Any attorneys here expert in Stock repurchase agreements involving paying overtime for the stock?

[Eliot Rosewater]

I have a question about whether or not the seller of the stock, if being paid over a period of years, would normally put in the agreement that if the buyer defaults the stock or a portion thereof reverts back to the seller?

[Gothmog]

1. It varies

Often the shares being purchased are pledged to secure the note or promise to pay the purchase price. If there is a default on the note, then the seller can accelerate the note and then foreclose on the pledge and regain ownership of the stock. This requires a true pledge where the seller has possession of the stock certificate and stock power to be used in case of a foreclosure sale. The trouble is that you have to do an UCC foreclosure sale that has to be commercially reasonable in order for the foreclosure to be valid. I have done several such foreclosure sales and there is often litigation on what is a reasonable foreclosure sale. Under the UCC, one can accept the collateral if the pledgor does not object by agreeing to not seek a deficiency judgement.

I have also seen deals where the seller retains title to stock until paid and gives the buyer a proxy to vote the stock so long as the note is current. This structure is not common.

[Eliot Rosewater]

2. Thanks.

I was told that it was not uncommon for the stock to be transferred in full at time of first installment and then if for any reason the note is not paid off the unpaid for stock is returned, as it is collateral but I would give it up at the outset.

I dont expect more free legal advice LOL so thanks for this much. I have an appt monday to see a local atty, but it would seem simple to put wording in on the promissory note stating the stock is returned to seller if not paid for.

I hope.

[Gothmog]

3. You need a valid stock pledge agreement to secure the note

It is never that easy. To have a perfected security interest in stock, one has to have a valid stock pledge agreement and the possession of the stock certificate unless the corporation has elected to issue uncertificated shares (which is very rare). Stock pledge agreements have some strange provisions to reconcile the differences between the UCC and the securities sales. Under the UCC one can conduct a private sale but normally one cannot seek a deficiency judgement or one can conduct a public sale where you advertise the sale. Normally under the securities laws one cannot sell a security in a public sale unless there is a valid SEC registration statement for what is called a shelf registration that is effective and maintained (this never happens and would be very expensive). The SEC has allowed public foreclosure sales to be done with some limitation that are built into the security agreement or pledge agreement. There are a series of SEC no action letters that outline how one conducts a valid UCC foreclosure sale without violating the securities laws.

Again, you have to actual possession of the stock certificate to have a perfected security interest. Without possession of the stock certificate, you are an unsecured creditor and any one who buys the stock can take free of your security interest. Again, I have done a number of foreclosure sales of stock.