What exactly is a MIPA Agreement?
A "Multiple Independent Party Agreement ("MIPA"), or co-sale agreement, typically provides the current management and/or outside investors of a private company with the right to buy the equity securities being sold to an outside buyer under a stock purchase agreement with the company’s founders, controlling shareholders, or other selling stockholders. These agreements are used by private companies to protect their management from shares being sold to outside parties and thus increasing the attacking shareholders’ control of the company.
A MIPA agreement allows, generally, for a sale of equivalent amounts of the company’s stock to be made to shareholders at the same time and at the same price as the share being purchased by the buyer . Rather than allowing control of the General Partnership to be transferred to outside parties, the founders transfer the shares to management and/or outside investors, while retaining an equal distribution of shares of the company in order to maintain an equal or controlling interest.
The MIPA agreement functions to protect the existing management of the business, and/or the other investors, against dilution of their control over the company, while allowing the seller of the shares (founders and/or the general partnership) to sell their shares to the other shareholders.
Key elements of a MIPA Agreement
The essential components of a MIPA Agreement typically include representations, warranties, indemnities, purchase price adjustments, and conditions to closing. As these are often the most heavily negotiated sections of the MIPA, it is important to understand how each component works.
Representations are statements of fact with regard to the transaction. For example, a representation that the Seller’s financial statements are complete and accurate will give rise to liability to the Buyer if the Buyer later discovers those statements were incomplete or inaccurate. The key idea behind these statements is to put the Buyer on notice of what issues attended the sale. In other words, they encourage the Buyer to inquire into the matters that a reasonable buyer should examine.
A warranty serves a similar purpose. But rather than simply acknowledging facts and putting the Buyer on notice of issues that might be present, a warranty gives the Buyer recourse for damages it may incur as a result of the issue.
Indemnities are important because they facilitate the negotiation of a strong warranty, which gives the Buyer the comfort of knowing that it will be compensated for any damages it incurs, but at the same time puts the Seller on notice to deal with the issue in question.
Purchase price adjustments may be made for a number of reasons, but the most common reason is to ensure that the purchase price reflects the state of the business based on the closing balance sheet of the business. Generally, the Buyer and Seller work off of a projected balance sheet. At the closing, the actual balance sheet will usually differ in some respects from the projected balance sheet. In exchange for agreeing to close under those circumstances, the Buyer will typically receive a downward adjustment to the purchase price.
Conditions to closing are typically a list of events and documents that must exist at the Closing. The Buyer and Seller must both agree to the conditions that are included in the agreement.
Each component typically appears in a series of enumerated items in the agreement. Many agreements also include a section called "General Representations and Warranties" that typically covers most of the items that are commonly represented or warranted by the parties.
Legal implications of MIPA Agreements
The legal considerations in drafting and executing a Membership Interest Purchase Agreement (MIPA) are critical. There are many provisions that may not be top of mind when acquiring a minority interest that are important to the enforceability of the agreement itself. It is important for minority and majority owners to understand the legal considerations that go into drafting a MIPA whether you are the purchaser or seller of your interests.
Some common legal challenges with the enforceability of a MIPA are:
- Difficulty obtaining third party approvals needed for the PDA
- A violation of the implied covenant of good faith and fair dealing under the bylaws
- A violation of a non-compete provision by the buyer
- A breach of the buyer’s fiduciary obligations to the seller
Formalities are important to follow when entering into a MIPA and will ensure that the transaction is easy to execute, and the governing documents are properly edited to reflect the new ownership.
Negotiating the terms of MIPA Agreements
The negotiation of a MIPA Agreement begins at the closing stage of a sale of business. The parties agree on a purchase price based on the purchase price to revenue ratio for companies in the same industry. Then, the buyer and seller must decide how that purchase price will be divided between the cash payment and the equity or stock option. Sellers prefer more weight in the cash payment, while the buyers prefer to pay the majority of the purchase price in the form of equity shares or stock options. Employing the right strategy in negotiating a MIPA Agreement is necessary in ensuring that your objectives are met. These strategies must include an understanding of the company’s cash flow projection, the value of the target, the potential risks the acquisition may have in terms of management turnover or operational problems, and whether the MIPA Agreement covers all future potential disputes. While strategic negotiation is vital, due diligence is equally as important. It may seem like the obvious first step in the MIPA Agreement process, but taking the time to plan and execute a comprehensive due diligence process can save significant time and effort during the negotiation stage. A failure to conduct appropriate due diligence could lead to future disputes amongst shareholders, higher than expected taxes, breaches of contract, and other potential issues.
