Within an SPA, certain conditions are specified that must be satisfied (or waived) before the transaction can proceed to closing. These conditions, termed "Conditions Precedent," act as safeguarding mechanisms, ensuring that specific criteria are met before the transaction's completion. If these conditions are not satisfied by a predetermined date, often referred to as the "long stop date", neither party will be obliged to close the transaction. Let's delve into some of the commonly included conditions: - Regulatory Approvals: Depending on the nature and scale of the transaction and the jurisdictions involved, various regulatory approvals may be required. Competition clearance: In transactions where the combined entity may have a significant market share, competition or antitrust authorities might need to assess and approve the deal to ensure it doesn't hinder market competition. Sector-specific approvals: Certain industries, like banking, telecommunications, or energy, have specific regulatory bodies that must greenlight transactions to ensure compliance with sector-specific regulations. - Approvals from third parties: Third-party approvals are necessary when external entities have a say in the transaction due to prior contractual arrangements or vested interests. Consent from creditors: If the Target Company has outstanding debts or loans, creditors might have to consent to the change in ownership, especially if the change could impact the company's ability to repay. Landlord approvals: In cases where the Target Company leases property, landlord consent might be required to transfer the lease or ensure its continuity post-acquisition. Contractual consents: Some business contracts may contain "change of control" provisions that require the other party's consent if the controlling interest of the company changes hands. - Other commonly included conditions: Due diligence satisfaction: The Purchaser often conducts a due diligence exercise to assess the Target Company's financial, legal, and operational aspects. A common condition is that the Purchaser must be satisfied with the due diligence findings. Operational conditions: The SPA might include conditions related to the Target Company's operations between signing and closing, such as maintaining a certain level of working capital or not engaging in significant transactions outside the normal course of business. No Material Adverse Change: This condition ensures that no significant negative change (be it financial, operational, or legal) occurs in the Target Company between the signing and closing of the deal. Employee-related conditions: If retaining key employees is crucial for the Purchaser, a condition might stipulate that specific employees remain with the company post-acquisition or that there's no significant staff turnover. - The Long Stop Date: This is the ultimate deadline by which all conditions precedent must be satisfied or waived. If any condition is not met by this date, the transaction will typically not proceed, and neither party will have the obligation to close. The long stop date acts as a safeguard, ensuring that the transaction doesn't remain in limbo indefinitely and that parties have clarity on the transaction's timeline. - In conclusion, conditions precedent in an SPA play a pivotal role in ensuring that specific criteria are met before ownership changes hands. They offer both the Purchaser and Seller the reassurance that key elements, whether regulatory, operational, or third-party related, are addressed before the deal's completion.

In Share Purchase Agreements (SPAs), Seller warranties and representations serve as statements of fact or promises about the condition, operations, or prospects of the Target Company. They provide a basis for the purchaser to understand the exact status of the target and act as safeguards against potential undisclosed issues. - - Qualification of Warranties Warranties and representation are often heavily negotiated and scrutinised. From the Seller's perspective, warranties and representation must not be given lightly and qualified where possible: Warranties might be qualified by what the seller "knows" or "reasonably ought to know". For example, the statement, "To the best of the seller's knowledge, there are no pending litigations against the target company." This qualification limits the scope of the warranty to what the seller is actually aware of. The effectiveness of warranties can be limited by specific disclosures made against them. A comprehensive Disclosure Schedule can detail exceptions to the general warranties, which can shield the seller from future claims related to disclosed items. Some warranties might be qualified by materiality, implying that the representation only holds for issues above a certain significance or threshold. Warranties can also be restricted in their duration, by the use of sandbagging clauses (which deal with issues the buyer knew about pre-closing but still makes a claim post-closing), or through other specific conditions agreed upon by both parties. - - Importance of Target Company & Subsidiaries making warranties : While the seller might be the shareholder, they may not be involved in the day-to-day operations. The target company itself will have more intimate knowledge of its operations, assets, and liabilities. Therefore, it's crucial for the target company to provide warranties, especially concerning operational matters. - If the target company is a holding entity with various subsidiaries, these sub-entities might have their own set of assets, liabilities, and operational intricacies. It's essential for subsidiaries to provide warranties, especially if they form a significant part of the target company's value proposition. - - Timing of Warranties It's crucial that the SPA outlines when the warranties and representations are made. Typically, they are given as of the signing date of the SPA. - It's often beneficial for the Purchaser to ensure that warranties are repeated on the Closing Date. This provides comfort that the state of affairs of the target company hasn't materially changed between signing and closing. If there's a significant gap between signing and closing, the risk of changes in the company's state increases. - Warranties and representations in SPAs play a vital role in bridging the information gap between the seller and purchaser. Given the potential risks and high stakes involved in M&A transactions, it's essential that these provisions are clearly defined, appropriately qualified, and diligently negotiated to protect the interests of both Parties.

