Merger & Purchase Agreements: The Final Contract

Navigate the complexities of definitive M&A agreements with expert legal and valuation guidance

Types of M&A Agreements

Merger Agreement

Legal document governing the combination of two companies into a single entity, typically used in mergers of equals or statutory mergers.

Key Characteristics:

• Statutory merger structure under state law
• Surviving entity and dissolved entity
• Automatic asset and liability transfer
• Shareholder approval typically required
• Appraisal rights may apply

Purchase Agreement

Contract for the sale of assets or stock, more commonly used in acquisitions where one company purchases another.

Key Characteristics:

• Asset or stock purchase structure
• Buyer and seller remain separate entities
• Specific asset and liability allocation
• More flexibility in structuring
• Selective shareholder approval

Essential Agreement Provisions

Purchase Price

• Base purchase price calculation
• Adjustment mechanisms
• Payment terms and timing
• Escrow and holdback provisions
• Earnout structures and metrics

Representations

• Corporate organization and authority
• Financial statement accuracy
• Material contracts and commitments
• Compliance with laws
• Environmental and regulatory matters

Covenants

• Pre-closing operating restrictions
• Best efforts to close
• Regulatory approval cooperation
• Employee and customer retention
• Post-closing integration support

Conditions

• Regulatory and antitrust approvals
• Third-party consents
• No material adverse change
• Accuracy of representations
• Financing conditions

Indemnification Framework

Component	Typical Terms	Key Considerations
Survival Period	12-24 months (general), longer for tax/environmental	Balance discovery time vs. ongoing exposure
Deductible/Basket	0.5-1.5% of purchase price	Tipping vs. dollar-one recovery
Cap/Maximum	10-25% of purchase price	Fundamental reps often uncapped
Escrow Amount	10-20% of purchase price	Should cover most likely claims

Agreement Negotiation Strategies

Buyer Priorities

Risk Mitigation:

• Comprehensive representations and warranties
• Broad indemnification coverage
• Material adverse change protections
• Strong closing conditions

Operational Control:

• Pre-closing operating covenants
• Key employee retention agreements
• Customer and supplier protections
• Integration cooperation requirements

Seller Priorities

Liability Limitation:

• Narrow representation scope
• Short survival periods
• High deductibles and caps
• Knowledge qualifications

Deal Certainty:

• Limited closing conditions
• Financing commitment requirements
• Reverse termination fees
• Minimal operating restrictions

Common Agreement Challenges

Valuation Disputes

Disagreements over purchase price adjustments, working capital calculations, and earnout metrics.

Solution: Clear definitions and independent accounting procedures

Regulatory Delays

Antitrust and regulatory approvals taking longer than expected, causing deal uncertainty.

Solution: Realistic timelines and "hell or high water" provisions

Material Adverse Change

Disputes over what constitutes a material adverse change and buyer's right to walk away.

Solution: Specific definitions and carve-outs for known risks

Agreement Best Practices

Documentation Excellence

• Engage experienced M&A counsel early
• Ensure consistency with term sheet and LOI
• Include detailed definitions and schedules
• Address all material due diligence findings
• Plan for post-closing integration needs
• Include dispute resolution mechanisms

Risk Management

• Balance risk allocation fairly between parties
• Include appropriate insurance requirements
• Address key person and customer risks
• Plan for potential regulatory challenges
• Include material adverse change protections
• Consider tax optimization structures

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