M&A Building Blocks

M&A Building Blocks

Basic Structure of a Share Sale and Purchase Agreement

Definitions

• Sale and transfer of shares
• Price Determination
  • Adjustment/s
  • Earn-Out
• Conditions Precedent (CPs)
  • Description
  • Obligations of the parties in relation to the CPs
  • Long-Stop Date
  • Consequences of non-fulfillment of CPs

Pre-Closing Covenants

• Interim Period Management
• Preparatory actions required for Closing

Closing Actions

Indemnification Regime

• Purchaser’s liability
• Seller’s liability
• Indemnities
• Indemnification obligations / Exceptions / Limits
• Claims procedure

Post Closing covenants

Miscellaneous

• Entire Agreement
• Notices / Assignment
• Applicable law and forum

Conditions Precedent (CPs)

• Give one or both of the Parties the right to “walk away”. The contract will expressly state which party benefits from the CP and can therefore waive it.
• Obligations of the parties to sell and transfer and to acquire and pay, respectively, are “suspended” until conditions precedent are fulfilled and terminated if such conditions precedent do not occur prior to a Long-Stop Date / Drop-dead Date.
• Conditions precedent may be of a wide variety and should be tailor-made for each transaction.
• Obligation of the parties to achieve fulfillment of CPs – Efforts standard:
  • Best efforts
  • Commercially reasonable efforts

Common Conditions Precedent in International M&A

• Regulatory approvals:
  • Antitrust authorities
  • Sector regulators (financial, energy, TMT, etc.)
  • Foreign Investment Authorities (i.e. CFIUS)
• Shareholders approval (deals involving listed companies)
• Consent from key clients / suppliers entitled to terminate agreement on the basis of a change of control clause
• Bring-down of representations and warranties
• No legal proceedings (Typical in U.S. deals – Purchaser protection against litigation).
• No Material Adverse Change - Typical in U.S. deals
• Financing / Funding Condition?

Timing Outline

• Results from pricing and conditions precedent
• Balance Sheet Date → Signing Date → Closing Date
• “Absence of Changes” Rep + “Accuracy of Rep” Condition = Backdoor MAC
• Express MAC Condition

Examples of CPs

• Regulatory approvals (applicable to both Parties)
  • The respective obligations of each Party to effect the Closing shall be subject to the satisfaction or waiver (to the extent permissible under applicable Law) at or prior to the Closing of the following conditions:
    • Governmental Approvals and Third Party Consents. The third-party consents or any other approvals, orders or authorizations of, or registrations, declarations or filings with, any Governmental Authority set forth in Section [[*]] of the Disclosure Schedule shall have been made or obtained and shall remain in full force and effect, and all statutory waiting periods in respect thereof shall have expired.
• Bring-down of R&W & MAC (only for the benefit of Purchaser, who can waive them):
  • The obligations of the Purchaser to effect the Closing are further subject to the fulfillment or waiver (to the extent permissible under applicable Law) at or prior to the Closing of the following conditions:
    • Representations and Warranties. Each of the representations and warranties made by the Seller in this Agreement shall be true and correct as of the date of this Agreement and at and as of the Closing Date as if made on that date (except those representations and warranties of Seller that expressly speak as of a specified date or time, provided that such representations and warranties shall have been true and correct as of such date or time)[[ except where the failure to be so true and correct would not reasonably be expected to have a Business Material Adverse Effect].
    • No Business Material Adverse Effect. Since the date of this Agreement, there shall not have occurred a Business Material Adverse Effect.
      • Business Material Adverse Effect: Needs to be tailor-made to the specific concerns of the Purchaser on the transaction, in addition to typical MAC Events (i.e. change of laws, illegality, civil law force majeur, etc.

Examples of CPs - Accuracy of Target’s Representations

When must they be accurate?

