their interests are generally aligned, such as helping entrepreneurs to
organize and establish a business entity. 38 In such circumstances, “[t]he lawyer seeks to resolve
potentially adverse interests by developing the parties’ mutual interests.” 39 This situation is
further discussed in the Colorado Bar Association Ethics Committee’s Formal Opinion 68,
“Conflicts of Interest; Propriety of Multiple Representation.” 40 The syllabus to Formal Opinion
68 is quite clear:
The Committee does not adopt a per se rule prohibiting a lawyer from
representing opposing parties in a transactional matter; however, a lawyer should
proceed very cautiously. Before accepting employment, the lawyer must
determine whether the lawyer can adequately represent the interests of each party
to the transaction. In those situations in which a lawyer ethically may accept such
a role and agrees to do so, the lawyer must obtain the informed consent of each
client, confirmed in writing. The nature of the disclosures required and the ability
to represent each party adequately will depend on the situation in question. Under
no circumstances should a lawyer representing multiple parties be considered a
mere “scrivener” in a transaction. 41
In many cases, it is preferable for the lawyer to represent one party to the business
transaction or settlement, leaving the other persons involved, including perhaps the entity-to-be-
formed, to retain their own counsel if they want to do so. Following the formation of the entity
37
This paper discusses “informed consent,” as defined in Model Rule 1.0, further in IV, below.
38
Model Rule 1.7, cmt. [28].
39
Id.
40
CBA Ethics Comm., Formal Op. 68 (1985), revised Dec. 9, 2011.
41
Each Formal Ethics Opinion carries the following disclaimer:
Formal Ethics Opinions are issued for advisory purposes only and are not in any way binding on
the Colorado Supreme Court, the Presiding Disciplinary Judge, the Attorney Regulation
Committee, or the Office of Attorney Regulation Counsel, and do not provide protection against
disciplinary actions.
239
and with the informed consent of the client and others involved, it may be appropriate for the
lawyer to migrate his or her representation to and enter into a new fee agreement with the entity.
IV. Informed Consent
If the lawyer reasonably believes that other interests will not affect the representation,
and the conflict is consentable, the lawyer may represent multiple clients if each client gives
informed consent confirmed in writing. 42
“Informed consent” and “confirmed in writing” are defined in Colo. RPC 1.0. “Informed
consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has
communicated adequate information and explanation about the material risks of and reasonably
available alternatives to the proposed course of conduct. 43 The communication necessary will
vary according to the circumstances. The lawyer ordinarily must
1) Disclose the facts and circumstances giving rise to the conflict;
2) Explain the advantages and disadvantages of the proposed course of conduct;
3) Discuss other options or alternatives; and
4) In some circumstances, advise the client to seek advice from independent counsel
before commencing the multiple-party representation. 44
The lawyer should disclose that as between commonly represented clients, the attorney-
client privilege does not attach, and if subsequent litigation develops, the privilege will not
protect any communications between the lawyer and each party. 45 In a joint representation, the
lawyer also should disclose that information obtained from each client will be shared 46 and that
if one client decides that a material matter should not be shared with the other, or if a dispute
otherwise develops, the lawyer probably will have to withdraw from representing both parties.
42
Model Rule 1.7(b)(4).
43
Model Rule 1.0(e).
44
45
Model Rule 1.7 and cmt. [30].
46
Id., cmt. [31].
240
The likely effect of such a withdrawal is that each party will incur higher legal costs than if
separate counsel had been secured at the outset of the transaction. 47
There is a limited potential exception to the general rule that confidentiality does not
apply among commonly represented clients. Comment [31] to Model Rule 1.7 states, in pertinent
part:
In limited circumstances, it may be appropriate for the lawyer to proceed with the
representation when the clients have agreed, after being properly informed, that
the lawyer will keep certain information confidential. For example, the lawyer
may reasonably conclude that failure to disclose one client’s trade secrets to
another client will not adversely affect representation involving a joint venture
between the clients and agree to keep that information confidential with the
informed consent of both clients.
For informed consent to be valid, the lawyer must explain the risks and benefits in
sufficient detail. The analysis of the Wisconsin Supreme Court, although made under a prior
version of the Rules of Professional Conduct, is instructive:
An effective waiver of a conflict or potential conflict of interest which is knowing

