Merger and acquisition (M&A) contracts contain elements that communicate the terms and conditions of the transaction that will take place between the two companies. In addition to the pricing of assets, taxes and other financial information, the M&A contract also serves to protect the rights of both parties and ensure a smooth integration process.
When Do You Need Merger and Acquisition Contracts?
During the negotiation stage of the deal, the M&A contract is used to disclose the details of the terms before finalizing any arrangement. The contracts include all these details and allow the companies involved to evaluate the terms and negotiate appropriately.
Corporate statutes mandate that boards and shareholders approve mergers after the agreements have been submitted. M&A contracts will give a concise overview of these agreements between companies before the finalized takeover or consolidation.
9 Essential Elements of a Valid Contract for M&As
M&A contracts are divided into sections or articles, each containing different information. These articles consist of the following elements:
1. Parties and recitals
This constitutes the introduction to the parties involved, along with background information. This introduction can also provide a summary of the intentions of the transaction, and a description of the general business activities engaged in by the participating companies.
2. Price, currencies and structure
This includes financial data related to the pricing and structuring of the deal. This section will also include information about the new equity, debt or asset structure of the new company. If the M&A contract is signed, these numbers are considered final and binding. As such, there is often intense focus on these numbers, as they form perhaps the most important part of the negotiation.
3. Representations and warranties
The representations and warranties allocate risk between the parties and serve as the foundation for an indemnification claim (see below) in case of a breach or inaccuracy. In other words, representations and warranties spell out the current and expected future state of each company involved in the transaction, and, further, protect the parties when the other side doesn’t disclose everything. If there are material omissions uncovered in the due diligence process, litigation could result.
This is intended to protect the buyer; covenants are enforceable promises to either do or not do something that will impact the transaction. Typical covenants made by the seller might include the seller continuing to operate the business in an ordinary way and not take any major actions without the prior consent of the buyer, or the seller agreeing to a “no shop” clause in which the seller agrees not to enter into any competing negotiations with another buyer.
As its name implies, conditions must occur in order for the transaction to close. These might include clauses that demand that certain senior leadership remain in place during M&A transitions or clauses that state that no major events (i.e., a major asset sale) may take place until the transaction closes.
6. Termination provisions
These are the liabilities that each party must assume should the transaction not proceed and the agreement is terminated.
This is a contractual remedy and risk allocation mechanism used to compensate either party for damages suffered as a result of misrepresentations and breaches of warranties and covenants (see above). Some M&A transactions carry indemnification insurance, used to compensate a party should the transaction not close.
An explanation of the corporate income tax liabilities and obligations are included in this section should the transaction close. Tax liabilities are known to fluctuate, but a reasonable presentation of expected tax liabilities must be included in the contract.
9. Miscellaneous clauses
This includes any additional information not covered by the above components.
These components appear in a particular sequence strategically. The first items are the areas of interest. Following this are the terms and conditions that both parties must abide by if they wish for the transaction to close. The covenants lay out the responsibilities of the parties before the contract’s finalization. In case of undesirable outcomes, termination provisions provide all the required information.
Managing M&A Contracts
While online document hosting and sharing is nothing new, complications arise when thousands of pages of highly sensitive materials need to be reviewed by dozens or even hundreds of people. The strongest encryption and security measures are required to ensure that the right access has been granted to the right people at the right time.
Any access or technology issues can slow down the due diligence process during a transaction, thereby affecting the outcome of the deal—especially as asset prices can fluctuate during the review period.
For a smoother, frictionless process, organizations should consider a cloud-based enterprise document hosting and security solution, such as CapLinked, which has these needs in mind. Digital rights management capabilities provide encryption and complete control over how a document is used, edited, annotated, shared, copied or even printed.
Ready to learn how CapLinked can streamline your enhanced due diligence process for an M&A transaction? Start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.