Acquisition Agreement:
The literal meaning of the word ‘acquisition’ is process or an act to acquire. However, in corporate terminology it is used when one company acquires control over another company by buying some or all shares of the other company. This control may be acquired through shares or in the participation in the management. When talking about acquisition, two parties are involved – the buyer (acquiring company) and the seller (target company).Acquisition is a complex process involving various steps. Starting from identifying opportunities, valuation, negotiations, due diligence, financing, till reaching an agreement and executing the same.
Acquisition Agreement v. Letter Of Intent:
During the process of negotiation usually a letter of intent (LoI) is formalised which discusses the structure of the deal. It is a non binding contract which discusses the key terms to have clarity throughout the acquisition process.Acquisition agreement is a contract between the buyer and the seller which is legally binding. It is usually followed by negotiation and due diligence process. It takes help of letter of intent in incorporating the terms before making it a definitive agreement (stock purchase agreement).Hence, once a definitive agreement is drafted it becomes final having overriding effect over all sorts of previous documents.
Stock Purchase Agreement And Asset Purchase Agreement:
In asset purchase agreement individual assets are transferred and liabilities are assumed while in stock purchase agreement whole entity is transferred by way of stocks leaving assets and liabilities remain unchanged. Different objects of the buyer and seller help them to decide whether they want to go for stock purchase or asset purchase. For instance, in asset purchase tax benefit can be availed in favour of buyer by adjusting values of asset. Also, such transactions limit the liabilities to specific items. However, all the contracts with customers and suppliers are to be renegotiated.Similarly, in stock purchase there is no cumbersome requirement of re-titlement or revaluation of individually since assets are transferred at their carrying values. However, unwanted liabilities are carried over unless excluded by specific agreement. Sometimes shareholder may dissent to acquisition which may prolong the whole process.Therefore, abovementioned aspects are looked into before formation of agreement and negotiation shall be done accordingly.
Acquisition Agreement- Important Clauses:
Although every acquisition agreement differ from each other because it is tailored suiting the requirements of parties involved, there are few important clauses which are more or less present in almost all types of acquisition agreement. Acquisition agreement are divided into various article which is sub divided into sections. Some the clauses discussed are the followings:
Recitals:
To start with an agreement, recitals are basic. The recitals, often known as ‘whereas clause’ gives introduction about the object of the agreement, information about the parties to the agreement and the reason for making the agreement. It usually acts as preamble for the third party to understand the essence of the agreement. It is generally non operative, guiding interpretation which gives definition of the terms used under an agreement.
Representations and warranties:
Representations are warranties (Reps and warranties) are assertions of facts on which a transaction is based. It is given by both buyers as well as seller; however the burden is more on seller to disclose all kinds of liabilities. This clause helps the parties to take up the risk by providing for fixing of accountability in case of breach or inaccuracy. This saves buyer or seller from potential risk. This clause is extensively negotiated in any Mergers and Acquisitions transaction. The representation are warranties are generally made of the facts that the parties are in legal capacities to sign the deal, all the compliances are adhered to, all the legal requirements under specific legislation are taken care of etc.
Solicitation:
This section deals whether the buyer and seller are involving in exclusive transaction or there is possibility of finding a new buyer. Under this section the following two clauses are used:
Go- shop: this clause benefits the buyer wherein he can look for better prospective offering higher bids.
No- shop: this clause benefits the seller, which puts the restriction on the buyer to look for any other prospective buyer.
Covenants:
Covenants are the second-biggest part of the agreement. In M&A contracts, covenants come in several places:
(a) basic promises to fulfil the deal are in the deal terms section,
(b) Negative or “interim” or “operating” covenants which limit the target’s ability to changes it practices materially prior to the closing,
(c) “processing” covenants that specifythe parties’ respective obligations to take specific actions to complete the deal, (d) post-closing covenants, including servicing, director and officer indemnification and employment, employee benefit commitments, and non-competition, as well as covenants addressing tax and indemnification obligations (which are generally contained in a separate Article).
Indemnification clause:
This clause comes in addition with reps and warranties. When a seller has failed to disclose something important or committed any breach or inaccuracy, he has to pay a huge amount for such type of non- disclosure. The indemnification clause provides for such kind of non disclosure. Few of the important clauses under this are:
Caps: This clause limits seller’s indemnification obligation to a specific amount or a fixed percentage of transaction value.
Damages: These are types of damages that can be recovered through seller. The buyer would to make it as broad as possible so as to include even punitive damages. On the other hand the seller would want to narrow it as much possible.
Basket: This clause protects the seller for being liable in case of immaterial claims. This clause specifies an amount and if the total caused to the buyer is more than that amount agreed in the basket, then the seller is liable to pay the amount of actual cause. When the total loss caused doesn’t exceed the amount specified in the basket the seller is not liable to pay any amount at all.
Survival: This provides for time limit for the indemnification clause to operate. It provides for period which ranges from 12-24 months, beyond this term the clause would not operate.
Sand bagging clause: This is a buyer friendly clause wherein indemnity is applicable even if buyer knows prior to closing of any information. This prevents seller from limiting buyer’s remedies based on his pre-existing knowledge.
Closing condition: These are the conditions which must be fulfilled before the closure of the deal. This requires as the date of signing of the agreement is different from date of closing the deal. Both the sides (buyer and seller) should meet these closing conditions.