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What preliminary agreements are commonly drafted?
The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters of the transaction. Often these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
Even if not expressed as legally binding, it is common for a period for exclusive negotiation to be agreed and for the buyer to undertake confidentiality obligations (either as part of the letter of intent or as a separate non-disclosure agreement) with respect to the information that it will receive on the target.
What documents are required?
The principal documents for M&A transactions vary depending on the nature and structure of the transaction. Documents which are commonly used include:
- share purchase agreements;
- share subscription agreements;
- asset purchase agreements;
- disclosure letters;
- amended or restated shareholders' or joint venture agreements; and
- agreements for terminating certain arrangements between the seller and the target (eg, existing inter-company or shareholder's loans).
Which side normally prepares the first drafts?
While there is no predominant trend, the buyer (and its legal counsel) will often prepare the first draft. This tends to be particularly true for private equity investors, which may have well-developed precedents for certain industries.
However, this is a generalisation from which there are departures. One example is where the target is being sold through a bidding process. The seller may provide a draft of the acquisition agreement and will consider the buyer's comments on the agreement in deciding who to do the deal with.
What are the substantive clauses that comprise an acquisition agreement?
Substantive clauses of an acquisition agreement generally include:
- the parties and subject matter;
- price and pricing mechanism (including any price adjustment, hold-back of purchase price, escrow arrangement and timeline for payment);
- deal structure (eg, whether signing and closing will occur simultaneously and whether there will be one closing or multiple closings);
- conditions precedent to closing;
- pre-closing covenants (governing the target's conduct and affairs between the signing of the acquisition agreement and the closing of the transaction);
- warranties and indemnities from the seller;
- non-compete and confidentiality obligations (from the seller and the target's executives and senior management, particularly those who will not be retained after closing);
- post-closing arrangements (eg, provision of transitional services or IP licences to the target by the seller or its affiliates) – the acquisition agreement often sets out the key terms, while providing for separate agreements (eg, a transitional services agreement and a trademark licence agreement) to be entered into at closing;
- apportionment of tax liabilities and transactional costs and expenses; and
- governing law and dispute resolution.
Where all or substantially all of the assets of a business are being transferred in Hong Kong, the Transfer of Business (Protection of Creditors) Ordinance provides that any party with a claim against the seller may bring a claim against the purchaser. This provision can be avoided by publishing certain public notices; a creditor must then make its claim within one month of the public notice.
What provisions are made for deal protection?
The deal protection provisions usually form part of the substantive clauses of an acquisition agreement since they are intrinsically linked to the economics and risk allocation of the deal. Examples are:
- conditions precedent;
- pre-closing covenants;
- warranties and indemnities;
- non-compete clauses; and
- confidentiality obligations.
Break fees are rare.
What documents are normally executed at signing and closing?
Signing and closing may occur separately or on the same day (if no conditions precedent must be fulfilled before closing). Where closing is to take place after signing, most of the transaction documents will be signed first – with common exceptions being the amended/restated shareholders' or joint venture agreement, and agreements for terminating existing arrangements between the seller and the target, which may only be executed at closing (although they would be in an agreed form before that).
Other documents to be executed at closing include:
- documents for the transfer of title to the shares or assets in question, such as instrument of transfer for shares and (for shares in a Hong Kong company) bought and sold notes;
- resolutions of the target and parties, approving the transaction;
- resolutions of the target approving the change of each member's directors, secretary, auditor, banking signatories and (if applicable) senior management, together with corresponding resignation or termination letters;
- new employment or service contracts with incoming management;
- resolutions for the change of company name or address (if applicable); and
- closing letters (confirming the fulfilment or waiver of the conditions precedent and that none of the warranties has been breached at closing).
Are there formalities for the execution of documents by foreign companies?
Foreign companies should comply with their articles of association and constitutional documents in executing documents. Other than that, Hong Kong law does not require legalisation or notarisation for the execution of M&A documents in general.
Are digital signatures binding and enforceable?
Under the Electronic Transactions Ordinance, electronic signatures (if correctly used) are recognised as binding and enforceable.
However, the signatory should exercise care in using the appropriate signature, depending on the parties and the type of document, for instance:
- in transactions involving government entities, a digital signature supported by a digital certificate (issued by a certification authority recognised under the Electronic Transactions Ordinance) should be used;
- in transactions not involving government entities, any form of electronic signature can be used, provided that it is logically associated with the electronic record for identifying the signatory; is reliable and appropriate for purpose; and the recipient of the signature has agreed to its use; and
- the Electronic Transactions Ordinance sets out certain documents to which electronic signatures should not be applied (eg, wills or other testamentary documents; documents for the creation, variation or revocation of a trust arrangement; powers of attorney; most instruments required to be stamped under the Stamp Duty Ordinance; and conveyancing documents for real estate).
In practice, transactional documents in M&A deals are mostly executed by hand rather than electronically. This may be attributable in part to the above limitations, and partly due to conventional preferences.
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