What is a Redemption Agreement? A redemption agreement is a sophisticated legal contract formed by and between a company, on the one hand, and its investors, on the other hand. There are several critical components to any effective and legally sufficient redemption agreement. 1. Recitals. This section must introduce the characters, tell the story of the relationship between the parties, and describe the events that led to the forming of the agreement. Usually the parties are already contractually related by way of one or more earlier agreements, such as a Securities Purchase Agreement, an Amendment and Exchange Agreement, and/or a Registration Rights Agreement. The Recitals section of the redemption agreement must also describe the overall purpose of the redemption agreement; namely what is being redeemed, from whom is it being redeemed, and on what terms and conditions is it being redeemed. 2. Redemption. Generally it is stock or other equity offering that is being redeemed by the company from the investors upon the occurrence of a certain event, such as the death of the investor, although it can be for other reasons as well. This paragraph of the redemption agreement should address how much notice of the redemption date the company must give to the investor. It must also address the method and time for delivery of the stock, warrants, notes, or whatever is being redeemed, and what, if anything, will be delivered back to the investor in consideration for the exchange. This paragraph will also address the effect of the redemption; any forbearance that may take effect, and any waiver of rights that may be involved. Finally, the redemption paragraph should include a provision addressing any restrictions on transfer or conveyance that is being placed on the investor until the closing date of the redemption agreement. 3. Representations and Warranties. The redemption agreement must also include a generic paragraph addressing the Representations and Warranties of both the company and the investor(s). The company must warrant that it is a duly organized, validly existing company in good standing under the laws of the jurisdiction; has all corporate power and authority to execute the agreement; and that the redemption agreement has been duly and validly authorized by the Board of Directors. For their part, the investors must warrant that they are also duly organized and validly existing and in good standing in the jurisdiction, and that they have the requisite power and authority to execute and deliver the agreement and perform the obligations. 4. Conditions to Redemption. This paragraph of the redemption agreement should address any and all conditions to redemption that exist. Often the obligation of the company to follow through on its obligations under the agreement is subject to the satisfaction of some other obligations promised by way of a separate agreement. For instance, in a merger situation, the redemption agreement may only take effect after all of the conditions to the merger have been satisfied or waived. Likewise, the company may make its obligations contingent on the investors performing all of their obligations prior to the redemption date. Finally, the redemption agreement may state that the investors
must have made full, true and accurate disclosures in order for the company’s obligations to take legal effect. 5. Termination. Finally, how and when the redemption agreement may be terminated should be addressed. Often the company will want to reserve the right to terminate the agreement if, again in the situation of a merger, the merger agreement is terminated, or if there has been a breach of any representation or warranty by the investor. Likewise, the investor will want to reserve the right to terminate the redemption agreement prior to the redemption date if there has been a breach of any representation, warranty, covenant, or agreement made by the Company. These are the most important provisions of a Redemption Agreement. For copies of actual and well-drafted Redemption Agreements, check out the Agreements Section of the RealDealDocs.com website.