Key provisions of M&A deals

Key provisions of M&A deals

Author: Joris Kersten MSc/ Owner Kersten Corporate Finance

M&A Advisory + Valuations. www.kerstencf.nl

5-day training “Business Valuation & Deal Structuring” – 4th until 8th November 2024 @ Amsterdam. www.joriskersten.nl

Source used: Make the deal – Negotiating Mergers & Acquisitions. Christopher S. Harrison. 2016. Bloomberg Press/ Wiley.

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Introduction

This blog is about the key provisions taken up in M&A transactions.

I will mention a few, and will then explain them in more detail.

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“No poach” provisions

Through the diligence process the buyer will get to know the target’s key employees.

They can identify the ones who have talent and significantly contribute to the business.

If the buyer does not get the deal it may be relatively easy for the buyer to poach core employees from the target.

This potentially for competing activities with the target.

To address this risk, target companies will often include a “non solicitation” or “no hire” provision in the non disclosure agreement (NDA), or later in the letter of intent (LOI).

A “no hire” provision prohibits the buyer from hiring the covered employees.

And a “non solicit” provision prohibits the buyer from soliciting them for employment.

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Exclusivity agreements

Exclusivity agreements give the potential buyer time to finalize the deal.

And the target agrees not to negotiate with other potential buyers.

Buyers invest significant time and money into the due diligence.

This before they are in a position to negotiate, and sign, a share purchase agreement (SPA).

So a buyer may be reluctant to risk wasting time & money on a target who is negotiating with other parties as well.

But be careful here, because for the target exclusivity can potentially harm its ability to get the best price and conditions for the deal.

This because there is less competition in the M&A process due to exclusivity.

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Exclusivity period

Exclusivity expires at the end of a short, and defined, period.

This is negotiated between buyer and seller.

The exclusivity period is designed to be long enough to complete the M&A process. And to negotiate the deal.

Without locking up the target for unnecessary time periods.

And the time period varies depending on the parties desire for speed, and the complexity of the due diligence (DD) and the M&A transaction documentation (like the SPA).

In this case, targets may use tight periods in order to put pressure on the buyer to keep working hard on the deal.

And to keep the focus on the deal since this is in practise often challenging (since also "normal" business continues).

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Obligation to negotiate in good faith

Some exclusivity agreements obligate the parties to negotiate in good faith during the exclusivity period.

This when the parties have already reached a basic agreement about the (financial part) of the deal.

A buyer may want to have this provision taken up, because then the intention is there for getting the deal done.

And this should be done through a normal M&A process.

On the other hand, the seller could be reluctant for this provision.

Because when they do not continue with the deal, they could get a liability for the failure to keep negotiating.

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No obligation to execute definitive documentation

Even when the target is obliged to negotiate in good faith, it is not obliged to take the final step.

This to actually sign the definitive transaction documentation.

So, an exclusivity agreement may require the parties to negotiate towards acceptable terms.

But it does not require the parties to actually agree on those terms!

Just to be sure, in most cases there is an additional provision confirming that the parties are not obliged to enter into definitive agreements.

Scope of damages

When it comes to exclusivity, it is hard to measure damages for breach of the contract.

So to some extent this limits the legal value of the contract.

Although it may still have real value, because the target will want to avoid any lawsuits, so they will do their best in the negotiations.

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Term sheets

Letters of Intent (LOIs), memoranda of understanding (MOUs) and term sheets establish the key terms of M&A transactions.

They have a benefit of reducing legal costs at a point when it is not clear whether the parties will reach agreement on the fundamental terms of a deal.

I am from The Netherlands and involved in non public (private) M&A transactions.

Potential buyers will first receive an Information Memorandum (IM) with all the core info on the target and the deal process.

And before they get access to a full blown due diligence (DD) we often negotiate the deal on main points in a Letter of Intent (LOI).

This on for example enterprise value (EV), and on for example the definition of adjusted net debt (cash & debt free) and the further process and time line.

And when the LOI is signed, the DD can start, and at the same time (or just a little later) the SPA negotiations start.

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Non binding

LOIs, MOUs and term sheets are typically intended to be non binding.

So when this is the case, it needs to be explicitly stated that the parties do not intent to be legally obligated to sign or close the transaction!

Absent clarity on this issue would potentially mean that this needs to be determined through litigation.

Nowadays in practise M&A lawyers will make it clear on the face of LOIs, MOUs and term sheets that these documents are non binding.

This in order to avoid discussion, and potential litigation.

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Hope this was useful.

See you next week again with a new blog. The topic then will be:

-Representations in the share purchase agreement (SPA).

Regards Joris

Source used: Make the deal – Negotiating Mergers & Acquisitions. Christopher S. Harrison. 2016. Bloomberg Press/ Wiley.