and voluntary requires the lawyer to disclose the following: (1) the existence of
all conflicts or potential conflicts in the representation; (2) the nature of the
conflicts or potential conflicts, in relationship to the lawyer’s representation of the
client’s interests; and (3) that the exercise of the lawyer’s independent
professional judgment could be affected by the lawyer’s own interests or those of
another client. On the part of the client, it also requires: (1) an understanding of
the conflicts or potential conflicts and how they could affect the lawyer’s
representation of the client; (2) an understanding of the risks inherent in the dual
representation then under consideration; and (3) the ability to choose other
representation. 48
Valid informed consent to a conflict of interest involves more than just a statement from
the lawyer; it also requires the lawyer to ensure the client understands the ramifications of the
representation. Each client must be aware of his or her ability to reject the proposed conflicted
representation.
Even when the lawyer provides an extensive conflicts of interest disclosure, the lawyer
may be at risk of violating Model Rule 1.7. For example, in People v. Quiat, 49 the lawyer was
47
See Model Rule 1.7, cmts. [29]–[32].
48
.In re Guardianship of Lillian P., 617 N.W.2d 849, 856 (Wis. App. 2000).
49
People v. Quiat, 979 P.2d 1029 (Colo. 1999).
241
suspended for 90 days for representation despite impermissible conflicts of interest. He had
provided a disclosure of the conflicts in writing, even though under the former version of Rule
1.7 he was not required to do so. The Colorado Supreme Court upheld the finding that “Quiat’s
conflicts disclosures were ‘totally insufficient,’ in that they did not detail the potential for
conflicts, nor disclose the waiver of attorney-client privilege.” 50
“Confirmed in writing” denotes either informed consent that is given in writing by the
client or a writing that the lawyer promptly transmits to the client and that confirms an oral
informed consent. If it is not feasible to obtain a contemporaneous written confirmation at the
time the client gives informed consent, then the lawyer must obtain or transmit it within a
reasonable time thereafter. 51 “Writing” and “written” are defined broadly as “a tangible or
electronic record of a communication or representation, including handwriting, typewriting,
printing, photostating, photography, audio or videorecording and e-mail. A ‘signed’ writing
includes an electronic sound, symbol or process attached to or logically associated with a writing
and executed or adopted by a person with the intent to sign the writing.” 52
V. Organization as Client
When representing an organization, Model Rule 1.7 recognizes that no LLC, partnership,
corporation, or other business entity has its own voice. The business entity relies on its
constituents for speech and actions. These constituents may be the board of directors, president,
or a junior officer of a corporation; the manager or agents of the manager of an LLC; or the
general partner (or a general partner) of a partnership. A common theme is that the persons
speaking to the lawyer and acting on behalf of the entity are natural persons — flesh and blood
human beings. In such a case, who does the lawyer really represent?
In reaching that conclusion, the lawyer must consider Model Rule 1.13, which provides
in pertinent part:
(a) A lawyer employed or retained by an organization represents the organization

acting through its duly authorized constituents.
***
50
Id. at 1035.
51
Model Rule 1.0(b) and cmt. [1].
52
Colo. RPC 1.0(n).
242
(f) In dealing with an organization’s directors, officers, employees, members,
shareholders or other constituents, a lawyer shall explain the identity of the client
when the lawyer knows or reasonably should know that the organization’s
interests are adverse to those of the constituents with whom the lawyer is dealing.
(g) A lawyer representing an organization may also represent any of its directors,
officers, employees, members, shareholders or other constituents, subject to the
provisions of Rule 1.7. If the organization’s consent to the dual representation is
required by Rule 1.7, the consent shall be given by an appropriate official of the
organization other than the individual who is to be represented, or by the
shareholders.
The author knows that a surprising number of lawyers think that Model Rule 1.13
protects them from forming an attorney-client relationship with a constituent of an entity that the
lawyer represents. As Rule 1.13(g) clearly states, this could not be more incorrect.
There is no question that a lawyer who is representing an entity must receive direction
from one or more humans who are authorized to act on behalf of the entity. It is also likely that
the lawyer will form friendships with some of the constituents with whom the lawyer is working
on behalf of the entity. The attorney must exercise caution to avoid a situation in which one or
more of the entity’s constituents has reason to believe that the attorney is providing legal advice
to the constituent in the constituent’s personal capacity.
There may be situations where the lawyer is willing to represent the business
organization and one or more constituents. Derivative litigation or class action litigation is one
such area. Another may be where the entity is the target of a merger or acquisition and the
constituents are negotiating employment agreements, non-competition agreements, or other
personal obligations. There is no per se rule that there can never be joint representation by the
same lawyer, but there are issues that must be addressed and Rule 1.7 to be considered before the
lawyer may do so.
VI. Potential Issues in Multiple Representation
If the lawyer intends to represent only the new LLC or partnership or some but not all of
the members or partners, and if the lawyer knows or reasonably should know that an
unrepresented member or partner misunderstands the lawyer’s role, the lawyer should inform
that person that the lawyer does not represent such member or partner. Model Rule 4.3 states:
In dealing on behalf of a client with a person who is not represented by counsel, a

