There are three main phases of paperwork: documents that initiate the conversion process, documents that articulate what is being converted, and documents that make the conversion official.
Documents that initiate the conversion process
Letter of Intent (LOI) + Employee Memorandum of Understanding (MOU) AKA the “Ok, Let’s Do This” Documents
Even before getting to this point, both the owners and the workers will have likely done a great deal of exploration and assessment of the viability of conversion. There are one or two relatively loosely-binding documents that can be used to launch the conversion process.
- Letter of Intent: signed by participating employees and owners, can lay a rough road map of the process. Let’s talk about the terms that we want to be included in the agreement
This can be one of the first roadmap documents that outline the terms and process that the parties are contemplating. It also states that each party will commit to figuring out all the details more firmly in a future more binding agreement. This Letter of Intent might be between one and four pages and could consist of simple bullet points. Although it is a short document and not meant to be strictly binding, it can help each party feel secure to commit time, money, and effort to larger steps. The parties might also want to agree not to disclose the details of the negotiations. What would make it legally binding is if you have a provision that says, ”By signing this you agree to do X.”. An example of a provision could be what is known as an Exclusivity Agreement – agreeing to negotiate exclusively with workers and not seek or entertain other offers to buy the business.
Each worker may sign the Letter of Intent as an individual party, or if the workers have an MOU and have appointed a Steering Committee, it may be signed by one or more individuals designated to represent the workers as a group.
- Employee Memorandum of Understanding (MOU): signed by participating employees can describe how employees will work together in negotiating the buy-out.
An MOU is a documented agreement between two or more parties that outlines the terms and details for a shared understanding. This could be a short and informal document, or, alternatively, it could reflect the future bylaws that the cooperative may eventually adopt, which has the benefit of giving the workers practice in operating as a cooperative and understanding Bylaws.
Steering Committe
All participating employees should be in sync regarding the way forward, and it may be beneficial for them to establish a “Steering Committee” or a smaller group (volunteers or chosen) to take the lead in managing the cooperative conversion process on behalf of the employees.
To officially create this committee the employees may want to create an MOU to officially appoint this committee to act on behalf of workers. The workers may want to create an MOU, signed by all involved workers, describing
- Their purpose,
- any commitments of time or money employees will pledge,
- powers granted to the Steering Committee, and
- how the workers will make decisions as a group.
Documents that articulate what is being converted
When the Letter of Intent and Memorandum of Understanding are complete and everyone is in agreement ready to fully bind themselves to the conversion process, the owners and workers will likely execute a lengthy contract called a “Conversion Agreement”.
Additionally, if a new cooperative entity is to be formed, employees should execute
- Articles of Incorporation,
- bylaws,
- any other formation and governance documents for the cooperative.
All of these documents are pivotal to the conversion process, and we strongly recommend that parties consult with a lawyer to make sure that the terms are fair, in compliance with the law, and that no important terms are omitted.
The Conversion Agreement
This document is a detailed and formal document that binds all parties to complete various steps in order to eventually finalize the conversion.The Conversion Agreement might also be called Buy/Sell Agreement, Sales Agreement, Purchase Agreement, Stock Purchase Agreement, or something similar. It will likely run between 5 and 40 pages and include multiple attachments that represent samples of other documents to be executed before or at closing. It will contain:
- The sale price,
- list of assets being transferred,
- information and assurances on which all parties are relying (representations and warranties),
- promises by each party to do or not do things (covenants), and
- various contingencies (conditions) that allow each party to back out of the deal if certain requirements are not met, such as the necessary financing.
Since this document will have many similarities to a buy-sell agreement used when selling any business, many samples of such a document are available.
Although the Conversion Agreement will contain many terms not described here, below are a couple terms worth describing in greater detail:
- Non-Compete Agreement and Non-Solicitation Agreement:
these agreements are often used in the sale of a business since the selling owner(s) could easily create a competing business and/or poach employees from their sold business. It can specify a period of years and a geographical area in which the selling owners(s) are prohibited from starting a specified type of business and it can prevent the owner(s) from soliciting or hiring any of the co-op’s employees.
- Consulting Agreement with Selling Owners:
The knowledge and expertise of the selling owner(s) can greatly benefit a business, particularly in the months or first few years after transitioning to a cooperative. This agreement can specify that the selling owner will give advice and consulting services to the new cooperative.
Documents that make the conversion official – aka “Now Everything is Final and Official” Documents
To make the conversion final and official, a variety of documents will likely need to be executed. An escrow service may be used to facilitate the final execution of documents and transfer of funds, and many of the documents will be signed at a single closing meeting. One or more of the documents may be completed after closing, in situations where parties agree to take a specified action within a reasonable period of time after closing (such as changing trademark registration). Some of the documents needed before or at closing may include:
- Redemption Agreements: the owners may sign a document at this point to officially relinquish their interests in the business.
