M&A contracts
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This article is written by Shankarlal Raheja, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

What is an M&A Contract?

Mergers & Acquisitions are the consolidation of two or more companies in the interest of their respective business or service expansion. It is a tedious business deal wherein the companies also bring their multiple advisors to have the best output through this decision & the agreement drafted is made accordingly. 

A merger, also called an amalgamation, is a combination of two or more companies which subsequently brings about a formation of new legal entities under one corporate name. Under the Indian legal framework, the Companies Act (1956 and 2013) and Income Tax Act provide for the definitions of a merger (or amalgamation). Section 230 (corresponds to Section 394) of the Companies Act, 2013 provides for compromise, arrangements and amalgamations, whereas Section 2(1B) of the Income Tax Act defines the term “amalgamation” and provides for the manner in which it must be carried out.

An Acquisition is where a company purchases the other company but the brand name of the other remains unchanged. The legal name or the structure remains unchanged but the only difference is that its owner is now the parent company.

Since both mergers and acquisitions have an effect on competition in India, they must only be executed in adherence to the provisions of the law, the Companies Act in particular. Further, legislations like the Indian Contracts Act, the Insolvency and Bankruptcy Code, the Competition Act, the Income Tax Act. Besides these statutes, parties to an acquisition or merger have to comply with the Foreign Exchange Management Act, amended FDI policies and the Regulations provided by the Securities and Exchange Board of India.

An M&A contract is a binding agreement between the parties that highlights rights & obligations of both the parties and includes confidentiality, trust & business growth followed by legal acumen.

The primary motive of a merger or acquisition is to guarantee strong business growth to either parties through the agreement & therefore, preventive measures have to be taken to curb the disputes & keep everything well defined as much as possible considering the rise & fall through the business period. Failure to do so may give rise to disputes. 

Risks involved in M&A contracts

Due diligence from the parties is essential by the parties involved before entering into a contract for a successful business transaction in the future. It is a skill to identify potential liabilities. All the possible loopholes shall also be clarified through the contract before signage by the parties. Following are the contract risks before completing M&A transaction: 

  • Business risks: Non–compete clauses can cause multiple interpretations & may keep parties away from liabilities & obligations. Such causes can impose disadvantageous limits on acquiring business & can affect overall value of M&A. 
  • Transaction complications: Some complicated set of contracts may not provide sufficient notice or may end up being vague & it might end up being not transferable & the parties will have to figure out an alternate solution. 
  • Legal risks: In the interest of the parties, the contract might end up getting drafted not in compliance with the bye-laws. The contract may breach the law which could make it void-ab-initio & the parties following the respective contract can be held for breach of law. 
  • Contracting risks: The incoming contracts shall be in compliance with the purchasing standards of the either parties for healthy contractual relationships. Often the business gets disrupted as the contract does not interpret the pre-decided terms & conditions verbally.

Types of disputes in M&A

  • Pre-closing disputes: It is basically a negotiation between the buyer & seller where the closing conditions to be satisfied by both the parties are negotiated. It shall be made sure that the closing conditions have been achieved & the parties are satisfied. If there is a fair bit of bonding & understanding between the parties & the condition is not directly related to the desired transaction, it often happens that the buyer may waive that condition & close the deal. Percentage of the shareholder plays a major role as the buyer will ask for a higher threshold whereas the seller will be inclined towards a smaller threshold. In these cases, counsels can be a great help to negotiate to make the particular transaction go through.
  • Post-closing disputes: Even after pre-closing all the terms & conditions to make the transaction go through, the chance of disputes still arising does not cease to exist. These disputes are called post-closing disputes, which usually arise from the non-compliance to the closing conditions. For example, in the case of Eli Lilly & Co. v. Competition Commission of India (“CCI”), the CCI served a show-cause notice upon Eli Lilly & Co. for not notifying the Commission of its acquisition of Novartis Animal Health in India (“NAH India”), which was a crucial closing condition pertaining to government regulation to be complied with. 

