Purchase Agreement

Blogroll

May 17

(No Ratings Yet)

Loading ...

The purchase agreement outlines detailed terms and conditions of a transaction.

Purchase Price Terms
Escrow
Representations and Warranties
Provisions of the contract that are crucial, since it is usually provided that if the representations and warranties are untrue, that the Buyer is entitled to indemnification from the Seller for any resulting losses sustained by the buyer
Special Considerations
Indemnity
Post-closing covenants / restrictive covenants

Representations and warranties have several purposes
- Assist in due diligence review
- Establish bases and limits on post-closing liabilities
- Closing Conditions - requirements for the Seller to adhere to in order for the Buyer to proceed with transaction
Representations and warranties are often qualified
- Materiality Qualifiers - is it significant (e.g., company losing 3rd largest customer)
- Material Adverse Change/Effect (MAC) - have conditions in the company’s customers, management, market or industry changed dramatically. An example would be the company’s COO and head of business development left, that
- Knowledge Qualifiers - basically, this is for the Sellers and its management to hold that they are representing facts that they know of and what they are expected to reasonably know.

Typical Representations and Warranties

Typically 1-2 years, both for most representations and warranties and foi the right to bring a claim
Exceptions
Taxes, environmental, ERISA are often extended to the expiration of the applicable statute of limitations
Power and authority, title, and capitalization often do not expire
Covenants typically survive indefinitely

Baskets: “deductible” and “first dollar”
- Often do not apply to the same items for which caps do not apply
- Deductible basket - buyer must absorb loss up to the basket amount
- First dollar - buyer is covered for the entire loss once the basket is filled
Example: $55,000 loss due to undisclosed litigation
- Deductible basket of $50,000: sellers pay $5,000
- First dollar basket of $50,000: sellers pay $55,000
Market - majority of the time baskets are deductible
- Typically 1 % - 2% of purchase price in smaller deals, less than 1 % in larger deals
- Indemnification without regard to the materiality

Off-sets for taxes and insurance
Sandbagging
- Buyer will often try to negotiate that its knowledge of a breach does not foreclose indemnity
- Sellers will often try to negotiate that actual knowledge of a breach by Buyer prior to closing frees the Sellers
Indemnity as the exclusive remedy

Non-compete
- Prevents a former employee from competing with an acquired business for a specified period following termination
Non-solicit
- Prevents a former employee from soliciting employees, customers, and clients of an acquired business
Non-disclosure
- Prevents a former employee from disclosing trade secrets and confidential information obtained during his or her employment with an acquired business
Indemnity as the exclusive remedy

Scope: restrictions limited to comparable employment and type of industry
Time: restrictions limited to reasonable duration
- Generally reasonable: 1-2 years for employment contracts; 3-5 years in connection with a sale of a business
Geography: Restrictions limited to reasonable geographic area
- Generally reasonable: jurisdictions where business operates; worldwide restrictions viewed unfavorably in employment contracts

Ancillary to Sale of Business
- Restrictive covenants allowed greater scope when made in connection with the transfer of goodwill in the sale of a business
Other Reasonableness Factors
- Extent to which the employee possesses confidential information or trade secrets
- Pre-existing skills vs. skills developed during employment - Economic hardship imposed on the employee
- Attempt to restrict ordinary vs. unfair competition