The term "ancillary agreements" describes the various agreements executed and delivered by the parties at the closing of an M&A transaction to supplement the terms of the definitive acquisition agreement. Although the ancillary agreements needed vary from deal to deal, most will fit into one of the following categories:
- Escrow agreements;
- Documents of transfer;
- Agreements for post-closing services;
- Agreements for post-closing commercial arrangements; and
- Agreements restricting the seller's activities after closing.
Although these agreements are not executed and delivered until closing, they are typically negotiated at the same time as the definitive acquisition agreement and the agreed-upon forms thereof are attached as exhibits to that agreement. This approach avoids complications and disputes in the period between signing the definitive acquisition agreement and closing the transaction.
Escrow agreements are used when a seller has agreed to escrow part of the purchase price for a specific period after closing. Escrow agreements are typically among three parties—the seller, the buyer, and the escrow agent, which is usually a bank or other financial institution. Escrow agreements establish the escrow account and provide for when and how the buyer can make claims against those funds for either a working capital adjustment, losses that are indemnified by the seller under the purchase agreement, or both. Additionally, escrow agreements typically set forth the rights and responsibilities of the escrow agent, how the funds are to be invested by the escrow agent, and the allocation of investment income on the escrowed funds between the buyer and the seller, as well as the reporting of such income for federal tax purposes. At the end of the specified escrow period (unless there is a pending claim), the account balance is disbursed to the seller.
Documents of Transfer
Documents of transfer are delivered at the closing of asset acquisitions to evidence and effect the transfer of assets and liabilities from the seller to the buyer. This category of ancillary agreements includes bills of sale, assignments and assumptions, and deeds. Documents of transfer are typically short, simple agreements between the buyer and the seller that state that the seller has transferred the specified assets or liabilities to the buyer, and that the buyer has accepted the assignment of such assets and has assumed any such liabilities. Bills of sale are used to transfer tangible personal property, while assignments and assumptions are used to transfer intangibles such as contractual rights and obligations. Intangible assets registered with a third party, such as trademarks, patents and domain names, are typically transferred by a separate, specific assignment and assumption agreement because that agreement will need to be filed with the appropriate third party. Deeds are used to transfer real property.
Agreements for Post-Closing Services
Agreements for post-closing services, such as transition services agreements, employment agreements, and consulting agreements, are important ancillary agreements because such agreements facilitate the smooth transition of the business from the seller to the buyer. Under a transition services agreement, a seller agrees to provide the buyer with key support services, such as accounting or information technology services, for a limited time after closing until the buyer can provide those functions or transition them to a third party. Transition services agreements can also be used to allow the buyer to access facilities or other assets that are used by the purchased business but that are not part of the transferred assets. Consulting agreements are used for a seller to provide general knowledge about the purchased business and related services to the buyer, usually on a part-time basis. Employment agreements for key employees are also frequently used to allow the buyer to access the historical knowledge and existing skills of senior management.
Agreements for Post-Closing Commercial Arrangements
Agreements for post-closing commercial arrangements, such as supply agreements, distribution agreements and real property leases, set forth the terms and conditions of commercial relationships between the parties following the closing. These agreements typically are needed for the buyer to operate the business in the same manner as it was operated by the seller immediately before the closing. For example, the parties may enter into a supply agreement when the business being sold obtains inventory from another business unit of the seller or an affiliate of the seller not included in the transaction. Similarly, the parties may enter into a post-closing distribution agreement when the sales force serving the target business is being retained by the seller and not included in the transaction. A post-closing real property lease agreement is typically entered into in cases in which either the seller does not want to sell the real property used in the business or the buyer would rather lease the property rather than buy it.
Agreements Restricting Seller's Activities
Although provisions restricting the seller's activities after closing are sometimes set forth in the definitive acquisition agreement, transactions may also be structured to have a non-competition or non-solicitation agreement delivered at closing as an ancillary agreement. The objective of these agreements is to prevent the seller from using its knowledge of the transferred business to take actions that could harm the business after closing. Under a non-competition agreement, a seller usually agrees for a specific period not to directly or indirectly operate, invest in, or provide services to competing businesses that operate in the same field and geographical location. Under a non-solicitation or no-hire agreement, a seller agrees for a specific period that it will not solicit or hire any employees whose employment has been transferred to the buyer.