These disputes usually involve monetary compensations but not always as it might depend upon the extent & type of dispute. The representations, interpretations, warranties, confidentialities agreed upon may come into the picture, based upon which claims can be demanded by the parties. Though the uncertainty can be minimized, it cannot be eliminated. 

Mitigations for Pre-Closing Disputes

  • Non-disclosure agreement: 

It is a preventive step of documentation which shall be undertaken by the parties. The document promises that there will be no sharing of information to anyone apart from the parties involved in the agreement. This protects the interests of the parties & also secures them from the outside competition to get any similar ideas & exploit it.

  • Common accounts: 

Maintenance of common accounts for the parties in the interest of transactions to be taken place keeps the business transparent & arrests any malicious activities if planned. This naturally decreases the uncertainty with respect to accounts & its monetary related disputes to take place as the transaction keeps on taking place in the awareness of either parties. 

  • Warranties, representations, indemnities:

There shall be mandatory obligations placed for the parties in case the transaction doesn’t happen according to the planned agreement. This brings about discipline via the contract & keeps the parties well aware of the consequences if the necessary obligations are breached & the compensation required to be taken care of. 

  • Break-up fees:

In the event of the proposed transaction not seeming to be working out in the future which could be due to any unavoidable reasons with respect to the parties or the business conditions because of the market, it is an insurance promised to the objective through the medium of provision of satisfactory damages. 

  • Letters of credit:

It is a way of providing economic guarantee as an undertaking that the buyer’s consideration will be received by the seller according to the promised figure & date on acquisition. 

Mitigations for Post-Closing Disputes 

  • Representations & warranties:

There are possibilities that certain facts, statements, information & any other details shared by the parties during pre-closing are not matching with post-closing. In such instances, disputes can crop up & the aggrieved party can demand for reimbursement for breaching pre-closing provisions & can blame other parties for fraud or misrepresentation. So, this provision shall be carefully drafted reducing the possible risk & keeping the actions of the parties in check & their aware.  

  • Earn-out clause:

It is a recommended clause for the safer side with respect to profit earned through the business carried out by the respective party. Whenever there is a profit earned, it shall be noted that the seller shall pay certain compensation to the buyer which is usually stated as a percentage of gross sales or earnings. It is an additional future compensation paid to the owner of a business after it is sold. But a basic amount of honesty is expected from the parties in such cases & the transactions & the workings should be kept clean with transparency to avoid any future disputes when it is considered with future compensation.

  • Joint ventures & Shareholder agreements:

There should be clarity between the both types of agreements. Joint venture agreement specifies on how the companies are jointly going to operate to perform businesses together. Shareholder agreement is only based upon how much share of the company is owned by the parent company & its allowable decisions with respect to the same. A shareholding company functions individually & has no relations with respect to the other company whereas in joint ventures, the companies function together on common terms & conditions agreed mutually to perform the respective business. 

  • Completion of all pre-closing covenants:

The parties to the agreement should ensure that all the pre-closing conditions and obligations are duly observed and executed. For example; the buyer conditions that the Seller obtains consents from any suppliers as part of the conditions. 

  • Compliance with Governmental agencies:

Non-compliance of certain regulations set out by governmental institutions is a key reason for breach of agreements, post-closing disputes and fallouts. For example, under Section 6(2) of the Competition Act, 2002, the CCI requires certain combinations to be notified, which cross the predetermined jurisdictional thresholds. Non-compliance with the said provision may result in penalty to the parties involved for the offence of gun-jumping under Section 43A of the said Act.


In a regular contract, the documentation initiates & completes as soon as the signing of the contract is complete. But in case of mergers & acquisition, the process is tedious as there is a process to be followed before going for the actual contract & the later legalities are different from the pre-closing documentation. It is essential for the drafting to be carried out by experienced professionals with legal expertise & business understanding. Consequences shall be ensured of each & every clause through their various interpretations. Though all these precautions reduce the probability of disputes, it cannot be guaranteed that there cannot be any disputes. For a speedy remedy, arbitration clause is must for dispute resolution as it is legally valid & considered binding even in the court of law.

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