Purchase agreements have become rather standard over the years, and although lengthy negotiations on the terms of the agreement are still usually conducted, every U.S. law firm has a standard "boilerplate" agreement which is the starting point for the agreement. Obviously, the terms of the agreement, as well as the creativity of the economic structure of the transaction, vary from one deal to another, but in principle, each agreement usually contains the following provisions.
A Description of the Transaction
The first part of the agreement contains a general description of the transaction, including the parties and the nature of the deal (merger or asset purchase), as well as the technical details of the timing and manner of closing (place and time).
Price and Terms of Payment
When the deal is made in cash, this clause is very simple. However, when the consideration takes the form of shares, mechanisms have to be fixed for possible changes in the stock price between the date of signing and the date of closing as described in the previous chapter. There are also agreements in which the final price depends on the performance of the acquired business over time, and in such cases this provision contains the payment formulas in accordance with the terms, as well as the control mechanisms to be used in order to check whether such terms had been fulfilled.
Representations and Warranties
Naturally, most of the reps and warranties are made by the target and not by the acquirer. However, the acquirer's representations with regard to its financial stability and abilities are particularly important in a stock deal, since the medium of payment is the acquirer's shares. The target warrants a range of facts, including the veracity of its financial statements, the absence of liabilities not reflected in the financial statements, the lack of undisclosed legal claims or threatened legal action and ownership of and rights to material assets. The purpose of this section is to provide the most accurate description possible of the object of sale, namely, the company or the assets.
Covenants and Conditions to Closing
Since there is a time gap between the dates of signing and of closing of the deal due to the need to obtain shareholder approvals, complete the due diligence process, obtain approvals from the antitrust authorities, and reach an agreement with the tax authorities with respect to the amount of tax to be imposed, a contractual solution is required to bridge this time gap. The solution is twofold: undertakings with respect to the target's activity during the time between signing and closing, and other conditions which need to be fulfilled at the time of actual closing. The common undertakings assumed by the target with respect to the interim period are that it must conduct its affairs in the usual course of business, avoid irregular expenses, etc. The additional conditions include the accuracy of the reps and warranties at the time of closing, receipt of all necessary statutory approvals by such time, and the absence of any material adverse change in the target's condition. The buyer makes various undertakings pertaining to the employment of managers and employees, the conversion of options in the target into options in the acquirer, and the indemnification of directors. This part of the purchase agreement also addresses issues which are significant after the closing. Since in mergers the target ceases to exist, most of the undertakings revolve around the relationship between the target's entrepreneurs and managers and the acquirer.