Partnership Redemption Agreement
A partnership redemption agreement is a common type of buy-sell agreement and is commonly referred to as the “stock redemption” agreement. This is an agreement between partners in a partnership that provides that when a shareholder leaves the business, their interest is bought back by the partnership. In the case of a company, the partnership redemption agreement in a company that states when a shareholder leaves the business, whether it be due to retirement, disability, death, or other reason, the departing members shares will be bought by the company. With the company buying out the departing shareholder, this effectively increases the proportionate holdings of each shareholder within the business, assuring that no shareholder acquires any more power or a majority ownership interest in the company.
Partnership redemption agreements are formally written and can be prepared years before the departure of shareholders. They are constructed in order to avoid issues related to compensation of the departing member and which remaining shareholders will purchase the departing members’ shares. Stock redemption agreements are best implemented within businesses where the current shareholders each have an equal amount of stock in the company. They assure all shareholders that no minority shareholder will purchase the departing member’s shares and thus take a majority ownership of the business upon a shareholder’s departure. The partnership redemption agreement also gives partners or shareholders the security of knowing that no third party will purchase the shares and become a member of their business.
A major benefit of a partnership redemption agreement is simplified funding for the departing member. The compensation for the departing member is agreed upon beforehand and the funding for such compensation is made available at the time of the agreement. This avoids normal liquidity issues associated with a departure. When you leave the business, you are paid the money immediately, without any questions asked.
Like other buy-sell agreements, stock redemption agreements can set a predetermined value for the company for tax purposes, which is useful for companies which are only going to increase in value. However, for the government to honor such a predetermined value, three strict conditions must be met:
- The partnership redemption agreement must be a bona fide business agreement.
- The partnership redemption agreement cannot be a device to transfer the business to members of a decedent’s family for less than full and adequate consideration.
- The terms of the partnership redemption agreement must be comparable to similar agreements entered into by non-parties.
These conditions prevent partners or shareholders from using partnership redemption agreements as a way to get around paying gift tax or reduced income/estate taxes.
Partnership redemption agreements should be prepared by an experienced business law attorney. This is because there are numerous guidelines that must followed in order to be recognized. If written properly, they can be incredibly beneficial to any business. They assure partners or shareholders that they will not have to find a buyer for their interest or shares and will be compensated when they depart from the business. They assure partners or shareholders that they will not be blindsided by another partner or shareholder buying a departing members’ interest or shares. This might result in the buyer becoming a majority owner in the partnership or company. The partnership redemption agreements also assure partners or shareholders that no third party will enter into the business without their approval.
Contents of a partnership redemption agreement
- Section one: Redemption of Holder’s Redeemed Units
At the redemption clause of the partnership redemption agreement consideration is made of the Company entering into the Executive Award Agreement. Further, the clause provides the holder with the consideration thereunder and holder’s right to receive payments of his pro rata portion of the merger consideration. The partnership or company also redeems from holder and holder hereby transfers to the company free and clear of any encumbrances. Also, the redeemed units set forth in the recitals which shall automatically be cancelled effective as of the redemption closing are included in this section of the partnership redemption agreement.
(i) Parent shares.
In this clause of the partnership redemption agreements, the holder acknowledges and agrees on certain conditions. For instance, that in no event shall holder offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, sell short, or otherwise dispose of or transfer any parent shares direct or indirectly. This is unless the holder has received certificates registering such parent shares in the holder’s name or, if such parent shares are in book-entry and have been recorded on parent’s books in the holder’s name.
Notwithstanding the foregoing, in the partnership redemption agreement, the holder acknowledges and agrees that the company or partnership will require the cooperation of parent. This is in transferring to the holder any interest or shares to the Company to which Holder is entitled pursuant to Section 1(a). This may include the cooperation of parent to prepare and deliver, or cause to be prepared and delivered, to parent’s transfer agent a customary legal opinion. Further, this clause of the partnership redemption agreement provides that the partnership or company cannot cause, without such cooperation on the part of parent and parent’s transfer agent, the transfer of any parent shares to holder.
(ii) Cash
Regarding any cash payment to which holder is entitled pursuant to section 1(a), this section of the partnership redemption agreement provides for the mode of payment. Precisely, that the partnership or company shall pay to holder, through a check made payable to holder or by wire transfer of funds to an account designated by holder. In each case, the partnership redemption agreement requires that the payment is made within the stipulated time. The amount should be equal to such cash payment.
- Indemnification and contribution agreement.
A partnership redemption agreement also contains an agreement relating to indemnification and contribution. In this section, the holder acknowledges that the partnership or company would not be entering into this agreement if holder was not simultaneously entering into the indemnification agreement.
This section of the partnership redemption agreements provides that the consummation of the redemption shall take place automatically. The partnership redemption agreement also provides that this happens in connection with and simultaneously with the closing under the merger agreement. Also, the clause provides that the redemption is contingent and conditioned upon the consummation of the Closing. In the event that the merger agreement is terminated in accordance with the terms before closing, the redeemed units shall not be cancelled. Instead, the redemption shall be void and the preferred units shall remain outstanding. This shall be subject to the terms of the senior management agreement and the limited partnership agreement.
- Partnership and partnership agreement.
The holder, in this clause, acknowledges and agrees that after consummation of the transactions contemplated, he will no longer hold any equity. This also excludes any other interest in the partnership or company. Hence the holder ceases to be a partner of the partnership or company. Further, he or she will not be entitled to receive any distributions from the company pursuant to the limited partnership agreement in respect of any of the redeemed units. Also, the partnership or company acknowledges and agrees that after consummation of the transactions in the agreement the holder has no obligations. This is with respect to the preferred units under the limited partnership agreement or the senior management agreement. Such is including, without limitation, any obligation to contribute capital to the company under any circumstances.
This section stipulates that the holder accepts the assignment of and assumes such rights and obligations. This is provided that, notwithstanding anything herein to the contrary, the company’s or partnership’s demand of registration of rights shall not be assigned to Holder.
- Section 2: Representations and warranties.
Some of the warranties and representations included in the agreement include:
- Holder representations. The holder represents and warrants to the partnership of company as of the effective date the redemption closing:
- The redeemed units are owned of record and beneficially by holder. Further, the holder has good and marketable title to the redeemed units, free and clear of any security interest, claims, liens, pledges, options, encumbrances, charges, agreements, voting trusts, proxies or other arrangements or restrictions. However, such transfer restrictions as are required under the securities act and the restrictions set forth in the limited partnership agreement are excluded.
- Legal capacity. The holder has full legal capacity to enter into and perform his obligations in the partnership redemption agreement. The agreement constitutes the valid and legally binding obligation of holder, enforceable against holder in accordance with its respective terms.
- The execution, delivery and performance of the agreement and the indemnification agreement by holder does not conflict with or result in a breach of any agreement. It also does not affect any instrument, order, judgment, decree, law or governmental regulation to which holder or the redeemed units are subject.
References
https://www.business-in-a-box.com/redemption
https://www.bestdiscoveries.co/search/results
https://www.zapmeta.ws/web/results
https://www.contractscounsel.com
At Legal writing experts, we would be happy to assist in preparing any legal document you need. We are international lawyers and attorneys with significant experience in legal drafting, Commercial-Corporate practice and consulting. In the last few years, we have successfully undertaken similar assignments for clients from different jurisdictions. If given this opportunity, we will be able to prepare the legal document within the shortest time possible.