The main legal document in the M&A process is the Share/Sale Purchase Agreement (SPA) - this is the contract that documents all of the terms agreed upon between the seller and acquirer in an M&A process.
An SPA can take the form of a merger agreement or a stock or asset purchase agreement. All of these agreements detail a number of key clauses and terms relating to the transaction. Therefore, it is vital for both the acquirer and seller to appoint an experienced lawyer and a M&A advisor to ensure the agreement is fair for both parties and represents what has been agreed earlier in the process (such as in the Letter of Intent/Heads of Agreement).
The key sections of an SPA are as follows:
- Valuation/consideration details the headline price to be paid and how this is derived - for instance on a multiple of EBITDA. This section also details when consideration is to be paid (including any deferred terms) and any conditions to which the payment of consideration is subject to (earn-out mechanism);
- Execution provisions detail the way in which the transaction is to be structured and the form of consideration. For example, an asset purchase and an all cash consideration or a share purchase with deferred terms;
- Representations and warranties outline exactly what is being sold/acquired and that the seller is delivering a clean title (proof of ownership). A warranty is a contractual statement or assurance given by the seller to the buyer that a certain state of affairs exists. A breach of warranty by the acquirer will result in the acquirer being able to sue for breach of contract. A representation is a statement of fact or opinion, which is made prior to a contract being entered into. If the representation is false, and it was relied on by the buyer when entering into the contract, then this may entitle them to rescind the contract and claim damages;
- An indemnity is an agreement by the seller to reimburse the buyer for losses arising from a specified event.The seller may give indemnities for specified costs or losses the buyer incurs. Indemnities are useful where there is an unquantifiable risk of a claim and it is difficult to make a price adjustment to reflect the risk accurately (for instance, in the case of contingent liabilities);
- Covenants are the agreements made between the acquirer and seller PRC and post closing. They are usually extensively negotiated. Examples of covenants include conduct of business post-closing, non solicitation of employees and access to information for the seller for the purposes of preparing completion accounts (if a "true up" is to occur post deal);
- Conditions to closing are conditions that must be met such as regulatory approval prior to the closing of the transaction;
- Termination provisions are conditions in which the transaction could be terminated. For instance, if, for any reason, the acquirer cannot finance the acquisition;
- Break-up fees are the fees that must be paid in the event that one party backs out of the transaction.