Your videos are awesome Brett, thank you for sharing them! The following is a curiosity that came to mind while considering indemnity agreements. What if the seller of a "share sale" business is a one-person operator? The business is structured as a C-corp or an S-Corp. The seller owns 100% of the shares being sold to the buyer. The seller is willing to provide all the customary indemnity agreements the buyer could possibly want. The share sale successfully goes through with all customary and mandatory processes completed and the deal closes. One week after the sale is finalized, god forbid, but the seller dies. Is the negotiated indemnity agreement, covenants, right to be defended, etcetera, still of any value to the buyer? In other words, say a buyer is served a lawsuit for past operational liabilities incurred prior to owning the newly purchased business, which would normally be handed over to the past owner, and accordingly the indemnity agreement would come into play. But, the prior owner of the corporation has passed away. Now what? Baby Boomers are not getting any younger and the majority of businesses for sale are listed by Boomers. How is this potentially real scenario typically handled within the contract/sales agreement?
Hey Brett, I have been really enjoying your videos! I am planning to go to law school this upcoming fall and am very interested in M&A law. Do you have any further suggestions of where to learn more about an attorney's role in M&A deals (especially lower middle market)? Thanks!
Could you do a video on materiality and materiality scrape? I can't really understand why to agree to a materiality qualification for the seller's R&Ws and later agree the buyer to scrape it out. Let's say that i do it for administrative purposes, like to not drawn the buyer with documents and not be obliged to disclose everything (even slightly irrelevant things to the buyer) and also I do it so that not every small breach can be considered material and calculated for indemnification. On top of that, let's say that i agree to a basket clause. Then, with materiality scrape (double) I as seller have nothing to win. Still, in the end i better disclose everything , because everything even immaterial will be calculated and tipped into the basket and as a result I indemnify for everything. Am I missing something here? What's the purpose of this thing ?
What is indemnification in a startup, for example, if someone is proving me converted note as debt, he is asking for indemnity letter? Kindly explain should I give him an indemnity letter? I don't have a company yet, he will just make a transaction to my account. Please explain pros and cons?What challenges I can face if he recalls debt?Btw why he is asking for indemnity letter?If you can provide free advice in Corona Virus as gift ,I will be obliged
Waseem, I am not entirely following what this person is offering to do for you. Taking an investment in the form of a convertible note without a company seems odd and problematic. How are you describing what shares/equity interests the note would convert into--your company to be formed? Because a convertible note is a security, you are in highly regulated territory here, so be cautious about the DIY approach in those waters. Regarding the main question, I don't know what he'd be asking you to indemnify him for. When we represent the issuer (the company raising money and selling a security), we often ask the investor to indemnify the issuer for misstatements the investor makes that lead to problems, e.g., if an investor represents that they are accredited but they are actually not accredited, and that leads to the issuer losing its securities law exemption for the overall offering (fundraising round), the issuer could turn to the investor who misstated something and ask them to cover the legal fees and other losses that the issuer incurs.
@@BrettCenkus Thanks for the detailed reply, Scenario,firstly, we've agreed for 20+4 equity in lieu of converted note. Secondly, the transaction is cross border into my personal account. Thirdly, he wants and indemnity letter, that I should write-need help with the language. Now I want my understanding , isn't converted note unsecured loan? I'll use the money for prototype testing and may exhaust money or become profitable after 2 years,isn't what investors expected. What is the legal consequence I can face, citing extra-territorial transactions? In conventional banking, we've some kind of security like an asset. In this case, apart from my future company, he doesn't have security any such security. Yeah, I am answerable for fraud and misdeclaration, etc. But if I work diligently, can he still ask me to pay note at once at maturity which can hamper my company's liquidity. What if I not in a position to pay at once or couldn't pay?And how to draft indemnity letter if you can help.
@@learn_techie yes, it is an unsecured loan, although US law would treat it as a security (not all loans are securities, although startup convertible notes are almost always securities, yours would be in this instance), which means you need to comply with securities laws. That isn't necessarily difficult, although it's something to work/talk through and depends on lots of factors, definitely not something I can easily speak into here (outside a formal attorney-client engagement). Overall your understanding is correct regarding what a typical deal with an investor using a convertible note looks like, i.e., if the venture doesn't make it, the debt won't be repaid. That's essentially what makes it a security, BTW.
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This channel is Gold!
thank you, Named!
I recently completed my law degree. I am trying hard to learn M&A transactions. I am finding these videos very helpful. Thankyou
You're welcome!
