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Preliminary agreements

What preliminary agreements are commonly drafted?

Among the most common preliminary agreements are confidentiality agreements and letters of intent.

Confidentiality agreements A confidentiality agreement is usually entered by the parties in the first stages of the negotiations to protect sensitive information that will be exchanged between them in connection with structuring the transaction and conducting due diligence. In the case of a public target, confidentiality agreements often include standstill provisions.

Letters of intent A letter of intent typically contains basic terms pertaining to the proposed transaction and often lays the groundwork for commencing negotiations before drafting the definitive agreements. Generally, a letter of intent contains a number of non-binding clauses (eg, proposed structure of the transaction and process) and a few binding clauses (eg, exclusivity, confidentiality, standstill and dispute resolution).

Letters of intent are generally not used in connection with the acquisition of public companies because of the desire to avoid triggering disclosure requirements.

Principal documentation

What documents are required?

The documents required for an M&A transaction depends on the nature and structure of the transaction. Such documents may include:

  • an acquisition agreement;
  • in the case of a public transaction, certain disclosure based documentation (eg, a proxy statement or Schedule TO);
  • a shareholder, investor rights or joint venture agreement;
  • a transition services agreement;
  • employment agreements; and
  • other ancillary agreements (eg, escrow agreements, paying agent agreements, bills of sale, assignment agreements, letters of transmittal and stock powers).

Which side normally prepares the first drafts?

The buyer often prepares the first drafts, except in an auction context.

What are the substantive clauses that comprise an acquisition agreement?

Generally the substantive clauses that comprise a private M&A acquisition agreement include:

  • transaction mechanics (eg, asset purchases, stock purchases and mergers);
  • purchase price and other related provisions (eg, adjustments to purchase price, purchase price allocations, method and timing of payment, earn-outs and escrow arrangements);
  • representations and warranties;
  • covenants (interim and post-closing);
  • closing conditions;
  • indemnification (in private M&A deals);
  • termination (which may be coupled with break fees); and
  • general provisions relating to notices, confidentiality, assignment, expenses, governing law and dispute resolution.

What provisions are made for deal protection?

In transactions where the target is a public company, common deal protections include:

  • no-shops (frequently with a fiduciary out);
  • matching rights;
  • force-the-vote provisions;
  • support agreements;
  • top-up options (unless unnecessary as a result of legislation); and
  • break fees.

Private targets are typically subject to exclusivity. These deals sometimes contain break fees, but other deal protections noted above typically do not apply.

State laws differ on the enforceability of deal protection devices, and the context is critical.

Closing documentation

What documents are normally executed at signing and closing?

The specifics of what is executed (and timing) varies from deal-to-deal and may depend on specific circumstances.

Documents often executed at signing include:

  • the principal transaction agreement, including:
    • certain exhibits; and
    • disclosure schedules in final form (potentially subject to update); and
  • written consents and resolutions approving the transaction and related documentation.

Documents often executed at closing include:

  • certain exhibits – applicable ancillary agreements vary, but can include documents such as:
    • escrow agreements;
    • warrants;
    • notes;
    • registration rights agreements;
    • restrictive covenant agreements; and
    • employment agreements;
  • ‘bringdown’ certificates – these certify that the representations and warranties made by such party are true and correct as of the closing date and that the certifying party has complied with all its covenants and performed its obligations; and
  • officer’s certificates – these typically certify the accuracy and effectiveness of the resolutions of the certifying party, as well as its organisational documents.

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

Generally there are no required formalities imposed by US federal or state laws for the execution of documents by foreign companies simply as a result of such party being outside the United States. 

Are digital signatures binding and enforceable?

Digital signatures are generally binding and enforceable. The two primary laws governing digital signatures are the Electronic Signatures in Global and National Commerce Act, a federal law, and the Uniform Electronic Transactions Act, a uniform act adopted by most US states. A minority of US states use non-Uniform Electronic Transactions Act statutes or common law to govern the validity of digital signatures.

There are some transactions where original ‘wet ink’ signature pages may be required by a particular party or are generally preferred, such as in certain financing and real estate transactions. 

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