- Promissory Notes: Promissory notes are generally short documents that simply describe the terms of promised payments. Cooperative will likely execute promissory notes representing the cooperative’s debt to the prior owners and/or lenders. A very basic sample is linked here and some institutional lenders will often use their own form. If individual workers are receiving loans to finance their buy-in, workers will also need to execute promissory notes individually.
- Loan Agreements: if a promissory note isn’t enough for a lender, you can sign an ancillary Loan Agreement. An “ancillary Loan Agreement” is an extra agreement that goes along with the main loan agreement. It includes additional terms and details about the loan, such as collateral, repayment schedules, or interest rates. It provides extra information that is not covered in the main loan agreement. For example, the lender may require that the cooperative receive technical assistance from a specified provider, in order to ensure the financial viability of the cooperative.
- Inter-Creditor Agreement: In cases where multiple lenders collaborate to support a conversion, it may be necessary for the lenders to execute an inter-creditor agreement, committing each lender to provide financing and specifying the priority of repayment and the assets securing each loan. An Inter-Creditor Agreement was used in the conversion of the Island Employee Cooperative, as described in the case study later in this handbook.
- Share Certificates: The cooperative may prepare certificates evidencing the issuance of preferred shares, if any.
- Governing Documents: Where original business entity simply changes its structure, the new Articles and Bylaws may be officially adopted at closing.
- Leases, Lease Assignments, or Deeds: If the land that the business is on changes ownership you need to create new lease agreements (or deeds, or assignment of lease) to secure land tenure. Since there may be a name change to add “Cooperative”, it would be a good idea to change the name on any deeds or leases. Other tenants at the location should also be notified of the change in ownership.
- Assignment of Contracts, Bank Accounts, and Insurance Policies: Since the business before converting into the a cooperative will probably be in multiple different contracts (like insurance policies etc.), it may be necessary to transfer those contracts over to the new entity (if the cooperative formed a new entity). Bank accounts will also need to be closed and/or renamed.
- Transfer or Licensing of Intellectual Property Rights and Trademarks: In the case where the individual owners of the business personally own the rights to any intellectual property rights, or trademarks associated with the business, it will be necessary to transfer those rights to the cooperative. This can be done in the Conversion Agreement or in an ancillary agreement.
- Consulting Contracts with Third Parties: The Converion Agreement may require that the cooperative enter into a separate contract with other technical assistance provider.
- Letters and Resolutions Affirming Authority: Before closing you should make sure you have all the documents that verify that all parties involved in the Conversion Agreement have full legal authority to sign the agreement.
- Tax Clearance Letters: The business should provide all letters from an accountant or local,state and/or federal taxing authority to provide evidence that you have filed all tax returns and paid all your taxes.
- Bill of Sale: In the case of an asset sale, a bill of sale, or multiple bills of sale – will officially transfer ownership of certain assets, such as intellectual property, client lists, inventory, equipment, files, records, and so on.
- Securities Offering and Registration Documents and/or No Action Letter: In the cases where the cooperative receives capital contributions from cooperative members on loans, the cooperative should make that the receipt of capital from member complies with securities laws.
- Final Valuation of Inventory: For businesses that keep their inventory, the value of the inventory can change on a day-to-day basis. The final value of the inventory will need to be determined as close to the date of final sale as possible.
- Deeds of Trust: If any loans will be secured by real estate, it may be necessary to file (or “record”) a Deed of Trust along with local property records, to ensure that the lender’s right to the property is protected in the event of a default on the loan, and to make prospective purchasers aware of the security interest.
- Resignation of Officers and Directors: Except in the case of an asset sale, when an original owner sells their ownership they will need to also officially resign because selling their ownership doesnt necessarily mean they are being removed from governance or administrative tasks as well.
A Few Final Formalities
After closing, the parties may have a handful of additional papers to prepare and file.
Tasks that may occur after closing: might include
- Changes to contracts with third parties,
- changes to bank accounts,
- changes to trademark registration,
- and any other action that is both contingent on successful closing and on third party action.
Generally, the Conversion Agreement or other contracts executed at closing will bind the parties to completing these additional tasks as quickly as possible.
Additionally, the cooperative may need to file a Statement of Information or a similar document with the Secretary of State to provide an updated list of directors and officers. If it plans to do business under a name that is different than the entity’s legal name, it will usually need to file a Fictitious Business Name (“Doing Business As”) Statement.
In the case of an asset sale from one entity to the new cooperative, it is possible that the original entity will then want to dissolve, which requires a handful of formalities to wind up the business, file certificates of dissolution, final tax returns, and so on.
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