M&A Series, Part 5: Fundamental Transaction Documents - Ensuring You Get The Deal You Deserve

M&A Series, Part 5: Fundamental Transaction Documents - Ensuring You Get The Deal You Deserve

      While we are working with our clients to collect and review due diligence materials, we are also involved in the drafting and negotiating of the fundamental transaction documents that govern the legal responsibilities of the parties relating to the deal.  Unless a seller is using a very rigid auction process as part of the sale, the buyer’s attorney will typically handle the first draft of the asset or stock purchase agreement.  That draft will set the tone, and often the timeline, for this portion of the transaction. 

     The fundamental business terms of the transaction are already in the letter of intent, and both sellers and buyers may have the misconception that this means the transaction is already negotiated.  In reality, this is the part of the deal process where it pays to have a seasoned attorney with expertise in mergers and acquisitions, who understands what is customary in the marketplace and how to compromise to get the deal done without exposing the client to intolerable risks.

      Think of it like this: If I asked you to sign a document written 15% in English and 85% in an unfamiliar foreign language, would you sign it after reading the English sections only?  Of course not.  Would you sign it after reading the English sections, and then making sure a speaker of the foreign language had read the other sections? Still, no.  Understanding only a portion of the document and relying on a native speaker to understand the rest just isn’t enough when you’re signing your name on the dotted line.

       That’s why a well-versed mergers and acquisitions attorney will act like the seller’s translator.  We want our clients to read the entire purchase agreement, but it’s our job to provide the education and translation so that they can do so with understanding. 

     We spend a lot of time explaining the purchase price mechanism, closing procedure, representations and warranties, and indemnifications.  Through this explanation, our client almost always demonstrates their “risk profile”, their preference for a certain timeline, or their explanation of a certain hot button issue.  Because we have these conversations, our clients are not surprised by the deal terms, feel involved in the process, and understand the ramifications of their business decisions, and how those business decisions are incorporated into the transaction documents.  Those conversations also allow us to be nimble in negotiations, acting decisively during discussions with opposing counsel (rather than having to take every single little decision back to our clients).  All of that leads to preparing the deal documents efficiently, which gets your deal done faster. 

      During this negotiation process, one of the most important pieces of the purchase agreement for a seller is the representations and warranties section, and related “disclosure schedules”.  If you’ve been reading chronologically in this series, you may recall that we mentioned in the due diligence blog post that diligence materials often become a part of the purchase agreement.  Where it lands in the purchase agreement are the disclosure schedules, which list exceptions to representations and warranties, or list information that is material to a buyer’s decision to purchase a company.    

      These representations and warranties are statements that the seller is making about its assets and its business, and are very inclusive and detailed.  They cannot be taken lightly, because if incorrect information is given and it harms the buyer, post-closing there will likely be an “indemnification claim” against the seller, and this could be a potentially expensive matter.  That indemnification claim means that the buyer can go to a court, show a judge the purchase agreement, show the breach of the representation or warranty, and then receive damages for a breach of that representation or warranty. 

      As a result, we counsel our seller clients to read and confirm every sentence in the representations and warranties. To the extent that an exception applies, we must compile those exceptions in detail on disclosure schedules.  Once something is disclosed on a schedule, the buyer has information about that matter and cannot make a claim for indemnification based upon it.

      As the purchase agreement begins to take final shape, the parties move toward closing. Because most transactions are a “simultaneous sign and close” (meaning that we negotiate the purchase agreement all while running the due diligence process, and on the date we sign the purchase agreement, we also close the transaction), any consents from third parties (often required by company contracts) that may need to be obtained prior to closing should be obtained during this time. We encourage our sellers to be prepared for these requests, and to start that process as early as they can.  Once the purchase agreement has been negotiated, neither side wants to wait for a third party to act.  In addition, both buyers and sellers need to be prepared to obtain the consent of any shareholders or board members that must agree to the transaction.

If you’re considering a transaction and want more information or legal counsel, feel free to reach out to us! We’re prepared to meet your timeline and assist you in the sale of your company.