acquisition agreement

The first time I was asked to draft an acquisition agreement, I was given a bit of a background of the deal, the important points, and asked to simply draft it! I was nerve-wrecked thinking what to draft. At that point, I didn’t even know what are boilerplate clauses. I had not even asked too many questions in order to not appear incompetent. That was my first mistake.

You should always ask questions when you don’t understand the brief or instructions to gain clarity about what is needed. How could you provide for something, if you don’t know what is being sought?

I did not know how the draft should look or what all should it contain. So I googled templates in similar deals. That was my second mistake. I should have asked my mentor for reference contracts in similar dealings. Because they already had the data I needed. It would have been time efficient.

You should ask for help when needed rather than sitting on your own and coming up with disastrous results. In a team, everyone need help one time or the other. It is okay to not know, however with deadlines looming over your head you must avoid wasting time on avoidable things. Thankfully, my mentor was smart and experienced so he shared the reference documents on his own while I tried creating a fresh template from scratch!

I rushed once I got the reference documents. I added the specific provisions, made necessary changes and went to discuss it with my mentor. This was my third mistake. I should not have rushed with drafting, even with deadlines, and had created a mess.

I had not grasped the requirements, for I did not ask the questions. My drafting reflected the same. It was all sorts of wrongs and full of mistakes. My mentor said it would be easier for him to draft it himself than to revise my work. It was that bad!

The point is drafting is usually taught by training and learnt by practise. Most law schools don’t focus as much as they should, on the development of drafting skills. The students are usually left to figure it out for themselves, or if they require guidance and feedback, they can do contract drafting course to master the skill with support from lawyers in the industry.

The point is, a skill as essential as contract drafting should be taught much in advance and to all law students. It is a crucial skill set for the legal professionals. They need to advise on contracts, initiate dispute resolutions based on such contracts, and more. Hence, it is important to know what to put in a contract. Read this article titled 5 Things To Keep In Mind While Drafting Your Very First Contract’, to know what to keep in mind while drafting your first contract.

However, different agreements have different requirements. For instance, an agreement with a financial institution will differ from an acquisition agreement. Therefore, necessary changes are to be provided accordingly.

I did not know much about merger or acquisitions. So it seemed like the perfect place to start the research on. There are mergers and acquisitions courses which detail out the subject more, and hour long webcasts on YouTube that give you insights on successful M&A lawyers. You can learn about what goes on in an acquisition agreement. What are the essentials? What clauses must be incorporated in an acquisition agreement?

Here is a list I made summing up the essentials of an acquisition agreement:

# Description of the Deal

The structure of the acquisition, the payment mechanism and the item being acquired or purchased has to be specified. The assets and liabilities have to be identified. The nature of the acquisition, i.e., whether there is asset purchase, merger, or stock purchase have to be determined.

Then there is the consideration aspect, i.e., the amount or form of consideration. Whether there is an outright purchase through cash, securities, assets like properties, equipments, intellectual property, etc. or a combination of all or some of these. Then there is frequency or interval of payments and determining the time and amount of the same.

Whether the funds are being held by the buyer or a third party is also determined. The mechanism of such holding, how will it be triggered, i.e., on a specific date or on the occurence of a particular incident, etc. are also specified.

# Representations and Warranties

The acquirer undertakes a risk by the acquisition. Even the aquiree undertakes a risk of non-payment. Therefore, it is prudent by both parties to determine the nature of risks and conditions thereof, by providing assurances and warranties. If there are ongoing litigations, compliances to be made, inventory, tax issues, employee related issues, etc., full disclosures are to be made. The date of representations made is important. Usually the seller makes the representations, but in certain cases the buyers may also make some.

These representations are made by the parties to mitigate the risk in the event something is found out to be false or undisclosed. There is an allocation of risk whereby the parties are liable if their representation is false or warranty is breached. This serves as a basis for indemnifying the party who has suffered due to breach.

Generally, the representation and warranties are with respect to the authority or clear title of entering into the deal and making the assurances to the other party. The assurance is that there is no violation or conflicts in the present dealing. If there are necessary permissions to be sought prior to entering such an acquisition, then the parties are assuring each other such measures are duly taken. For instance, if the approval of the board of directors is essential prior to the deal, then the agreement will reflect that such measures were taken. In case they were not, then the acquirer will be duly indemnified for such breach.

# Covenants

Pre-closing and post-closing covenants or promises are made by the parties to facilitate the transactions. In the pre-closing covenant the parties promise to inform the buyer about necessary consents acquired form internal and external regulatory bodies.  The requirements and restrictions are clearly laid out. The seller is restricted to say, negotiate deals with other parties or give information to potential buyers, etc. The buyer may be given additional time to meet a higher bid.

Post-closing covenants are usually about non-competition or non-solicitation of employees, confidentiality, employees or tax related matters, etc. For instance, the agreement may impose a condition that the seller will not start a competing business in a specific location or within a specified time.

# Conditions

The conditions prior to the deal must be closed is essential before the obligations are created. The closing conditions are straightforward and based on the representations and warranties and the pre & post closing covenants.

Whether the necessary regulatory compliances have been met with? Whether the consents have been duly obtained? Were there are any pending legal requirements or ongoing litigations? Was the compliance of the pre/post covenants done suitably? Are there any additional agreements to be entered into? Were the key personnels retained or not?

The conditions are established in order to determine the obligations of each party arising out of the covenants or representations and warranties. This is essential in order to give basis to indemnification process. The prerequisites have to be met with at first.

# Indemnification

The acquisition agreement must also provide for the risks and what happens in case of a breach of covenants, non-disclosure of pertinent facts, inaccurate representations or warranties, fraudulent acts, etc.

If the parties were made aware of the breach of covenants prior to the closing of the agreement, then no indemnification is required for said breach. But in case the breach of covenant was not disclosed, then the buyer retains right to be indemnified for the loss.

The parties may agree upon setting pecuniary or conditional limitations on indemnification of losses. For instance, the parties may agree upon a ceiling of INR 100 crores for the indemnification. The parties may remove such ceiling amounts for instances of fraud, disclosed litigation, title to assets, etc.

The parties may agree upon the mechanism of indemnification, i.e., through deductions, set-off, or actuals against the security of the seller. There may be provisions included for the buyer to be indemnified, post closing of the deal. There may be guarantors brought into picture or, security given by seller, or, funds set aside to be held by buyer or a third party in case of potential breach of covenants.

# Termination

The terms of the contract must also include when the parties can terminate the agreement and under what circumstances. The agreement can be terminated by mutual consent of parties or by either party, in case of a contractual breach. The agreement can also be terminated on a particular date as agreed upon by the parties.

The conditions for termination may also be specified like failure to obtain necessary consents and approvals, or in case of a lawsuit or permanent injunction or, in case the board of authority withdraws its approval, etc.

The termination clause allows the parties to exit the agreement with minimum hassles. The party has to prove that the conditions of the agreement were not met with in accordance to the agreement. Thereafter, they can exit the deal after fulfilling the necessary prerequisites, if any.

Apart from these provisions, there are the boilerplate clauses which give structure to the agreement. The aforementioned provisions are critical to all kinds of acquisition deals.

The idea is to learn more about the nuances involved in order to practise them more efficiently. You can learn more by doing a merger and acquisition course or getting trained over the years with a law firm. Do keep learning and improving yourself.

Good Luck!

 

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