An acquisition of a business may be structured as a merger, stock purchase, or asset purchase, depending upon considerations such as the number of sellers and the desired tax effects from the transaction. Merger, stock purchase, and asset purchase agreements all generally follow a similar outline, but differ in their details.
Closing
One important set of provisions deals with what has to happen at the “closing,” meaning the time when the purchase price is paid and the ownership of the business is transferred.
Closing will often come with a list of closing conditions, or steps that have to take place before the parties are required to deliver. These may include director and officer resignations, signing of new contracts (such as a shareholder agreement), regulatory approvals, remediation of known issues with the business, or other particular tasks that the buyer wants to see completed before the hand-over of the business.
Depending upon the steps and payment terms agreed for the deal, there may be more than one step involved in closing, with different conditions for each step.
Representations and Warranties
These provisions are essentially statements of fact by the parties, which the parties agree that they are relying upon when they enter into the deal. Both sides will typically make representations and warranties about their authority to enter into the deal and other similar basic assumptions.
The most interesting representations and warranties are the representations and warranties made by the seller regarding the business. These give the buyer recourse if any issues are found with the business at a later date. A business sale may be conducted on an “as-is” basis, but a buyer will often require lengthy and detailed representations and warranties from the seller about all aspects of the business, including its financial situation, tax compliance, labor compliance, legal compliance, environmental issues, and other areas where liabilities can arise. These are typically accompanied by a “disclosure schedule,” which provides details of specific exceptions to the representations and warranties.
Covenants
These are the parties’ obligations after the agreement is signed. If the closing will happen immediately upon signing, these can be relatively simple and limited to basic obligations such as confidentiality. If there will be some time between signing and closing (such as to fulfill a list of closing conditions), the covenants often need to be more complicated in order to prevent the seller from affecting the buyer’s value.
Termination
Termination, in this kind of contract, means calling off the deal before it is completed. It may occur if a problem is found between signing and closing, if a party breaches their obligations, or if closing simply does not happen by a particular deadline. Termination may lead to a claim for damages or a fixed “break fee” depending upon the circumstances.
Indemnification
This section deals with the parties’ liability to pay damages. In addition to covering breaches of representations, warranties, and covenants (including failure to close when required by the agreement), there is typically indemnification for past tax liabilities, and there may be special indemnification provisions so that the seller is required to pay for other known problems with the business.
Miscellaneous Provisions
The final section of the contract will deal with technical issues such as notice procedures, governing law, and jurisdiction for disputes. This is an area that business people typically don’t pay much attention to, but it can make or break the contract in some situations. (See my separate article on governing law and jurisdiction.)