This is the first in a series of planned posts in which I will discuss in some detail the structure and components of the “typical” purchase and sale agreement for shares or assets of a private company.
The importance of the purchase and sale agreement cannot be overstated as it governs the entirety of the transaction and at the end of the day specifies, among other things, who is paying how much to whom for what and when and in which circumstances the price can be adjusted or “clawed back”. For this reason, it is critical for purchasers and sellers, whether it’s their first time or their hundredth time, to be thoroughly familiar with this document.
Conventionally, a purchase and sale agreement will more or less be structured in the following manner:
- Parties. The parties to the agreement will be listed, usually with their contact addresses and, in the case of companies, partnerships and other business entities, their jurisdictions of formation.
- Recitals. A series of recitals will normally be included to establish the relevant background and the nature of the transaction.
- Defined terms and rules of interpretation. Usually contained at the beginning of the agreement will be a list of defined terms that will be relied upon throughout the balance of the agreement. In addition, provisions guiding interpretation of the agreement as a whole (for example, the meaning of “knowledge”, the operative currency and governing law/jurisdiction) will appear.
- Purchase and sale. The next section of the agreement will typically confirm who is buying what from whom (and, especially in the case of asset transactions, what isn’t included in the transaction). It will then go on to deal with the related, but fundamentally distinct and often confused, elements of the purchase price, namely, its determination (including any possible adjustments), payment and allocation.
- Representations and warranties. Generally speaking, representations and warranties comprise the lengthiest part of the typical purchase and sale agreement. These are, essentially, statements made by the purchaser and the vendor (though much more extensively by the vendor) that the other side is relying upon in order to consummate the transaction. Representations and warranties are inextricably linked to the indemnifications provisions that appear later in the agreement and are usually the most heavily negotiated part of the purchase and sale agreement.
- Covenants. Most purchase and sale agreements will impose both pre- and post-closing obligations on the parties in the form of covenants. These can be of the positive (i.e., something that one or more parties must do) or negative (i.e., something that one of more parties can’t do) variety and may be of varying importance.
- Conditions. Especially in cases where the purchase and sale agreement is signed in advance of, rather than concurrently with, closing of the transaction, various conditions precedent to closing will be inserted for the benefit of the parties. These may be “one way” or “mutual” conditions that, absent waiver or satisfaction by the prescribed time, will entitle a party to terminate the agreement and not complete the transaction.
- Closing. This part of the agreement will deal primarily with procedural matters in relation to the closing of the transaction. For example, when and where closing will occur and what documents and instruments will be delivered on or before closing.
- Indemnification. Together with the representations and warranties, the indemnification provisions are one of the most critical components of the purchase and sale agreement. The indemnification section will specify, substantively and procedurally, how a party to the purchase and sale agreement can go about seeking remediation from the other as a result of breaches by the other of the purchase and sale agreement or other “wrongs”.
- Dispute resolution. Oftentimes purchase and sale agreements will provide that disputes arising under or in connection with the purchase and sale agreement will be resolved by arbitration or some other method of dispute resolution alternative to the courts.
- Termination. Termination provisions of a purchase and sale agreement are closely related to the section on conditions precedent discussed above. In circumstances where there is an interim period between signing and closing the transaction, this section will usually be inserted to clarify on what basis either or both parties may elect (or be deemed to have elected) to terminate the purchase and sale agreement and abort the transaction.
- General or miscellaneous provisions. The last substantive section of the typical purchase and sale agreement deals with various general provisions such as public disclosure of the agreement and the transaction, to whom and in what form notices to the parties must be delivered, responsibility for legal and other professional fees, requirements for amendment to the purchase and sale agreement, allowances for execution and delivery of the agreement in counterparts and by electronic means and so on. It is common to view these “boilerplate” provisions as inconsequential or otherwise unimportant, but parties should be cautioned to take the opposite approach.
- Execution block. At the end of the agreement will appear execution blocks for the parties to the agreement. Though seemingly innocuous, it is important to ensure that full, legal names of all parties are included and that the agreement is fully and properly executed.
- Schedules and exhibits. Most purchase and sale agreements will include a number of schedules and/or exhibits. These are typically used for disclosure purposes (for example, to qualify representations and warranties) and to attach forms of ancillary agreements and other documents to be executed and delivered on or before closing of the transaction.
Stay tuned for future posts as we take a journey through each of the above components of the typical purchase and sale agreement in the context of private company transactions!