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Helpful Guidance in Drafting Transaction Documents

Thomas W. Hartmann
The Hartmann Law Firm LLC
[email protected], 908 769 6888

It has been said that the best business transaction contract is the one the parties put in a drawer and never review again - because the deal goes so well and the parties get along. Few are so lucky.

In a business transaction, one cannot simply hope that everything will go well because people get along at the start. It is critical that one be hard-headed and practical in drafting and reviewing business transaction documents.

Structure. The structure of any transaction must be carefully analyzed. The most basic question is whether a transaction is to be a stock sale or an asset sale. This can have a significant impact on liability pass through, as liability passes with the stock, unless there are limitations in place.

Indemnification. This raises issues of indemnification or the extent to which a party will agree to be responsible for the liability of another person. For example, a buyer might agree to purchase a company or its business, with the requirement that the seller remain responsible for liability that arose before the sale. This involves indemnification.

Tax consequences also play into the decision about how a transaction should be structured and how a payout should be planned. Usually both parties have an interest in tax efficiency.

Price. Once structure is arranged, price is top of mind. The price must be clear. The payout terms must be fixed. If there is an earn out through which payment is based on future performance, those terms must be beyond debate, as this is very frequently an area for future disagreement.

Non-compete. In the same vein, if the owner of the selling company is to sign a non-compete, as the buyer often requires, that must be precise and limited in duration, geography and subject matter.

Warranties. Parties should be clear about their promises or warranties as to what they think is happening. Most warranties come from the seller, who knows the company and is promising the buyer that certain things are true.

Dispute Resolution. Often people ignore the "boilerplate" clauses in a contract such as dispute resolution, choice of law or choice of forum. These topics are far more important than the limited amount of space they occupy in the transaction documents.

Many debate whether the parties should agree to skip the court system and opt for arbitration. Both methods of dispute resolution have strengths and weaknesses, but New Jersey courts strongly favor mandatory arbitration clauses and enforce them. It is important to know what one is giving up in agreeing to arbitration, because once the agreement is signed, the parties are likely to be forced to take disputes to arbitration rather than the courts.

Likewise, take care with choice of law or choice of forum provisions. If one sells a New Jersey entity to a California entity and agrees that California law and courts will resolve disputes, the New Jersey seller is exposing itself to an expensive, long-distance dispute process.

When in Doubt, Shout. Beyond anything else, know what you are signing. If you have doubts, do not sign. You should know what every word means. If you do not or just have lingering doubts, stop. Clarify. Rewrite the offending provision. Have a third party look at it. Do not sign because you are tired or you assume the good faith of the other side.

Lawyers can assist at every step of the process. Hiring the right professional to negotiate, draft and review the transaction documents is an excellent investment - with the best payout being the disputes and litigation you avoid.

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Watchung, NJ 07069
Telephone: 908-731-6976 
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