What preliminary agreements are commonly drafted?
Most buyers enter into a non-disclosure or confidentiality agreement prior to engaging in due diligence in order to protect confidential information. In this context, the buyer will agree to use the information to which it gains access strictly in connection with the transaction. Once the earliest stages of due diligence are complete, the parties may execute a letter of intent, memorandum of understanding or term sheet. This preliminary agreement is typically not binding except with respect to specific provisions concerning, for example, confidentiality, exclusivity and dispute resolution. The letter of intent or similar agreement sets out the parties’ agreement on general terms, which customarily includes:
- the form of transaction;
- the purchase price;
- the proposed transaction timeline;
- a summary of any required internal or material anticipated third-party consents; and
- to the extent applicable, indemnification and management arrangements and restrictive covenants.
What documents are required?
The form of the main transaction document depends on the structure of the transaction (ie, a merger agreement, a stock purchase agreement or an asset purchase agreement). Other documents that may be required include a non-disclosure agreement (or similar type of confidentiality agreement such as a letter of intent, memorandum of understanding or, if the transaction commences with an auction, a process letter). There may also be a management presentation or confidential information memorandum. Other documents associated with the transaction may include:
- disclosure schedules;
- escrow agreements;
- employment agreements;
- restrictive covenant agreements;
- management equity arrangements; and
- ancillary agreements relating to the transfer of securities or assets.
In addition, third-party or governmental consents and regulatory filings may be required.
Which side normally prepares the first drafts?
A buyer normally prepares the first drafts of the principal documentation in an M&A transaction.
However, in the context of an auction process, counsel representing the target and/or the sellers normally prepares an auction draft of the principal documentation that is made available to prospective buyers. Customarily, each buyer is then required to include, as part of its bid to acquire the target, a full mark-up of the auction draft.
What are the substantive clauses that comprise an acquisition agreement?
While the substantive clauses vary from deal to deal depending on the specific structure of the transaction, the following terms appear in most definitive transaction documents:
- the purchase price and any adjustments to the purchase price or earn-outs;
- representations and warranties;
- conditions to closing the transaction;
- provisions relating to indemnification and survival of representations, warranties and covenants;
- specific provisions detailing tax matters; and
- miscellaneous provisions including those relating to choice of law and venue for resolution of disputes.
What provisions are made for deal protection?
Buyers and sellers have a number of mechanisms at their disposal to protect a deal during the period between signing and closing:
- Termination fees – if a seller fails to satisfy its obligations required for closing and the transaction is terminated, it may be required to pay the buyer a fee.
- Reverse termination fees – if a buyer fails to satisfy its obligations required for closing and the transaction is terminated, it may be required to pay the seller a fee.
- ‘No-shop’ provisions – these provisions prohibit the seller from soliciting alternative offers after a deal has been signed. There may be exceptions given the fiduciary duties of the target’s directors.
- Specific performance – the definitive transaction agreement may include a provision enabling one party to compel the other to specifically perform and close the transaction if the conditions to closing have been satisfied or waived.
- Matching rights – when there are multiple bidders to acquire a company, matching rights grant the beneficiary of such rights the opportunity to match a competing bidder’s offer.
- Stockholder agreements – these agreements may be entered into with a significant stakeholder, or stakeholders representing a high percentage of the voting power of the target company, to obligate such stakeholders to vote in favour of the transaction or cooperate with the buyer or to agree not to sell their shares to a different buyer prior to closing.
- Force the vote – if a company’s board has initially recommended that the company enter into a transaction but subsequently withdraws such recommendation, Delaware corporate law nevertheless permits the directors to submit the transaction to the equity holders for approval. Accordingly, definitive transaction agreements may include a buyer-friendly provision requiring the target company’s directors to submit a transaction to a vote in such circumstances.
What documents are normally executed at signing and closing?
In a customary transaction with a ‘split’ signing and closing structure, the parties sign the definitive transaction document on the signing date. In the private equity context (ie, where the buyer is normally a newly formed special purpose vehicle without assets), the buyer customarily delivers an equity commitment letter evidencing the commitment of fund entities sponsoring the purchase to fund all or a portion of the purchase price at closing. If any third-party debt financing is contemplated, the buyer will also deliver a signed debt commitment letter evidencing the lender’s commitment to fund a portion of the purchase price at closing. Fund entities sponsoring the purchase may also deliver a limited guaranty, wherein such sponsor guarantees payment of the buyer’s obligations in the event the agreement is terminated and the transaction is abandoned (including a reverse termination fee (if applicable) and the buyer’s share of deal expenses).
At closing, each other transaction document will be executed and exchanged, including but not limited to employment arrangements, escrow arrangements and other ancillary agreements, such as bring-down certificates and authorising resolutions.
Are there formalities for the execution of documents by foreign companies?
Signatories with respect to the transaction documents must be appropriately authorised by the foreign company to execute documents on the company’s behalf. Frequently, there are notarisation or other formal requirements intended to ensure that the executed document is enforceable against such company. The requirements for such authority vary by jurisdiction and transaction document; therefore, the domestic entity will typically engage local counsel in the relevant foreign jurisdiction to obtain comfort that the document will be enforceable against such company.
Are digital signatures binding and enforceable?
Two sets of legislation address electronic signatures in the United States:
· the Uniform Electronic Transactions Act, which is a model state law that most states (including Delaware) have adopted; and
· the Electronic Signatures in Global and National Commerce Act, which is federal law.
The Electronic Signatures in Global and National Commerce Act applies when federal law governs a given matter and will pre-empt inconsistent state law unless a state has adopted the Uniform Electronic Transactions Act. Under both the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act, an electronic signature is generally binding and enforceable as long as it is signed with the appropriate intent. Both acts provide that electronic signatures are not enforceable in the case of documents relating to certain domestic and family law, estate planning and Uniform Commercial Code matters.
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