Ancillary Agreements 

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Author: Jonathon Wise Polier
Member of the Bars of New York State and Paris (France)
4 rue de Marignan, 75008 Paris

Telephone: (33) 1 47 23 41 51 / Fax:  (33) 1 47 23 37 93
E-Mail: j-polier@paris-law.com / http://www.paris-law.com

(List of articles in English and French relating to various legal issues)

5.4 Ancillary Agreements (Key Personnel and "Consultants")

The Representations and Warranties in an America Purchase and Sale Agreement generally are not sufficient to assure the buyer that it will receive full value for the purchase price. Thus, as a condition of closing, it us normal for the certain physical persons to sign ancillary documents dealing with their employment, services and/or agreement not to compete.

For example, certain key employees (i.e., Director of Marketing) at the target may not have employment contract. 

If there is to be a stock acquisition and if such key executives were to resign shortly after the closing, the value of the stock might be less. Thus, it may be appropriate to negotiate one or more employment agreements and attached the form of the employment agreement(s) to the Stock Purchase and Sale Agreement and to provide that the buyer need not close unless the key employee(s) sign(s) the employment agreement(s) on the closing date.

If there is to be an asset acquisition and if such key executives were not free to work for the American company which purchased the assets,  the value of the assets might be less. Thus, it may be appropriate to negotiate one or more employment agreements and attached the form of the employment agreement(s) to the Asset Purchase and Sale Agreement and to provide that the buyer need not close unless the key employee(s) sign(s) the employment agreement(s) on the closing date.T

In addition to the above-mentioned key employees, the controlling shareholders and their immediate family may represent a commercial danger. Often such  persons could undermine the value of the stock or assets purchased, if they decided to worked with a competitor company during the first year after the closing. To manage that issue, it is not uncommon for there to be an ancillary "consulting" agreement with an appropriate non-compete covenant. Thus, if the purchase price of the assets or stock were $ 5 million, at the closing $ 4.5 million might be paid for the stock or assets and $ 0.5 million allocated to the payment of a 5 year consulting arrangement. Such a "consulting" agreement will have tax consequences for both the consultant and the buyer which must be taken into consideration.