What is a Merger and Acquisition Agreement?
The essential factor of virtually every business combination transaction is the merger and acquisition agreement, which is the contract that governs the terms and conditions of an acquisition of a corporate target by a buyer. The merger and acquisition agreement includes not only an acquisition by way of a direct merger of a target business into the acquiring company, but also an acquisition by way of merger into a subsidiary of the acquiring company.
A merger and acquisition agreement typically contains, among other provisions, the following. ATTORNEYS FEES clause, which customarily provides for the payment of legal fees by the losing party, or those who are not the prevailing party, in the event that litigation is required to enforce the terms of the merger and acquisition agreement. CONDITIONS PRECEDENT clause, which is often a lengthy provision that describes the closing requirements that must be satisfied by both the buyer and seller, before a closing may occur. ESCROW – SURVIVAL OF REPRESENTATIONS AND WARRANTIES clause that customarily requires the surviving corporation to provide for a set amount of escrow and indemnification security . LIMITATION OF DAMAGES clause, which often caps damages at the number of times the representations and warranties are capped. PRIOR TERMINATION CLAUSE, when either party is allowed to terminate the merger and acquisition agreement prior to closing under certain negotiated circumstances. REPRESENTATIONS AND WARRANTIES section that is typically the longest and most crucial part of the entire document and usually highly-negotiated. A careful review of the representations, covenants, agreements and indemnities clauses is critical, including the financial statements and disclosure letter provisions. SURVIVAL AND INDEMNIFICATIONS sections that usually provide some level of indemnification after closing, for breaches in representations and warranties. These sections require particular attention by the parties and their advisors. This description is intended as a brief overview of the merger and acquisition agreement. In our next blog, we will review options for working with merger and acquisition agreement templates to create an agreement that fits your needs.
Key Features of an M&A Agreement Template
A merger and acquisition agreement template should include the key elements that are commonly found in most mergers and acquisitions. A principal feature is the purchase price mechanism, which is essentially the formula to determine the final target consideration to be paid. Commonly, the purchase price consideration is subject to adjustments in indicated accounts such as working capital and net debt. Also, it is vital to address the particular representations and warranties that would be included as a part of the relevant transaction. These oftentimes mirror the provisions of the purchase agreement. The purpose of representations and warranties is to provide value and risk allocation with respect to the parties involved in the M&A transaction. A covenant is an agreement whereby one party promises to perform in a certain manner to effectuate the transaction. A covenant should describe the obligations as well as limitations, including obligations for disclosure and conduct of business. It is also common to include conditions such as obtaining legal opinions, delivering certificates and obtaining requisite approvals and consents.
Advantages of a M&A Agreement Template
The use of a merger and acquisition agreement template can significantly streamline the M&A process for all parties involved. For the buyer, the template provides a detailed structure and the ability to customize terms as needed, offering substantial legal leverage by ensuring that critical clauses and protections for the company are included. A comprehensive M&A agreement template can also help the buyer to identify and assess potential risks within the company, enabling the transaction to go smoothly. The buyer is not the only party to benefit from the use of an M&A agreement template. Sellers can also benefit from the use of a professionally created merger and acquisition agreement template. By using a template for M&A agreements, sellers can prepare to negotiate with the buyer and be confident throughout the negotiation process. The seller can understand the important aspects of the corporation being acquired and the process by which the transaction will take place. A merger and acquisition agreement template can be used by all parties in the transaction. Typically, templates will include provisions that are useful to buyers in mergers, acquisitions with a single transaction, acquisitions where payments are made over time and similar agreements. Templates are not one-size-fits-all, however, and should be customized according to the specifics of the transaction at hand. Perhaps more important than the advantages to buyers and sellers is the fact that the use of a merger and acquisition agreement template can help to ensure that the company remains compliant with regulations. All parties involved in the transaction have a responsibility to their stakeholders, while also being governed by specific laws. The use of a template can help minimize legal issues during the process by enabling parties to clearly define rights and responsibilities, and ensure legal issues are addressed in advance.