• Stand Alone: Since the date of this Agreement, there has not been any Target Material Adverse Change
• Back Door: “Absence of changes” representation
  • Since the Balances Sheet Date, there has not been any Target Material Adverse Change. Plus “bring down” formulation of “accuracy of representation” condition

Examples of CPs - Legal Proceedings

• There will not be pending [or threatened] any action, suit, or similar legal proceeding brought by any Governmental Entity [or third party] challenging or seeking to restrain or prohibit the consummation of the Transactions.
• No legal proceedings challenging the transaction

Covenants

Basic Structure of a Share Sale and Purchase Agreement

• Pre-Closing Covenants
  • Interim Period Management
  • Preparatory actions required for Closing
• Closing Actions
• Post Closing covenants

2021 ABA Study - Covenants - Operation in the Ordinary Course

Qualified by "Consistent with Past Practice"

Includes reasonable best efforts and commercially reasonable efforts to maintain/preserve business.

No shop / No talk – ABA 2015 Study

Target will not, and will take all action necessary to ensure that none of Target’s Representatives will, (i) solicit, initiate, consider, encourage, or accept any Acquisition Proposal, or (ii) participate in any discussions, conversations, negotiations, or other communications regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate, or encourage the submission of, any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.

Break-up Fees

• Break-up Fee in contract subject to Spanish Law:
  • In case of (i) breach by a Party of its obligations in relation to the satisfaction of the Conditions Precedent or (ii) despite both Parties having fulfilled all their obligations hereunder, any of the Conditions Precedent is not satisfied prior to the Long-stop Date), the Party in breach (in case of limb (i)) or the Party to which the non- satisfaction of the relevant Condition Precedent is attributable (in case of limb (ii)) shall pay to the other Party a penalty (cláusula penal) in the amount of EUR 6,000,000, which will cover any direct and indirect damages, including the loss of opportunity suffered as a result of Closing not occurring, and constituting the sole and exclusive remedy of the Parties in regard to the damages suffered. [The Parties expressly waive any other rights or causes of action under applicable Law with respect to such claims.] The Parties expressly agree that the amount of the penalty is adequate and moderate in light of the circumstances and the economic value of the sale and purchase agreed herein and, thus, Article 1,154 of the Spanish Civil Code shall not apply to this penalty clause, which shall not be subject to any judicial moderation or intervention.
• Break-up Fee in contract subject to NY Law / UK Law:
  • Shall not be a penalty (limitations under common law to enforceability of penalties).
  • Pre-agreed compensation for damages.
  • Ability to claim for specific performance?

Post-Closing Covenants

• Result from risk of Seller having all of the information from Target Companies.
  • Non-Compete
  • Non-solicitation
  • Confidentiality
• In the case?
• Transitional services?

Representations & Warranties (R&W)

What's a R&W?

• Assertions that a buyer and/or seller makes in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents to close the transaction.
• Disclosure of material facts about the assets or stock that are being purchased and the liabilities that are being acquired or assumed.
• Statements of fact, which are made by the seller of a business to induce the buyer into purchasing the business and to provide the buyer with certain assurances with respect to the business.
• Cornerstone of the acquisition agreement.
• Fundamental R&Ws vs Non-Fundamental R&Ws.

Functions

• Paint a picture as of the moment that the parties become contractually bound.
  • Complement the DD by requiring the disclosure of liabilities and establishing the parameters of the property being acquired.
• Allocate the risks associated with the property being acquired (whether or not known or disclosed)
• Work together with the covenants to set a road map of the events that must occur between signing and closing (for instance, regulatory authorizations).
• Allow the buyer to refuse to close the transaction if the R&Ws are not true al closing.
• Enable the buyer to recover damages if the R&Ws turn out to be false.
• While both the buyer and seller will make R&Ws, the seller’s representations will be more extensive. Why?
• Some sellers sell “as is” in which case the R&Ws will be more limited.

Seller representations and warranties

• Due organization of the seller/target and its legal authority to consummate the transaction.
• Compliance with laws and permits.
• Good and marketable title to the seller’s assets, free and clear of liens.
• Any required third-party consents to consummate the transaction.
• The physical condition of the fixed assets and the overall adequacy of the assets to run the business.
• Liabilities of the seller.
• Accounts receivable, inventory, and other current assets.
• Accuracy of the seller’s financial statements and its financial condition.
• Tax
• Intellectual property
• Environmental
• Employment matters
• Litigation matters
• Material contracts
• Real Property matters
• Broker’s fees

Buyer representations and warranties

• Due organization of the buyer and its legal authority to consummate the transaction.
• Any required third-party consents to consummate the transaction.
• Adequacy of the buyer’s funds to complete the transaction.
• Broker’s fees.

