In the previous blog post, we discussed the legal pitfalls associated with business acquisitions. In this blog post, we discuss the legal documentation involved.

A business acquisition is often a major milestone for both the buyer and the seller. The (financial) stakes are often high, which justifies the use of various legal documents to clearly outline the terms of the acquisition. To give you an idea of the legal documents we typically encounter in acquisition processes, we have provided an overview below.

§  Letter of Intent: in the initial phase of the legal part of the acquisition process, the seller and buyer often sign a Letter of Intent (LOI), which outlines the terms for the potential acquisition, such as the timeline, initial purchase price framework, conditions that must be met to finalize the acquisition (e.g. approvals from the supervisory board or the Authority for Consumers and Markets), confidentiality, exclusivity, and the due diligence to be conducted by the buyer;

§  Sale and purchase agreement: the sale and purchase agreement (SPA) between the buyer and seller.

§  Employment or management agreement: sometimes, the buyer may want the seller or key personnel to stay on with the target company for a specific period of time after the acquisition to help with the transfer and integration efforts, expand the business into a new market, or complete ongoing projects. An employment or management agreement may then be the appropriate type of contract to retain the seller or other key personnel with the target company. 

§  Lease agreement: it is common for the seller of the target company to also own the property where the target company is located. The acquisition may provide an opportunity to establish new (market-based) lease terms between the seller (as the landlord) and the target company (as the tenant). As the new owner of the target company, the buyer can set requirements for the lease agreement, such as a purchase option on the property in favor of the tenant or caps on the annual rent increases.

§  Security documentation: a prudent buyer will typically require security from the seller in connection with the acquisition. If the buyer has a claim against the seller (for example, based on the warranties provided in the sale and purchase agreement), they may come up empty-handed if the seller lacks the funds to satisfy the claim. To mitigate this risk, the buyer may require security in the form of a bank guarantee, escrow arrangement, or a statement of financial standing. The terms of these security instruments (e.g. the duration and amount of the security) are outlined in the security documentation. 

While other terms or documentation may be required, the parties should generally expect to draft, negotiate, and sign the aforementioned documentation. In the next blog post (blog post #4) of the M&A blog series, we will cover the warranties required in the sale and purchase agreement.