How to Customize Your M&A Agreement Template
A merger and acquisition agreement template can be a serve as a helpful tool to businesses looking to execute a business transaction easily and efficiently. Given how complex business transactions can be, having a standardized document can be a big-time saver in the legal preparation process. However, it is important to understand that a merger and acquisition agreement template is just that – a template. It may include terms or provisions that do not apply to your specific transaction. As such, customizing an M&A agreement template is essential for the purposes of ensuring that all parties are in agreement before the deal is sealed. For starters, take a look at the formula and language used in the M&A agreement template. Then, determine whether the language and formulas meet the needs of your transaction. For example, if the identified transaction price is listed… will the transaction actually take place at that price? Furthermore, after having evaluated the language used in the merger and acquisition agreement template, you may find terms that seem out-of-date or ambiguous. If so, those terms should be updated and clarified. Additionally, even if the merger and acquisition agreement template appears to be mostly acceptable and workable for your purposes, you might need to provide additional clarification on how the deal will be structured in order to avoid future misinterpretation and mistakes. The most important thing to consider when customizing an M&A agreement template is consulting with a legal professional. Regardless of how straightforward the transaction may be, an attorney can help you work through some of the more complex parts of the agreement. For example, how will payment be made? Are you willing to accept an earn-out? Is a post-acquisition adjustment required or desired? A legal professional can help you answer questions like these to identify how the terms of the merger and acquisition agreement template might need to be altered.
Pitfalls to Avoid When Using an M&A Agreement Template
A thorough understanding of the transaction is essential. Too often, the template agreement is used without careful consideration of the facts of the transaction, and the resulting M&A agreement does not accurately reflect the intent of the parties. For example, the buyer may be acquiring a group of real estate properties, but the template is drafted for the acquisition of cookie-cutter manufacturing companies . By the final draft phase, neither party is familiar with the details of the transaction, and the resulting agreement does not contain all of the necessary representations of the seller (such as exceptions to title) or does not provide an appropriate indemnification provision that takes into account the value of the transaction. At this point, it is hard to blame the drafter for failing to accurately set forth the terms of the transaction. By failing to accurately review the template agreement and revise it accordingly, the parties have jeopardized their desired structure.
Real Life Example: M&A Agreement Templates that Worked
Many successful companies have effectively utilized merger and acquisition (M&A) agreement templates to close deals efficiently and with favorable terms. One notable case involved a technology firm seeking to acquire a smaller startup that specialized in artificial intelligence. The two parties entered into an exploratory phase, during which they collaborated on a draft purchase agreement based on a comprehensive M&A template.
Leveraging the agreement, the two companies agreed to a share swap for the acquisition. Details concerning liabilities assumed, treatment of options and vesting schedules for founders were laid out in the template agreement, which saved attorneys time and helped to quickly address any concerns the parties had about those provisions, which narrowed the focus to issues of representations, warranties and indemnification. Because the deal was a share swap, the parties spent a significant amount of time negotiating those detailed issues, which was facilitated by working from a template. In fact, the careful attention to those issues was the reason the deal was able to be finalized after three months of negotiation.
There are many lessons this and other examples illustrate about effective use of merger and acquisition agreement templates:
Where to Find a M&A Agreement Templates
Acquiring or merging businesses can add complexity to the biggest business transactions. Thus, having a solid arsenal of merger and acquisition agreement templates could be key to the ongoing success of any company.
Luckily, sites such as Docracy provide a treasure trove of documents for companies of all sizes. This site allows businesses to upload their own documents free of charge for anyone to use. Similarly, sites such as ContractXP provide templates for a wide range of business forms and agreements for free with the goal of helping startups and entrepreneurs fund their most important ideas. Another resource is the SEC . The Securities and Exchange Commission keeps a vast database of all filings by public companies, including most merger and acquisition agreements. Form agreements for some of the most common transactions are easily located in SEC filings. A little searching and you can easily download a form for a merger or relationship termination agreement for a struggling company. Of course, templates are only a starting point. While it can be tempting to use these template documents as is, you should always consider having an attorney review any legal agreement you have to be sure that all provisions are appropriate for your situation and jurisdiction.