Disclosure Schedule

• Document that contains information required by the acquisition agreement—typically a listing of important contracts, intellectual property, employee information, and other material matters as well as exceptions or qualifications to the detailed representations and warranties of the selling company contained in the acquisition agreement.
• Informational vs exceptions
• Who prepares it?
• Can target correct or update the disclosure schedule between signing and closing? What effect will a correction or update have?

Updating the disclosure schedule

Covenants - Updating of disclosure schedules before closing

Qualifications - Knowledge

• Actual Knowledge
  • ‘Knowledge’ means the actual and conscious knowledge of . . . .
• Constructive knowledge
  • Knowledge that any given individual would be expected to learn after some reasonable level of diligence, or
  • What that individual would be expected to know in his or her capacity as an officer, director, or employee, etc. (as applicable) of the target.
    • ‘Knowledge’ means, the actual knowledge of [named individuals], and the knowledge that each such person would have reasonably obtained after making due and appropriate inquiry with respect to the particular matter in question.’

R&Ws (NON-RELIANCE / 4 CORNERS)

NON-RELIANCE / NO OTHER REPRESENTATIONS

• (All deals: includes simultaneous sign-and-close deals)
  • Express Non-Reliance
    • Buyer acknowledges and agrees that Buyer is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties in Section 3.
  • Express Disclaimer of Seller's Representations
    • Buyer acknowledges and agrees that Target has not made and is not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in Section 3.

Qualifications - Materiality

• Impose a materiality standard.
• Materiality is by nature a very imprecise concept and will depend upon the context and the target.
• The Company’s material operations are conducted in compliance with applicable law VS
• The Company’s operations are conducted in material compliance with applicable law VS
• The Company’s operations are conducted in compliance with applicable law except for such noncompliance, breaches and defaults that, individually or in the aggregate, have not had and could not reasonably be expected to have a company material adverse effect.

Examples (Financial Statements)

[(a)] Schedule XX sets forth [describe financial statements, including definition of “Balance Sheet”] (the “Financial Statements”). The Financial Statements have been prepared in conformity with GAAP consistently applied and on that basis fairly present the consolidated financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the respective periods indicated] [(b) [To the knowledge of [[Seller][Sellers] and the] Company, the] [The] Company and the Subsidiaries do not have any [material] liabilities or obligations of any nature (whether accrued, absolute, contingent, unasserted or otherwise) [of a nature required by GAAP to be reflected on a consolidated balance sheet [of the Company] or in the notes thereto] [that have had or could reasonably be expected to have a Company Material Adverse Effect], except (i) as disclosed, reflected or reserved against in the Balance Sheet and the notes thereto, (ii) for items set forth in Schedule XXX, (iii) for liabilities and obligations incurred in the ordinary course of business consistent with past practice since the date of the Balance Sheet and not in violation of this Agreement and (iv) for Taxes. [This representation shall not be deemed breached as a result of a change in law after the Closing Date.]]

Examples (Contracts)

Contracts: (b) Except as set forth in Schedule 3.09, [to the knowledge of [[Seller][Sellers] and] the Company,] all [material] Contracts [required to be] listed in the Schedules (the “Company Contracts”) are valid, binding and in full force and effect and are enforceable by the Company or the applicable Subsidiary in accordance with their terms [, except for such failures to be valid, binding, in full force and effect or enforceable that, individually or in the aggregate, have not had and could not reasonably be expected to have a Company Material Adverse Effect]. Except as set forth in Schedule XXX, [to the knowledge of [[Seller][Sellers] and] the Company,] the Company or the applicable Subsidiary has performed all [material] obligations required to be performed by it to date under the Company Contracts, and it is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any [material] respect thereunder and, to the knowledge of [Seller][Sellers] and the Company, no other party to any Company Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any [material] respect thereunder [, except for such noncompliance, breaches and defaults that, individually or in the aggregate, have not had and could not reasonably be expected to have a Company Material Adverse Effect]. None of [Sellers][Seller], the Company and the Subsidiaries has, except as disclosed in the applicable Schedule, received any notice of the intention of any party to terminate any Company Contract. Complete and correct copies of all [material] Company Contracts, together with all modifications and amendments thereto, have been [delivered] [made available] to Purchaser.

