Share Purchase Agreement Covenants
A “single materiality scraper” retains the qualifiers of materiality and knowledge when determining whether a seller has made a false representation or breached a warranty, but if a false statement or breach has been established, the qualifier of materiality is not taken into account in determining the damage. Subject to any deductible and other limitation of indemnification in the SPA, the buyer may claim the full amount of his damages due to the violation. A “double scratch of materiality” nullifies the qualifiers of materiality and knowledge both to determine whether a false statement has been made and whether a warranty has been breached, as well as to calculate the damages due to such a breach. I have sometimes seen drafts of the purchase agreement written by the seller`s lawyers that do not include this pre-closing agreement. Since competent buyer advisors will always add this agreement to any leveraged buyback transaction if it is not already in place,6 I see this small exclusion as a waste of time and energy for the parties. With this article, I have completed my investigation into the key provisions of a private equity acquisition agreement. This investigation only scratches the surface of a takeover contract – there are many nuances that cannot be conveyed without writing what would correspond to a small manual. Whether the transaction is an asset or equity transaction, collateral contracts and closing deliveries typically include: Apart from that, restrictive covenants are virtually ubiquitous in most financial contracts, especially in leveraged loan agreements and bond contracts, which have extended restrictive covenants designed to act as a “straitjacket” that reduces the risk of the borrower taking action, that are detrimental to the interests of lenders. In 2009, immediately after the 2008 global financial crisis, I spent far too much time realizing the details of these leveraged loan covenants, as Partners Group had private equity funds as well as mezzanine and senior debt funds. To prevent the seller and management of the target company from affecting the company, a buyer will generally use pre-closing covenants to prohibit the target company, its shareholders, directors and management from making the following: An important distinction must be made between a share purchase and an asset purchase. An asset transaction involves the purchase or sale of some or all of a company`s assets, such as. B equipment, inventory, real estate, contracts or leases.
A purchase of securities can be beneficial because it allows a buyer to be selective about the assets they acquire. In addition, an asset acquisition allows a buyer to acquire a company`s assets without the liabilities that would accompany the assets when purchasing shares. In the case of an asset acquisition, a full SD is always required, including ownership of those assets and privileges over those assets. The completion of an acquisition of shares or assets depends on many considerations and the objectives of the acquirer. The Seller(s), the Target Company and its subsidiaries undertake to provide the Buyer(s) with access to the offices and premises of the Target Company and its subsidiaries, as well as access to the books and records of the Target Company and its subsidiaries. These buyer and seller pre-closing clauses require buyers and/or sellers to take the necessary steps to make the necessary regulatory filings and obtain the necessary regulatory, shareholder and third party approvals for the transaction. These Closing Terms generally contain requirements that: (i) each party`s representations and warranties will remain accurate as of the closing date; (ii) neither party violates any of its obligations under the Purchase Agreement; (iii) all necessary regulatory and third party consents have been obtained; (iv) there is no legal proceeding that affects the objective or ability of either party to conclude; (v) the Buyer is satisfied with its duty of care; (vi) the buyer has received sufficient financing; and (vi) all ancillary agreements and final deliveries have been delivered. Buyers also make representations and warranties in a SPA. Typically, a seller wants to make sure that the buyer can legally acquire the target, close it, and have the funds to pay the purchase price. Typical buyer`s insurance and guarantees are aimed at, among other things: It would be rare for a choice of law provision to be excluded from a SPA (or other cross-border agreement). The absence of a choice of law clause in an SPA would expose the parties to unnecessary costs and complex rules in determining which law to apply, taking into account, inter alia, where the parties are located and where their obligations are to be fulfilled.
In the context of cross-border mergers and acquisitions, failure to indicate which law governs the SPA could be a disaster with respect to litigation, especially if the buyer is located in one jurisdiction and the seller is located in another, with subsidiaries and assets in several other jurisdictions. In most M&A transactions, the purchase price is typically determined against a target company`s most recent financial statements. Purchase price adjustments typically protect a buyer from changes in the value of the target value between the target valuation date and the closing of the transaction. In this regard, buyers and sellers must agree on a valuation method and have chosen similar or comparable accounting methods. 1. Forward (or direct) mergers – the objective passes with the buyer and takes into account all the assets, rights and liabilities of the target company (the objective ceases to exist as a separate entity); As you can imagine, management is heavily negotiated between the buyer, seller and management of the target company before closing. The buyer(s) will seek to set strict limits on the seller(s)`s ability to extract value from the target company between signing and closing, most often by buying back shares, paying a dividend, or repaying outstanding shareholder loans. Buyer will also attempt to prevent Seller and management of the Target Company from taking actions that materially alter the assets and activities of the Target Company, such as selling .B assets or operating activities, incurring debts, incurring capital expenditures, or altering significant contracts or business relationships.
Finally, buyers also want to ensure that the management of the target company does not take advantage of the opportunity to derive value from the target by declaring exceptional bonuses, salary increases and other compensation in cash or in kind. A “materiality scratch” is a provision typically included in a SPA compensation clause to favor a buyer. It generally provides that in determining whether an insurance is inaccurate or whether a warranty has been breached, or in calculating the amount of damage or loss due to inaccuracy or breach (or both), all qualifiers relating to materiality or knowledge in Seller`s representations and warranties for indemnification purposes will be ignored (overwritten). This article deals with common terms and variations of an SPA, but is by no means exhaustive. Some transactions and companies from different industries require different conditions and are often the subject of extensive negotiations between the parties. This article does not take into account the laws of a particular jurisdiction, or antitrust or competition law considerations that may be relevant to certain M&A transactions. In addition, PPS may also be controlled or influenced by existing shareholder agreements between the shareholders of a target company. An escrow account is an agreement by which a third party (for example. B, a law firm or bank) temporarily holds the assets associated with a transaction and is responsible for them until it is closed to provide security to the parties.
In the event of mergers and acquisitions, all or part of the purchase price may be deposited in trust to secure the interests of the parties. Escrow is particularly useful for holdbacks, earn-outs and purchase price adjustments, as well as a benchmark for compensation funds (if necessary). Escrow is the subject of a separate agreement and sets out the conditions under which the trustee may distribute the deposited funds or property held by the trustee on behalf of the parties. An escrow contract must be carefully and specifically designed to capture the key elements that determine whether funds should be paid or withheld in relation to its purpose. Supplementary documents and agreements generally consist of a set of documents listed in a schedule attached to an SPA that the parties must provide to each other at closing or before closing in order for a merger and acquisition transaction to proceed, and include, but are not limited to: holdbacks can be very useful in bridging the gap between diverging target value assessments and allowing such valuations to: prove themselves for a certain period of time after graduation ( B. the hold period) and even a buyer`s access to compensatory payments for post-closing risks, so they are secured (usually by escrow) and do not depend on a subsequent refund from the seller. However, it should be noted that if indemnification is the exclusive remedy, this method could serve as a compensation cap by limiting the buyer`s collection options to what is available in that pool of guaranteed funds. .
