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The role of a corporate lawyer in an acquisition of a company or business is an important one, sometimes even extending to that of negotiator or tactician. In any such acquisition , legal advice should be sought at an early stage.
As part of any sale and purchase transaction, corporate lawyers are required to draft, negotiate and advise on a large number of legal documents to ensure that the deal reached between the purchaser and the seller or vendor is accurately reflected. Three key documents typical in most such transactions are the Heads of Agreement, the Sale and Purchase Agreement and the Disclosure Letter.
Heads of Agreement
The corporate lawyer may be requested to assist with the drawing up of Heads of Agreement or an Offer Letter. This is a document which serves to record the principal terms of the offer, what has been agreed and the intentions of both parties, but is not usually legally binding. However, the details of what is being purchased, the price to be paid and form of consideration will probably have been the subject of intense commercial negotiations between the two parties for some time before the involvement of the lawyers.
Some sellers require Heads of Agreement to be signed before releasing any sensitive business information, although a separate confidentiality or non-disclosure agreement may be entered into before Heads of Agreement are completed to allow such information to be supplied. A purchaser may also require the seller to grant him a period of exclusivity to prevent the seller from dealing with other potential purchasers, and this can also be addressed in the Heads of Agreement. Unlike the outline terms of the deal, the confidentiality and exclusivity undertakings will be expressed as legally binding.
Sale and Purchase Agreement
The legally binding contract for the acquisition is the Sale and Purchase Agreement (SPA). The purchaser's lawyers usually prepare the first draft and should attempt to reflect as fully as possible the terms contained within the Heads of Agreement.
A typical SPA would include the following main sections:
- The identities of the parties to the contract
- Brief background to the transaction
- Description of the assets being acquired (in respect of an asset sale) and the price being paid
- Conditions to the contract
- Details of completion of the contract
- Warranties, indemnities and undertakings being given by the parties
- Other matters such as governing law, notices and announcements
The lawyers for both sides play a prominent role in shaping the final draft, which can often involve more focussed and intense negotiation than reaching agreement to the Heads of Agreement in the first place.
The area which frequently causes the most difficulty in the drafting of the contract is the giving of warranties by the vendor who is usually asked to warrant the condition of the business being sold in considerable detail. The warranty schedule of the agreement will usually take up 50% of the document. If the warranties prove to be false or inaccurate, subject to the limitations provided for in the SPA, the purchaser will be entitled to make a claim against the seller for its loss after completion of the acquisition. The purchaser will therefore wish to obtain extensive warranties, being as broad and open-ended as possible. The vendor on the other hand will wish to limit the warranties and put as short a time limit as possible within which any claims by the purchaser can be made.
As set out above, the seller will usually be required to give substantial warranties to the purchaser relating to the business. If these warranties prove to be false or inaccurate, the purchaser may be entitled to make a claim against the seller for breach of warranty. Accordingly, it is the corporate lawyer's role to ensure that the seller is fully aware of the risk arising from the giving of the warranties and to ensure that the seller gives full and fair disclosure in order to qualify each of the warranties where necessary. The corporate lawyer will draft a disclosure letter giving accurate details in respect of any inconsistencies between the warranties and the actual state of the company’s affairs and supply documentary evidence supporting these statements. Disclosure is a vital exercise to protect the value of a seller’s exit (by avoiding future claims made by the purchaser) and provides further transparency of the target company’s affairs to assist the purchaser in assessing his risk in proceeding with the deal.
The legal team in an acquisition is also responsible for the preparation of detailed board minutes and company and individual director approvals as well as the filing of all necessary documents with the relevant authorities.
Advice and services from corporate law specialists
The Corporate Law team at JMW Solicitors includes experts in company mergers and acquisitions and disposals who are able to provide high-quality legal services to companies expanding their businesses or shareholders looking to make an exit. The firm's partner-led approach offers fully comprehensive solutions to meet your business's needs.
For further information please contact us on 0345 872 6666 or complete our enquiry form - we will get back to you promptly.