Examples (Permits)

(a)Schedule xxx sets forth all [material] certificates, licenses, permits, authorizations and approvals (“Permits”) issued or granted to the Company or a Subsidiary. Except as set forth in Schedule xxx, (i) [to the knowledge of [[Seller][Sellers] and] the Company,] all such Permits are validly held by the Company or a Subsidiary, and the Company or the applicable Subsidiary has complied in all material respects with all terms and conditions thereof, (ii) during the past TIME MATERIALITY, none of [Sellers][Seller], the Company and the Subsidiaries has received notice of any suit, action or proceeding (a “Proceeding”) relating to the revocation or modification of any such Permits the loss of which, individually or in the aggregate, has had and could reasonably be expected to have a Company Material Adverse Effect, and (iii) [to the knowledge of [Seller][Sellers] and the Company,] none of such Permits will be subject to suspension, modification, revocation or nonrenewal as a result of the execution and delivery of this Agreement or the consummation of the Acquisition. (b)The Company and the Subsidiaries possess [or has applied for] all [material] Permits to own or hold under lease and operate their respective assets and to conduct the business of the Company and the Subsidiaries as currently conducted [, other than such Permits the absence of which, individually or in the aggregate, has not had and could not reasonably be expected to have a Company Material Adverse Effect].

Indemnification

Scope

• Breaches of R&Ws
• Breach of covenants
• Special Indemnities
• Your Watch, My Watch
• M&A transaction documents often contain an exclusion or limitation of the seller’s liability for “consequential”, “indirect” or “special” losses suffered by the purchaser. For instance, a purchase agreement will often provide that the liability of the seller under the warranties does not extend to these types of losses.
  • Loss of Profit?
• Several sellers: joint and several vs several but not joint.
• Exclusive Remedy Clause – Claims under the indemnity for breaches of the representations and warranties in the agreement are the buyers exclusive remedy with respect to the agreement.

Indemnification Agreement

From and after the Closing, [each] Seller shall [be liable for, and [Sellers, jointly and severally,] shall] indemnify Purchaser, its affiliates (including the Company and the Subsidiaries) and each of their respective officers, directors, employees, stockholders, agents and representatives (the “Purchaser Indemnitees”) against and hold it harmless from, any loss, liability, claim, damage or expense including reasonable legal fees and expenses (collectively, “Losses”), suffered or incurred by such Purchaser to the extent arising from , relating to or otherwise in respect of:

1. any breach [as of the Closing Date] of any representation or warranty of [such] Seller which survives the Closing contained in this Agreement [(it being agreed and acknowledged by the parties that for purposes of the right to indemnification pursuant to this clause (i) the representations and warranties of [Seller][Sellers] contained herein shall not be deemed qualified by any references herein to materiality generally or to whether or not any such breach results or may result in a Seller Material Adverse Effect or a Company Material Adverse Effect],;
2. any breach of any covenant of [such] Seller contained in this Agreement
3. Special Indemnities

Sandbagging

• BENEFIT OF THE BARGAIN/PRO-SANDBAGGING
  • The right to indemnification, payment, reimbursement, or other remedy based upon any such representation, warranty, covenant, or obligation will not be affected by any investigation conducted or any Knowledge acquired at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of, or compliance with, such representation, warranty, covenant, or obligation.
• ANTI-SANDBAGGING PROVISION
  • No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Losses had Knowledge of such Breach before Closing. (ABA Model Stock Purchase Agreement, Second Edition)

Sandbagging Statistics

Survival of R&Ws

• General Rule “The representations and warranties made by Sellers and Target in this Agreement shall survive the Closing for a period of two years.”
  • 11.5 TIME LIMITATIONS
    • If the Closing occurs, Sellers shall have liability under Section 11.2(a) with respect to any Breach of a representation or warranty (other than those in Sections . . ., as to which a claim may be made at any time), only if on or before the date that is ___ years after the Closing Date, Buyer notifies [Target’s representative] of a claim, specifying the factual basis of the claim in reasonable detail to the extent known by Buyer. (ABA Model Stock Purchase Agreement, Second Edition)
• Exceptions to survival limitations (i.e., fundamental R&Ws, fraud, tax, labour, environmental)

Survival - Time to Assert Claims