Joint and Several Liability
“The obligations of the Stockholders to the Purchaser under this Agreement are joint and several.”
This is a variation of a provision sometimes found in stock purchase agreements (SPA) to apportion liability among the selling stockholders. Each of the stockholders is an obligor with the duty to sell its shares, and make the usual laundry list of representations and perform all the covenants and indemnities set forth in the SPA. For example, if the stockholders fail to disclose an environmental problem in the SPA (let’s assume that nobody caught the issue in due diligence either), then the purchaser (as the obligee) would have a claim against them based on the misrepresentation. The extent to which the aggrieved purchaser/obligee can pursue any of the stockholders/obligors for this misrepresentation (or any breach of contract or to enforce any covenant or indemnity) depends on the type of apportionment clause contained in the agreement.
In most cases, the purchaser is going to want to include a provision similar to the above language to make all the stockholders jointly and severally liable for all obligations. In case of a misrepresentation or other breach, or in case the purchaser needs to enforce any covenant or indemnity contained in the SPA, this clause will allow the purchaser to go after all the stockholders together or any one or more of the stockholders separately for any amount up to the entire aggregate amount (not just the pro rata portion) of the claim, regardless of the degree to which any of the stockholders is at fault.
Where does this leave the passive investor with a small to medium stake in the company and probably no say or even knowledge about the day-to-day activities of the company? It seems like rough justice to allow the purchaser to pursue this investor for the entire amount of the liability.
Monetary CapThe passive investor might try to negotiate a hard monetary cap on the amount of his liability. He can argue that the purchaser is more than protected if the remaining stockholders agree to joint and several liability.
Contribution
In most cases, however, the purchaser won’t budge. It will invoke the oft-repeated mantra that the purpose of the reps and warranties is to allocate risk, and the stockholders (as a group) are still in a better position, vis-à-vis the purchaser, to know about (or at least to have investigated) the potential risks of the business. The purchaser wants the flexibility to go after the deep pockets and really doesn’t care which stockholder is to blame. It just wants to be made whole, by anybody. In this case, the stockholders may need to enter into a separate contribution agreement to apportion the liability among themselves in the event any of them is forced to bear a disproportionate amount of liability. Apportionment can be based on relative fault or just on their percentage ownership of the company.
