Co-op Law
Resources for Worker Cooperatives
Co-op Law
Resources for Worker Cooperatives

Signing a Sales Agreement During a Cooperative Conversion

Generally, a sales agreement will need to be negotiated and signed by the initial owners and the new cooperative entity. The agreement should include the sale price, the list of assets being transferred, and the terms of the transfer. Here we will learn more about what typically goes into this type of agreement when the seller is a corporation and the buyer is a newly-formed cooperative corporation.

Creating Stock Redemption and Offering Agreements when the seller is a corporation and the buyer is a cooperative

Where the Seller is a Corporation, and the Buyer is a Cooperative Corporation, the sale may occur through a Stock Redemption Agreement, which would lead to two documents being created: 

First, a Stock Redemption Agreement would be created. A Stock Redemption Agreement is a contract between the owners or shareholders of a company that defines the terms in which they may buy, sell, or transfer the shares of their company. For a cooperative conversion, it may also reduce the Seller’s tax burden where the Seller is a Corporation, and the Buyer is a Cooperative Corporation. And taking advantage of the 1042 Rollover.  

 

 For a Stock Redemption Agreement to qualify for 1042 tax treatment, the Agreement should: 
  1. State that 30% stock redemption must be accompanied by a change in control (>50% board control).
  2. Set out the share price.
  3. Create a control premium (a premium applied to the value of 30% of the stock mentioned above) to account for the change in control.
  4. Add relevant representations and warranties.
  5. Include assurances to the owner that the cooperative will act to protect the owner’s remaining ownership interests.
  6. Describe how the owner will support the employees’ financing of the stock purchase.
  7. Outline future steps to complete the cooperative’s purchase of the owner’s stock.

The second document that should probably be created in this scenario is an Offering Agreement. The owners’ attorney should simultaneously prepare an Offering Statement, which is a general written disclosure to the selling owners and the prospective worker-owners of all the relevant risks associated with the transaction. The purpose of the Offering Statement is to make a fair disclosure to potential members of the risks and responsibilities of becoming a worker-owner. It also provides lenders with a clearer understanding of the transaction. 

 The Offering Statement will outline: 
  1. The risks of selling shares and transferring control

  2. The risks of employee investment in the company

  3. The terms of the Stock Redemption Agreement

  4. The securities and tax law issues surrounding the transaction and the continuing operation of the business.

  5. The company’s reorganization into a worker cooperative, including attaching the new articles and bylaws (spelling out the terms and conditions of membership)

  6. Business planning and finances

     

Worker buy-outs are generally an excluded securities offering under Section 4(2) of the Securities Act of 1933 (which governs registration of sales of securities). Finally, Offering Statements are not Securities and Exchange Commission (SEC) disclosure statements (like Registration documents).

 

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