The merger agreement sets forth, preconditions to closing, closing procedures and post-closing obligations
Moreover, when one is dealing with billions of dollars, every aspect of the deal and the risks must be noted down in the document.
In a merger or acquisition transaction, there are three basic steps: (i) the negotiation period or pre-definitive agreement period; (ii) the definitive agreement or agreements; and (iii) closing.
The first and foremost step in an M&A deal is executing a confidentiality agreement and letter of intent. To keep the deal confidential, a confidentiality agreement must be signed on parameters on the use of information. The confidentiality agreement may contain other provisions unrelated to confidentiality such as a prohibition against solicitation of customers or employees (non-competition) and other restrictive
A letter of intent or Term Sheet is a preliminary document potential buyers might send over when buying a company a letter of intent must contain some sort of exclusivity provision known as no shop or window shop provisions. To spell it out, a no-shop provision prevents the parties from entering into any discussions or negotiations with a third party that could negatively affect the transaction. A window shop provision allows for some level of third-party negotiation or inquiry like a party cannot solicit other similar transactions but is not prohibited from hearing out an unsolicited proposal. All these provisions must be clearly spelt out in the deal agreement.
The definitive agreement, which is also known as Share purchase agreement, spells out the finalised deal terms that the buyer and seller are agreeing to During the period between signing and completion, it is important for the buyer to have some influence on the conduct of the business. The buyer must take undertakings from the seller that the target will not do anything out of the ordinary during this period without the buyer’s consent.
In any sale and purchase agreement of M&A, the parties agree to transfer title to the shares (share acquisition) or the assets of the business (business acquisition). It will also state the amount of the purchase price and the timing of the payment. The most common forms of consideration are cash, shares in the buyer (often called a share for share exchange) or loan notes/debentures. For public companies, the price is always given on a per share basis, with the exact share count and the treatment of dilutive securities spelled out later on.
In order to protect a deal, the common deal protection is a standstill agreement. A standstill agreement prevents a party from making business changes like selling off major assets, incurring debts or liabilities or hiring or firing management teams. An important aspect of the deal agreement is the representations and warranties which provide the buyer and seller with a snapshot of facts as of the closing date. From the seller the facts are generally related to the business like a title to the assets, no undisclosed liabilities, no pending litigation or adversarial situation likely to result in litigation, taxes are paid and there are no issues with employees. From the buyer, the facts are generally related to legal capacity, authority, and ability to enter into a binding contract.
In the indemnification or remedies part of the agreement, it provides the rights and remedies of the parties in the event of a breach of the agreement, including a material inaccuracy in the representations and warranties or an unforeseen third-party claim. The agreement must clearly spell out the regulatory issues and how to address them.
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