The acquisition purchase agreement governs the final sale of an acquiree to an acquirer. The contents of the purchase agreement can vary significantly, depending on the legal structure of the deal (such as an asset purchase or a stock purchase) and other factors.The following clauses are usually found in a standard purchase agreement:
- Business combination. This states the legal structure of the transaction, and when it will occur. The wording will be different for each type of legal structure, or if the transaction only involves the purchase of selected assets of the acquiree.
- Stock payment. If the payment is to be in the stock of the acquirer, the exchange ratio at which the seller’s shareholders will swap their shares for the shares of the acquirer will be stated.
- Cash payment. If the payment is to be in cash, this clause states how the funds are to be transferred to the shareholders of the acquiree.
- Debt payment. If the payment is to be in debt, this clause states the terms of the promissory note, and may include reference to a security agreement that states the secured position of the seller in the assets of the acquirer. The detailed debt documents are included in the accompanying exhibits.
- Option and warrant termination. The acquirer does not want to inherit any unexercised stock options or warrants, so this clause states that all options and warrants will be exercised or terminated prior to the acquisition, leaving no residual obligation for the acquirer to settle.
- Representations and warranties. This is a cluster of representations that the information provided by each party to the other is true. There can be a considerable amount of dickering between the attorneys working for each side in determining which items are included and excluded from this section, as well as the extent of the associated liabilities if any of the representations turn out to be false.
There may be additional clauses that deal with circumstances specific to the purchase transaction. Here are several such clauses:
- Basket. This clause sets a fixed dollar amount of losses that the acquirer must record from the acquiree before it can pursue damages from the seller under the indemnification provisions of the purchase agreement. For example, a basket of $100,000 prevents the acquirer from claiming reimbursement for the first $100,000 of losses.
- Collar. If payment to the seller is made in stock, it is set at a certain exchange ratio of the acquirer’s to the seller’s stock. The collar clause states that the exchange ratio will be reset to maintain the intended total purchase price if the acquirer’s stock price changes beyond a certain amount. This clause reduces the risk to the seller of suffering a reduction in the price paid.
- Earnout. This clause describes the calculation to be used to determine additional payments to the seller, as well as the form and timing of those payments.
- Material adverse change clause. This clause allows the acquirer to exit from the purchase transaction if the condition of the target company declines to a significant extent prior to closing the deal.
- True up provision. This clause entitles the seller to additional acquirer stock if it was originally paid in stock, and the market price of that stock subsequently declined. This clause is not normally used unless the acquirer is publicly-held, where there is a market for its stock that can be referenced. This is not quite the same as the collar provision, for a true up can occur many months after an acquisition has been completed.
The document may be hundreds of pages long, especially when appendices are included, and so requires a massive amount of detailed review by both parties to ensure that its terms are acceptable.