Common pitfalls to avoid in MIPA Agreements
The first mistake that I see frequently is the failure to conduct the necessary due diligence on the owner of the property right prior to entering into a MIPA agreement. Especially in New York, if you are adopting a methodology or using information owned by a third party, you want to make sure that the owner has the right to contract with you. Otherwise, your adoption may be invalidated down the road.
Second, parties frequently fail to have an enforceable agreement. No, it is not good enough just to have an email chain that states that you are adopting the methodology. An agreement should be well thought out and negotiated to ensure both parties understand how the agreement will work and what will happen if something goes wrong .
Third, especially in non-acquisition agreements, it is important to ensure that any share-back provisions are carefully considered and defined. For example, where there is a standard royalty rate, what happens if one party has to pay more than the royalty rate? Does the other party have a share-back, and what happens if they do not want a share-back?
Finally, it is always a good idea to have a carve-out when an agreement expires, which will allow you to continue using the methodology on a going forward basis, as many times agreements do not terminate for a prescribed time period, but continue indefinitely.
Case studies of effective MIPA Agreements
In the realm of corporate law, much can be learned from predecessors. The case studies presented here exemplify how MIPA agreements have been successfully utilized in previous transactions and how this sophisticated method of governance can make a big difference to the strategic structuring of transactions.
Case Study 1: The All In One Bundled Purchase and Sale Agreement
When an FMCG company wants to acquire assets under the relevant law, there is a legal requirement to either transfer the entire business or transfer the assets. The All In One bundled purchase and sale agreement has been one of the sophisticated methods adopted in the ever-growing fast moving consumer goods industry. Such an all-in-one bundled agreement offers the most efficient mechanism for the buyer, in that it assembles each part of the agreement to act as a single consolidated stream of transactions thereby enhancing its operational effectiveness and efficiency. Achieving an all-in-one bundled agreement requires clever thinking from the negotiating parties. It acts as a solution to many issues buyers face with this kind of transaction and helps buyers to consider a host of issues that can have an enormous impact on the short term success of the buyer post-acquisition. In addition it protects the interests the seller by consolidating its assets into one sale in the transaction. While buyers and sellers should consider the complexities involved in such a transaction, they can also be advantageous to both parties in moving forward.
Case Study 2: Mipa Group Centres and Overseas Group Centres
As part of an existing relationship between shareholders of two companies, both of which are well known internet companies, an MIPA agreement was developed for the purposes of re-structuring management in relation to usage for employee equity awards and projector development. Due to their success in the online industry, these two companies have a combined net worth in the hundreds of millions. Despite their previous successes, this new MIPA agreement has created extraordinary value for their respective companies. The combination of the expertise in both companies when brought together has enabled a new way of doing business. Through this new MIPA agreement, each company was able to bolster its respective talents and expertise through their cross company staffing. This process, known as fungibility, aided in simplifying the consolidation of some of their assets and processes, as a significant portion of effort was encountered when trying to integrate key talent from one company to another.
Emerging trends in MIPA Agreements
Emerging trends in the use of MIPA Agreements seem to suggest a continuation of the use of flexible and innovate MIPA provisions combined with their adaptation to reflect market changes and developments in the legal environment. For example, the Local Investors Agreement adopted into the CCoW under the PWP 2009 has meant more opportunities for local investors and also greater flexibility in the transaction process that attributes to innovation. So too , developing areas of law – such as Indonesia’s recent shift away from the negative in the restrictions in the Negative Investment List by allowing wholly foreign-owned stores – has enabled that type of MIPA Agreement to flourish. Careful analysis of underlying market conditions and legislative changes can help predict future trends for MIPA Agreements.