lawyer shall not state or imply that the lawyer is disinterested. When the lawyer
knows or reasonably should know that the unrepresented person misunderstands
the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct
the misunderstanding. The lawyer shall not give legal advice to an unrepresented
person, other than the advice to secure counsel, if the lawyer knows or reasonably
243
should know that the interests of such a person are or have a reasonable
possibility of being in conflict with the interests of the client.
A common scenario leading to conflict is when some members or partners contribute

capital and others contribute ideas, services, or management expertise to a new venture. The
parties must agree on the relative value of each member’s or partner’s contribution to the
enterprise; the lawyer may identify the issues but may not negotiate for the parties. If the lawyer
has relevant knowledge from experience, the lawyer could appropriately offer examples of how
others have resolved similar situations.
In this scenario, Rule 1.1 (Competence) is also implicated. A lawyer advising the
prospective owners and business partners in this situation must understand and be able to apply
the federal tax rules applicable to partnerships. If the lawyer does not have this expertise, the
lawyer should associate a competent tax practitioner if the lawyer does not think he or she can
gain the necessary knowledge through study. 53
VII. May the Lawyer Represent Only the Entity to be Formed?
Another issue arises if the lawyer wishes to represent only the new LLC or partnership. A
potential conflict exists since the entity does not exist at the outset of the representation. As
would be true even if the entity already existed, the lawyer must communicate with some or all
of the members or partners, but, because the entity does not yet exist, the entity itself cannot
consent to the conflict. Some states overcome this problem through the following analysis set
forth in the Wisconsin Supreme Court case of Jesse v. Danforth:
[W]here (1) a person retains a lawyer for the purpose of organizing the entity and
(2) the lawyer’s involvement with that person is directly related to that
incorporation and (3) such entity is eventually incorporated, the entity rule applies
retroactively such that the lawyer’s pre-incorporation involvement with the person
is deemed to be representation of the entity, not the person. 54
Other courts have concluded that a lawyer does maintain an attorney-client relationship
with individual entity members post-formation, contrary to the principle stated in Jesse. 55
53
54
Jesse v. Danforth, 485 N.W.2d 63, 67 (Wis. 1992). See also Alexander R. Rothrock, “Entity Formation:
Defining the Client and the Duty of Confidentiality,” 34 Colo. Law. 77 (July 2005) at 81 note18 (citing additional
cases following this approach).
55
See, e.g., Franklin v. Callum, 804 A.2d 444, 448 (N.H. 2002) (attorney for unincorporated solid waste
management district represented each member thereof).
244
Although the Colorado courts have not yet addressed this issue, the Ethics Committee of the
Colorado Bar Association has suggested: “if a lawyer makes adequate disclosures of his or her
intent to not represent individual entity members, then the lawyer should be able to avoid
forming an attorney-client relationship with the individuals and may represent solely the to-be-
formed entity.” 56
In its consideration of this issue, the Ethics Committee concluded that “in the formation
of a new entity, the lawyer may choose to represent (a) some or all of the entity members but not
the entity; (b) the entity itself and none of the individual entity members; and (c) the entity and
one or more of the individual entity members.” However, in all circumstances, the lawyer must
first undertake the conflicts analyses under Rule 1.7 and secondly make clear the risks of the
multiple-party representation. In discussing the disclosure required in a multiple-party
representation situation, Formal Opinion 68 says:
The lawyer should disclose that as between commonly represented clients, the
attorney-client privilege does not attach, and if subsequent litigation develops, the
privilege will not protect any communications between the lawyer and each party.
In a joint representation, the lawyer also should disclose that information obtained
from each client will be shared and that if one client decides that a material matter
should not be shared with the other, or if a dispute otherwise develops, the lawyer
probably will have to withdraw from representing both parties. The likely effect
of such a withdrawal is that each party will incur higher legal costs than if
separate counsel had been secured at the outset of the transaction. See Colo. RPC
1.7, cmts. [29]–[32] [Same as Model Rule 1.7, cmts. [29]—[32].
A lawyer who wants to represent an entity to be formed should also be mindful that, since
the lawyer is an agent of his or her clients, 57 the lawyer for a non-existent entity has a non-
existent principal. Under agency law, once formed, the entity will not be able to ratify the
lawyer’s prior actions and representation, but may adopt them. 58 Adoption is similar to
ratification but has no relation-back effect. As a result, the lawyer who acted on behalf of the
non-existent (pre-formation) entity may have continuing liability to third parties who dealt with
56
CBA Ethics Comm., Formal Op. 68 (1985), revised Dec. 9, 2011. Each Formal Ethics Opinion carries the
following disclaimer:
Formal Ethics Opinions are issued for advisory purposes only and are not in any way binding on
the Colorado Supreme Court, the Presiding Disciplinary Judge, the Attorney Regulation
Committee, or the Office of Attorney Regulation Counsel, and do not provide protection against
disciplinary actions.
57
.Restatement (Third) of the Law Governing Lawyers Chapter Two, Introductory Note.
58
Restatement (Third) of Agency § 4.04(1)(a).
245
the lawyer as the lawyer for the pre-formation entity. 59 Under agency law, this would be the case
even where the lawyer made it clear to the third party that the entity (the lawyer’s principal) had
not yet been formed unless the lawyer obtained the third party’s agreement to release the lawyer
from liability once the entity is formed and adopts the lawyer’s agreement with the third party.
This rule of agency law further emphasizes the need for the lawyer to be sure that the
principals of the entity to be formed are clear as to whom the lawyer represents. It also suggests
that the lawyer should not be acting on behalf of a non-existent entity but rather on behalf of at
least one principal, with the possibility of migrating the representation in the future.
For informed consent to be valid, the lawyer must explain the risks and benefits in
sufficient detail. The lawyer must identify current and potential areas of conflict, adequately
determine in the lawyer’s own mind whether those conflicts are consentable, and then, if they are
consentable, obtain informed consent from each affected client.
59
Id., cmt. c.
246
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continuing education needs.
Please visit our website at

