Key Clauses in M&A Agreements: Protecting Your Rights
July 10, 2024
Written by : Marc Huynh
Mergers and acquisitions (M&A) are complex transactions that require careful negotiation and drafting of legal documents. At the heart of any M&A deal is the acquisition agreement, which outlines the rights, obligations, and liabilities of the parties involved. Understanding key contractual provisions is essential to protecting your legal and commercial interests. This article highlights several critical clauses commonly found in M&A agreements, with a focus on how they safeguard parties during and after the transaction.
1. Representations and Warranties
Purpose: Representations and warranties serve as factual statements made by the seller about the condition of the target company, including its assets, liabilities, operations, and legal compliance.
Importance: These provisions form the basis of the buyer’s due diligence and risk assessment. If any statement proves to be false, the buyer may have grounds to claim for breach of contract.
Examples:
The target company is duly incorporated and in good standing.
All material contracts are valid and enforceable.
There is no pending litigation against the company.
For buyers, broad and specific warranties provide transparency. For sellers, limiting the scope of warranties and including appropriate qualifications (e.g., “to the seller’s knowledge”) can reduce exposure.
2. Indemnities
Purpose: Indemnity clauses allocate risk by requiring one party (typically the seller) to compensate the other (typically the buyer) for specified losses arising from breaches of representations, warranties, or covenants.
Importance: Indemnities offer a contractual remedy beyond common law claims and can be tailored to cover specific risks, such as tax liabilities, environmental issues, or undisclosed litigation.
Key Considerations:
Cap: The maximum liability of the indemnifying party.
Basket: A threshold that must be met before claims can be made.
Survival Period: The duration for which indemnity obligations remain enforceable.
Well-drafted indemnity provisions ensure a fair balance between protection and limitation of liability.
3. Conditions Precedent (Closing Conditions)
Purpose: Closing conditions are the requirements that must be satisfied (or waived) before the transaction can complete.
Importance: These provisions give parties the ability to terminate the agreement if critical obligations or approvals are not fulfilled, such as:
Regulatory approvals (e.g., antitrust clearance).
No material adverse change (MAC) in the business.
Accuracy of representations and warranties at closing.
Buyers benefit from stringent closing conditions to ensure the target remains in the agreed condition. Sellers may seek to limit or define these conditions clearly to prevent unnecessary delays.
4. Covenants
Purpose: Covenants are promises made by the parties to perform or refrain from certain actions between signing and closing.
Examples:
The seller agrees to operate the business in the ordinary course.
The buyer agrees to obtain financing.
Covenants maintain the value and integrity of the business during the interim period.
5. Dispute Resolution Mechanisms
Purpose: Dispute resolution clauses establish how disagreements under the agreement will be handled.
Common Options:
Arbitration.
Jurisdiction of courts.
Governing law clause.
International clients should ensure that the dispute mechanism is enforceable and efficient in their jurisdiction.
Conclusion
M&A agreements are more than just technical documents—they are essential tools for managing legal risk. Careful negotiation and drafting of representations, indemnities, closing conditions, and other key clauses can protect your rights and provide clarity throughout the transaction.
If you are considering an acquisition or divestiture, our legal team can assist you in reviewing and negotiating agreements to ensure your interests are fully protected. Contact us for tailored legal advice based on your business needs and jurisdiction.