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Preliminary agreements

What preliminary agreements are commonly drafted?

A non-binding term sheet (or a letter of intent or memorandum of understanding) is commonly used, which covers the main commercial terms of the transaction, such as:

  • the type and number of shares or assets to be purchased;
  • the consideration;
  • the transaction structure;
  • payment terms;
  • escrow amounts;
  • material conditions to closing; and
  • treatment of current officers and employees.

In addition, the term sheet includes certain legal provisions, such as confidentiality and ‘no-shop’ provisions (ie, an agreed period during which the target may not solicit or respond to other offers to buy the company’s shares or assets). Such legal provisions – unlike the other provisions in the term sheet – are binding on the parties.

Before negotiating the term sheet, a non-disclosure agreement is usually executed in order to prohibit the buyer from using any confidential information of the company which is provided to the buyer in the due diligence process.

Principal documentation

What documents are required?

The following documents are used:

  • A share purchase agreement or a merger agreement governs the sale of the shares and the consideration to the company or shareholders. Alternatively, in an asset purchase transaction an asset purchase agreement governs the sale of the company’s assets and their consideration.
  • A shareholders’ agreement is customary if certain shareholders remain shareholders of the company after the transaction.
  • Revised articles of association of the company.
  • An escrow agreement governs the holding and release of the amount placed in escrow to secure any indemnification claims by the buyer. It is common to use a trustee as a paying agent in the event of numerous sellers (eg, employees).
  • Retention agreements with key employees whose employment in the company is continued post-acquisition.
  • Transition services agreements govern any interim services to be provided by the seller to the buyer or target in an asset transfer.
  • Numerous other principal documents, including share transfer deeds, notices to the registrar, board/shareholders resolutions and legal opinions.

Which side normally prepares the first drafts?

The buyer usually prepares the first drafts of the principal documentation.

What are the substantive clauses that comprise an acquisition agreement?

Clauses covering the following elements are usually included in the agreement:

  • determination of the asset being purchased (shares or assets) and treatment of options;
  • consideration, payment terms and price adjustment mechanism;
  • representations and warranties by the selling shareholders (and the company, if applicable);
  • representations and warranties of the purchaser;
  • conduct of the ordinary course of business during the interim period between the signing of the transaction agreement and the closing of the transaction;
  • conditions precedent;
  • closing and closing deliverables;
  • indemnification by sellers for breach of representations (including any limitations on such indemnification) and specific indemnities;
  • waivers of claims by the sellers;
  • post-closing covenants (including non-compete undertakings of the sellers); and
  • miscellaneous other provisions, including with regard to dispute resolution.

What provisions are made for deal protection?

The no-shop provision of the term sheet usually takes into consideration an agreed time period for the execution of the final agreement.

Breakup fee provisions, which penalise a party that wishes to cancel the transaction, are uncommon.

A right of first refusal provision in case of a superior offer is often included, which enables the buyer to match any higher bid.

Closing documentation

What documents are normally executed at signing and closing?

On signing, the share purchase agreement, merger agreement or asset purchase agreement (as applicable) is executed.

On closing, all other ancillary transaction documents are executed, including share transfer deeds, updated shareholder registers, notices to the companies registrar, board/shareholders’, resolutions, shareholder agreements, escrow agreements, paying agent agreements, retention/employment agreements, transition services agreements and legal opinions.

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

There are no formalities for the execution of documents by foreign companies, but such companies will usually need to submit authentic copies of their certificate of incorporation to the companies’ registrar. 

Are digital signatures binding and enforceable?

There is no need for original signatures to consummate the transaction. However, notices to government bodies (eg, the companies’ registrar) require an original signature.

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