Your videos are awesome Brett, thank you for sharing them!
The following is a curiosity that came to mind while considering indemnity agreements. What if the seller of a "share sale" business is a one-person operator? The business is structured as a C-corp or an S-Corp. The seller owns 100% of the shares being sold to the buyer. The seller is willing to provide all the customary indemnity agreements the buyer could possibly want. The share sale successfully goes through with all customary and mandatory processes completed and the deal closes. One week after the sale is finalized, god forbid, but the seller dies. Is the negotiated indemnity agreement, covenants, right to be defended, etcetera, still of any value to the buyer? In other words, say a buyer is served a lawsuit for past operational liabilities incurred prior to owning the newly purchased business, which would normally be handed over to the past owner, and accordingly the indemnity agreement would come into play. But, the prior owner of the corporation has passed away. Now what? Baby Boomers are not getting any younger and the majority of businesses for sale are listed by Boomers. How is this potentially real scenario typically handled within the contract/sales agreement?
Hey Brett, I have been really enjoying your videos! I am planning to go to law school this upcoming fall and am very interested in M&A law. Do you have any further suggestions of where to learn more about an attorney's role in M&A deals (especially lower middle market)? Thanks!
Could you do a video on materiality and materiality scrape? I can't really understand why to agree to a materiality qualification for the seller's R&Ws and later agree the buyer to scrape it out. Let's say that i do it for administrative purposes, like to not drawn the buyer with documents and not be obliged to disclose everything (even slightly irrelevant things to the buyer) and also I do it so that not every small breach can be considered material and calculated for indemnification. On top of that, let's say that i agree to a basket clause. Then, with materiality scrape (double) I as seller have nothing to win. Still, in the end i better disclose everything , because everything even immaterial will be calculated and tipped into the basket and as a result I indemnify for everything. Am I missing something here? What's the purpose of this thing ?
What is indemnification in a startup, for example, if someone is proving me converted note as debt, he is asking for indemnity letter? Kindly explain should I give him an indemnity letter? I don't have a company yet, he will just make a transaction to my account. Please explain pros and cons?What challenges I can face if he recalls debt?Btw why he is asking for indemnity letter?If you can provide free advice in Corona Virus as gift ,I will be obliged
Waseem, I am not entirely following what this person is offering to do for you. Taking an investment in the form of a convertible note without a company seems odd and problematic. How are you describing what shares/equity interests the note would convert into--your company to be formed? Because a convertible note is a security, you are in highly regulated territory here, so be cautious about the DIY approach in those waters. Regarding the main question, I don't know what he'd be asking you to indemnify him for. When we represent the issuer (the company raising money and selling a security), we often ask the investor to indemnify the issuer for misstatements the investor makes that lead to problems, e.g., if an investor represents that they are accredited but they are actually not accredited, and that leads to the issuer losing its securities law exemption for the overall offering (fundraising round), the issuer could turn to the investor who misstated something and ask them to cover the legal fees and other losses that the issuer incurs.
@@BrettCenkus Thanks for the detailed reply, Scenario,firstly, we've agreed for 20+4 equity in lieu of converted note. Secondly, the transaction is cross border into my personal account. Thirdly, he wants and indemnity letter, that I should write-need help with the language.
Now I want my understanding , isn't converted note unsecured loan? I'll use the money for prototype testing and may exhaust money or become profitable after 2 years,isn't what investors expected. What is the legal consequence I can face, citing extra-territorial transactions? In conventional banking, we've some kind of security like an asset. In this case, apart from my future company, he doesn't have security any such security. Yeah, I am answerable for fraud and misdeclaration, etc. But if I work diligently, can he still ask me to pay note at once at maturity which can hamper my company's liquidity. What if I not in a position to pay at once or couldn't pay?And how to draft indemnity letter if you can help.
@@learn_techie yes, it is an unsecured loan, although US law would treat it as a security (not all loans are securities, although startup convertible notes are almost always securities, yours would be in this instance), which means you need to comply with securities laws. That isn't necessarily difficult, although it's something to work/talk through and depends on lots of factors, definitely not something I can easily speak into here (outside a formal attorney-client engagement). Overall your understanding is correct regarding what a typical deal with an investor using a convertible note looks like, i.e., if the venture doesn't make it, the debt won't be repaid. That's essentially what makes it a security, BTW.
@@BrettCenkus Thank You Brett ,I'll keep you in mind if startup is successful or I get a next big investment from Silicon Valley.
@@learn_techie you're welcome