www.nbi-sems.com
for a complete list of
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Business Contracts 101

This publication is designed to provide general information prepared by professionals in

Can training your staff be

What Makes a Business Contract? Navigating the 141

Negotiation Essentials: Key Issues to Anticipate 153

Business Contract Provisions: Do They Protect Your 165

Drafting and Reviewing Common Business Contracts: 197

Contract Ethics 233

What Make A Business Contract:

Acceptance of the Offer

Express v. Implied Terms

Purpose: to facilitate resolution of issues within a “reasonable” length of time

Written: 4 yrs. §337;

Oral: 2 yrs. Civ. Proc. §339

Common Law - services, real estate, insurance, intangible assets, and

Uniform Commercial Code - goods and securities

Main difference - acceptance

Changes to the offer signifies a rejection and counteroffer

Consideration - Not always required for modifications

Services vs. Goods

Parties are co-producers of the services

Sales of goods don’t always require transfer of ownership

Unclear what the parties intended

“Shall” - courts in virtually every English-speaking jurisdiction have held—by

Were the unperformed parts of the agreement material or not?

Term is an essential term for most agreements, whether it be ongoing or definite

Time is generally linked to some sort of performance

Initial client interview

Follow up with additional questions

Provide written work product

Involving Your Client in the Negotiation

When not to use

When not to use

Understanding interests - why it is a party wants what they do

Understanding positions - based on interest(s), what a party wants

Objectively understanding the negotiation

Is agreement possible? What might an agreement look like?

Identify how to be efficient

Understand how to improve the relationship between the parties

Issue: term or subject matter

Rule: your or client’s interest

Application: based on interest, what is client’s position on the issue?

Identify bottom lines

1. Discussion - in-negotiation communication, always look toward an agreement

Choosing a Style - Cooperative vs. Adversarial

Depends on subject matter and client

Who is the opposing side?

Ground in interests and positions

Is interest being calculated on any debts owed?

Are there penalties specified in the contract?

Break the ice

Characterize the issues

Present your (or your client’s) interests

Actively reflect and understand opposing side’s interests

Find common areas to ground all of the shared or unique interests

Understanding trial discovery

The Art of Bargaining

Active listening (and demonstrating it too!)

Principled Negotiation (from Getting to Yes, next slide)

Focus on interests, and not positions

Generate a matrix of possibilities before deciding what to do

Use objective standards to evaluate the results

Practical Tips For Pushing Beyond an Impasse

Use objective standards

A party’s failure to follow the terms of a contract

Post-Closing Covenants and Obligations

Joint and several liability where there are shareholder

Litigation vs. ADR

Buyer will insist on seller representations