Term sheets or letters of intent also give structure and security to a merger and acquisition transaction. These contracts give both the buyer and the target company the peace of mind of closing the deal with an agreement that they can look back as they move forward. An SPA generally contains language that states that the terms of the SPA itself, including its existence, are considered confidential information and cannot be disclosed to third parties. However, such wording should include and explicitly refer to all prior non-disclosure agreements (“NDAs”) entered into (and should have been concluded) between Buyer and Seller at an earlier stage of the Transaction, such as.B, the term sheet or the DD phase, and should emphasize that such agreement remains in full force and effect, until this Agreement terminates or is replaced. Each NDA language in the SPA may reflect additions to previous NDAs and incorporate the language of the previous NDA into the SPA by reference, replace those earlier NDAs in their entirety, or claim that only the language of the previous NDA that is incompatible with the SPA will be replaced. The first step in a typical M&A transaction is for both the buyer and the target to sign a term sheet or letter of intent. This article provides an overview of some of the most important terms that often appear on a term sheet for an M&A transaction. The term sheet is “non-binding” because it reflects only the most important and general points between the parties under which the investment is made. It also serves as a model for internal or external legal teams to draft final agreements. Statements are statements of fact (past or present) at the time made and given to convince another party to enter into a contract or to take (or refrain from) any other action.
A representation precedes and initiates the agreement and is usually information used by a party to decide whether or not to enter into a contract. A guarantee is a guarantee given to ensure that something is as promised, stays that way and is usually accompanied by a promise of compensation if the claim turns out to be false. Since the parties will spend significant costs and effort to negotiate the final agreement and other related documents, an overview of the key terms ensures that the parties reach an agreement on the main terms before proceeding. The term sheet asks the drafters of the people, lawyers, and advisors of the documents to write them. Buyers typically want comprehensive, absolute, and unrestricted assurances and warranties from sellers in order to provide stronger grounds for termination and indemnification. Sellers can mitigate the risk of representations and warranties by limiting them only to “material” matters and by using “standards of knowledge” to limit statements of fact to things of which the seller has or should have actual knowledge. Qualified representations and warranties may reduce the risk of future claims of misrepresentation and breach of warranty due to the non-disclosure of material information. Sellers can also reduce risk by limiting insurance and warranties to specific periods. To prevent the seller and management of the target company from interfering with the company, a buyer typically uses pre-closing clauses to prohibit the target company, its shareholders, directors, and management from doing the following: Pre-closing clauses generally limit what a seller can do before closing. Typically, the seller`s commitments are heavier than the buyer`s, as the seller usually retains control of the target until the transaction is completed.
Since certain things are promised to do or not to do, pre-closing covenants are common in deferred closing transactions to protect and maintain the value of the acquired company between the execution of the PPS and the closing of the acquisition. Associated with closing conditions are termination rights that would allow a party to terminate the SPA prior to closing. Typically, negotiated termination rights found in an SPA include termination: this was a practical guide to term sheets and understanding key terms and clauses typically included. To continue to learn and advance your career, check out these additional resources: Completing an M&A transaction typically makes a successful SD investigation and the underlying provision of complete and accurate documents a critical state of completion of the acquisition. The completion of a robust DD investigation cannot be overstated in most M&A transactions. Target companies usually have the heavy burden of providing an investor with all the documents requested in this regard. Even a seemingly simple merger and acquisition involving a small business with limited assets and transactions can come with large hidden liabilities. In the past, data rooms were the norm and ease in the premises of the target company or its lawyers, where all categories of requested documents were filed for inspection by the buyer. Nowadays, data rooms are typically digital and law firms and other third parties offer internal server-based or cloud-based platforms where all DD documents are uploaded by the seller and their advisors to be compiled and reviewed as much as possible by a buyer and their professional advisors (usually lawyers and accountants). As access to such information is generally subject to strict confidentiality obligations, it is necessary to clearly define who will have access to that information in order to avoid a possible breach of those restrictions. In addition to the purchase price, many trading conditions (see chart below) affect the timing and security of closing and post-closing issues, which ultimately determine how much and when you actually receive the product, and your exposure to risk. Since these are usually negotiated in the termsheet phase, it will be difficult to renegotiate them later.
In principle, a distinction should be made between the purchase of shares and the purchase of securities. An asset transaction involves the purchase or sale of some or all of a company`s assets, such as. B equipment, inventory, real estate, contracts or leases. A purchase of securities can be beneficial because it allows a buyer to be selective about the assets they acquire. In addition, an asset acquisition allows a buyer to acquire a company`s assets without the liabilities that would accompany the assets when purchasing shares. In the case of an asset acquisition, a full SD is always required, including ownership of those assets and privileges over those assets. The completion of an acquisition of shares or assets depends on many considerations and the objectives of the acquirer. As a key element of each SPA, this section of the agreement generally determines the number of shares to be acquired and specifies the rights, securities and shares that the buyer has acquired in the shares. This section should also indicate the purchase price of the shares and how it is to be paid (cash, buyer`s securities, debt/liability assumption, exchange of assets (real estate, personal property, intellectual property, etc.) or a combination of the above), as well as the time and place of completion of the transaction. In this context, it is also necessary to determine whether the execution of the SPA and the closure will take place simultaneously or whether there is a gap between the execution and the completion (a delayed completion). Deferred closures are common and may be necessary for a variety of reasons, including the requirement for parties to obtain various regulatory approvals and third-party consents, and in some cases, the buyer may need time to arrange third-party financing (as may be the case in a private equity scenario). In some cases, whether simultaneous or deferred, the full purchase price will not be paid at closing, as a certain portion of it will be payable upon the occurrence of certain future events.
As a general rule, sellers want definitions of confidential information to be as broad as possible to protect proprietary information. Conversely, buyers tend to prefer less comprehensive definitions to mitigate potential liability. A “single materiality scraper” retains the qualifiers of materiality and knowledge when determining whether a seller has made a false representation or breached a warranty, but if a false statement or breach has been established, the qualifier of materiality is not taken into account in determining the damage. Subject to any deductible and other limitation of indemnification in the SPA, the buyer may claim the full amount of his damages due to the violation. A “double scratch of materiality” nullifies the qualifiers of materiality and knowledge both to determine whether a false statement has been made and whether a warranty has been breached, as well as to calculate the damages due to such a breach. This term sheet is not a binding contract or agreement, but only the expression of a possible commercial transaction between the target company and the buyer. Neither party is bound by a transaction until no definitive agreement is reached by the parties to that transaction. As mentioned earlier, term sheets reflect the key concepts of a merger and acquisition transaction and serve as a guide to influence the security of financial statements and the ultimate success of the business. Negotiators may ultimately include anything they deem appropriate in their term sheet or letter of intent, but in general, most contracts include the following: M&A transactions are an all-consuming and high-risk process.
The term sheets allow stakeholders to review and negotiate the key terms of the agreement at an early stage. This gives them the opportunity to spot important chord breakers or problems before spending a lot of time and resources. .