Preliminary agreements

What preliminary agreements are commonly drafted?

Before starting the due diligence process, the parties to an M&A transaction typically enter into a non-disclosure or confidentiality agreement with a view to protecting their respective confidential data and business secrets during the due diligence. Once the initial phase of the due diligence is completed and the potential purchaser has received an overview on the target, parties typically enter into a letter of intent and/or a term sheet (non-binding, although binding in rare instances). The letter of intent is provided by the purchaser and customarily includes an initial purchase price offer (typically as an indicative offer in a certain range, as no full financial due diligence has been concluded at this stage), setting out the proposed transaction steps and a timeline until completion of the transaction. The term sheet is typically negotiated between the parties and signed by the purchaser and seller, once in an agreed format. It includes the main terms and conditions of the definitive agreements to be entered into if parties wish to proceed with the transaction after completion of the due diligence exercise, and is designed to minimise the risk of either party abandoning negotiations at a late stage of the transaction.

Other than in early-stage auction processes, exclusivity agreements between the parties are often concluded, either as an additional agreement or included in the letter of intent or term sheet, which prevents the seller (usually for a certain limited period) from entering into negotiations with a third party with respect to the subject matter of the contemplated transaction.

Principal documentation

What documents are required?

The main document is the share purchase agreement or, if the sale is structured as an asset deal, the asset purchase agreement. Sometimes the actual transfer of the shares is governed by a separate transfer agreement.

Which side normally prepares the first drafts?

In an auction process, the seller typically prepares the first drafts, whereas in other M&A transactions, the purchaser often provides the first drafts. However, the seller also often prepares the first drafts in transactions outside of auction processes.

What are the substantive clauses that comprise an acquisition agreement?

The substantive clauses of a purchase agreement in an M&A transaction include:

  • a detailed description of the purchase object (ie, shares or assets of the target);
  • the purchase price and payment conditions, including provisions governing locked-box, earn-out and purchase price adjustments;
  • closing conditions and actions, and deviating economic effective date;
  • the seller’s (and potentially also the purchaser’s) representations and warranties;
  • indemnifications, including for taxes;
  • remedies, including the statute of limitations;
  • costs and taxes triggered by the transaction;
  • choice of law and legal venue, and arbitration provisions; and
  • if required, cartel and/or foreign trade law clauses.

What provisions are made for deal protection?

Parties typically agree on confidentiality provisions either in separate non-disclosure or confidentiality agreements or in the principal documentation. In the preliminary agreements the parties sometimes agree on a break-up fee covering the advisory costs of the respective party. In addition, provisions governing joint press releases of the parties are customary in the principal documentation.

Closing documentation

What documents are normally executed at signing and closing?

The parties normally sign the acquisition agreement (ie, the share or asset purchase and transfer agreement), pursuant to which they agree on the terms and conditions for the sale and transfer of the target company (or the assets, as the case may be). The completion of the sale and acquisition (ie, the transfer of title ownership) is often conditional on the satisfaction of the agreed conditions (eg, the approval or non-prohibition of the transaction by competent merger control authorities).

Once all closing conditions are satisfied or validly waived, the parties either must execute the respective title transfer documents, resulting in the completion of the transaction, or the acquisition documents are structured so that the completion is implemented automatically when closing conditions are satisfied or validly waived. In the latter case, the parties typically execute a closing memorandum which confirms the completion of the transaction.

In addition to the aforementioned documents, as part of the closing action the parties often execute resolutions approving the transaction, removing and/or appointing board members or terminating related party relationships.

Are there formalities for the execution of documents by foreign companies?

Documents must be executed in notarial form with all parties in agreement being either physically present or validly represented where the documents relate to the sale and acquisition of:

  • shares in a German private limited liability company (GmbH);
  • assets including real estate; or
  • assets substantially constituting all assets of a German individual or company. 

In such cases, the notary public must verify the signing authority of the person(s) signing on behalf of the respective parties. For German parties, the notary public can usually easily verify the authority by reviewing the respective information in the competent German commercial registry. Foreign parties must present the notary public with a valid, publicly certified document proving the authority of the person who signed. Depending on its country of origin, the company may be required to provide evidence that the signature authority is certified and has an affixed apostille.

Are digital signatures binding and enforceable?

Yes, German law (Section 126 paragraph 3, 126a of the Civil Code) states that unless otherwise agreed, digital signatures can be binding and enforceable.

Click here to view the full article.