This article was originally published on the Hoban Law Group and appears here with permission.
Every merger or acquisition transaction is unique. Nonetheless, companies looking to buy, sell, or merge with another company will face common contractual terms and structures. The content of this policy differs from business to business and company to company. Firms entering into a merger or acquisition should work with knowledgeable corporate lawyers or M&A attorneys to ensure that their contract is comprehensive and protects their interests. A good M&A transaction document will work together internally, and most M&A transactions contain a version of all of the following types of clauses:
This is the beginning of a contract and establishes the identity of the parties, the date and the name of the document. Simply put, very basic information about the transaction and the contract itself. Other documents related to the contract refer to the information in this section.
Background information on the transaction can be found here. If the parties include other transactional documents in the transaction, this section describes how. For example, if a merger made through a separate real estate document has a real estate aspect, the recitals will typically describe that document and its relationship to the merger. Other things like prepaid funds, timing, identification of affiliates, history of transactions and related matters can be described in the recitals.
Recitals are important so that a third party, like a judge, can understand a contract the first time it is read.
Together with the preamble, the recitals set the tone for the entire transaction. It is customary for the recitals to state that the buyer is buying the assets in an asset purchase agreement or that the buyer is buying the shares in a share purchase agreement, along with a general description of those assets and shares. Recitals would also be useful to explain a particular tax or regulatory treatment of a transaction, e.g.
These can appear at the beginning or at the end of a contract, or even appear on an attached exhibit or schedule. Definitions in a complicated transaction are useful to clarify the meaning and to avoid typing a long definition each time a particular term is used many times in a document. Definitions are critical to avoiding ambiguity and ensuring the internal consistency of a document. If the parties to a merger or acquisition cannot agree on what an “Affiliate” is, or what “laws” apply, or what the definition of a “business day” is, there can be endless disputes later in the process of completing the transaction.
Some might say that the purchase price is the only part of a merger or acquisition that matters. The price, how it is paid, when and to whom is a critical aspect of the transaction. This section provides details on cash flow, whether an escrow account is involved in the transaction, cash vs. debt vs. stock compensation, retention agreements, price sharing for tax purposes, and similar items. When parties are engaging in intricate transactions running into the millions, the parties must work with cannabis transaction advisors to fully understand how the price is being paid, when the price is being paid, who the price is being paid to, and various considerations of what can happen to these events derail.
In any transaction, the parties agree to take certain steps to complete the transaction. Whether filing with regulatory agencies, clearing up environmental regulations, paying back debts, setting up escrow accounts, assigning intellectual property such as trademarks, or just a general collaboration, a merger or acquisition agreement will almost always be agreements for both the seller and for the buyer. Failure by one of the parties to a transaction to comply with an agreement could constitute a breach of contract, which could lead to legal disputes or the failure of the transaction.
Representations and Warranties
The parties promise each other that certain things are true. These promises are crucial! Certain promises are common, such as B. the promise that a company has a good reputation and is entitled to enter into the transaction. Other promises are more individual, such as promises to file tax returns, promises about regulatory status, statements about the status of litigation, promises that there is no lien, and the like. A party can address thoughtfully by working with a transaction advisor
what promises are made and how those promises are conditioned. For example, a party might limit its assertions of fact to things in its “actual knowledge”. But the party wants to be sure that “actual knowledge” is defined in the “Definitions” section as mentioned above. Likewise, a promise about a fact can be specific to a time. A party cannot necessarily claim that something will be true in the future. A misrepresentation and warranty can lead to claims for breach of contract.
Representations and warranties are often associated with “disclosure plans”. These plans are usually attached to a merger or acquisition transaction and serve as a means for the parties to make disclosures that limit or change the representations and warranties made by that party. For example, a party could represent and warrant that “the seller has filed its tax returns in a timely manner for all fiscal years ending prior to closing, except as set out in the tax return schedules”. The disclosure plan if
duly completed could reveal that the seller’s tax return for the previous year has still not been filed, with timely renewal. The parties must work closely with the Transaction Advisor to ensure that their disclosure plans are properly and fully presented to avoid future claims for breach of contract due to incomplete plans.
Conditions for completion
It is typical for buyers and sellers to insist that certain conditions are met before being obliged to enter into a merger or transaction. These terms can be standard such as “paying the purchase price” or customized such as “seller must hold funds in escrow account sufficient to cover their outstanding PPP loan balance”. Highly regulated marijuana merger and acquisition transactions require reasonable closing conditions to ensure that the parties obtain adequate regulatory approvals prior to closing. If a closing condition fails, the party who owns that closing condition has the right to refuse to close the contract. The contract can be terminated at this point.
Unfortunately, not every contract is signed. A comprehensive merger or acquisition agreement governs how the contract ends and what happens when the contract ends. A contract can be terminated for a variety of reasons: lack of funding, government regulatory issues, failure to complete a condition, material change in the business of the buyer or seller, or other termination events specified in the contract. The parties should work with experienced transaction advisors to ensure that there are clear instructions on how and in what situation to terminate a contract, and what happens to the parties if such termination occurs: Will the parties’ funds be refunded? Is there a separation fee? What happens to deposits and are there agreements such as confidentiality that survive the termination?
This is always a hot topic in a merger or acquisition. Compensation is a promise by one party to compensate the other party’s damage. This is a complex issue with strict drafting requirements, and the unspoken drafting of an exemption clause can result in a party incurring significant financial losses without recourse. We encourage the parties to work with well qualified attorneys to develop appropriate exemption provisions for their transaction.
Almost every merger or acquisition agreement contains several model clauses, usually at the end. Even if these may seem formulaic or unimportant, they can still be critical. For example, a binding arbitration clause is often included in boilerplate language. The same applies to termination provisions, choice of law clauses in order to define a contract in one country or another, and other essential provisions that may be of importance in the execution of a contract, and in particular in the case of controversial contracts. The parties need to understand the entirety of the pattern and experienced merger attorneys can assist the parties with this.
Because every transaction is so different, it is not easy to take clauses from one transaction and apply them to a new transaction. The parties must work with experienced regulatory and transactional attorneys to develop merger or acquisition agreements that are appropriate for their businesses. Conducting a merger or acquisition transaction that is internally inconsistent, that does not address regulatory issues related to cannabis, or does not adequately address any of the above critical areas can expose a party to a merger or acquisition transaction at great risk.
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