A Disclosure Schedule is essentially an annexure or attachment to a SPA, wherein the Seller provides specific details or exceptions to the representations and warranties made in the main agreement. It's a tool for the seller to 'disclose' facts or circumstances that might otherwise constitute a breach of a warranty or representation. By disclosing these exceptions upfront, the Seller seeks to avoid potential post-closing claims for breach of warranty. - Important aspects of a Disclosure Schedule: It's crucial that the Disclosure Schedule be specific in its detail. A general reference to external documents or statements like "as available in the public domain" are often insufficient. The more detailed and precise the disclosures, the more protection it offers to the Seller. Often, the Disclosure Schedule is organized to mirror the sections or warranties of the main SPA, making it easier to cross-reference. As negotiations progress and due diligence findings come to light, the Disclosure Schedule might be updated multiple times leading up to the closing. It's a living document until the deal is sealed. While a Seller might be inclined to disclose everything for the sake of completeness, it's crucial to focus on material disclosures - those that would have a significant impact on the buyer’s decision-making process. - Typical contents of a Disclosure Schedule: Warranted Accounts : This section discloses the financial statements of the company that are being warranted to be true, accurate, and complete. Any anomalies, qualifications, or deviations from the standard accounting practices, or any significant post-balance-sheet events, might be detailed here. Material Contracts : This is a listing of the key contracts the Target Company has entered into, which might include supplier agreements, customer contracts, lease agreements, and others. Any terms that deviate from market norms or could be potentially unfavorable to the company are highlighted. Litigation : Details of ongoing or potential litigation, disputes, or claims against the company. Regulatory and compliance issues : Information about any regulatory inquiries, violations, or potential non-compliance issues. Intellectual Property : Details of intellectual property owned or licensed by the company, including any disputes or potential infringements. Employee matters : Details of key employees, any ongoing labor disputes, or significant employment agreements. Property and assets : Specifics about owned or leased property, including details on any encumbrances, liens, or potential disputes related to them. Environmental and health matters : Information about the company's compliance with environmental laws or any potential environmental liabilities. Transactions with related parties : Details of any transactions between the company and its insiders, which could include the seller, the management team, or other related entities. - In conclusion, the Disclosure Schedule plays a crucial protective role for the Seller by laying out exceptions to the SPA's representations and warranties. At the same time, it offers the buyer clarity on the exact state of affairs, allowing them to make an informed decision. Proper drafting, review, and updating of this schedule are pivotal to the successful completion and aftermath of a transaction.

A Complete Guide to drafting Share Purchase Agreements (SPAs)

Q: Boilerplate

[ View the detailed guide on boilerplate ↗ ] - Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties' intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.

Home » Building Blocks » Foundation » A Complete Guide to drafting Share Purchase Agreements (SPAs)

Martin Kotze
Updated: March 12, 2024

A Complete Guide to drafting Share Purchase Agreements (SPAs)

A detailed guide on creating a Share Purchase Agreement (SPA) using foundation, primary, secondary and schedule building blocks.

Introduction

A Share Purchase Agreement, commonly abbreviated as SPA, is a legal contract that outlines the terms and conditions related to the purchase and sale of shares in a company. These shares can represent either a part or the entirety of the ownership in the company.

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The SPA contains detailed information about the company, the shares being sold, the agreed price for these shares, and any conditions or warranties that both parties must abide by. It’s akin to the comprehensive contract you sign when buying a house, but instead of bricks and mortar, you’re buying ownership stakes in a company.

Share Purchase Agreement (SPA)

In an SPA, the buyer acquires the shares (or stock) of the target company from the current shareholders.

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Key Features:

Entire Entity: When you purchase shares, you’re effectively buying the company itself, including all its assets and liabilities, whether or not they are identified in the SPA.
Succession: The company’s contractual relationships, permits, and licenses generally continue uninterrupted, since there’s no change in the company’s identity; it just has new owners.
Liabilities: Purchasing the shares means taking on the company’s liabilities, both known and unknown.

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Use Cases:

When purchasers wish to acquire an entire business without going through the complexity of itemizing assets and liabilities.
When certain assets of the company can’t easily be transferred (e.g., specific licenses or permits).
When tax or other structural advantages make it beneficial.

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Asset Purchase Agreement (APA)

In an APA, the Purchaser acquires specific assets and possibly liabilities of a company, rather than the company itself.

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Key Features:

Specificity: The purchaser can pick and choose which specific assets (and sometimes liabilities) they want to acquire.
No Succession: Contracts, permits, and licenses may not automatically transfer and might require third-party consent.
Liabilities: Generally, the buyer can avoid taking on unknown liabilities, though some might be assumed either intentionally or by operation of law.

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Use Cases:

When purchasers are interested only in certain parts of a business (e.g., a specific product line or division).
When purchasers want to avoid the liabilities of an entire company, especially if it’s under financial distress.
In situations where there are significant known liabilities in the selling company that the buyer wants to exclude from the deal.
When the deal structure has specific tax advantages.

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Conclusion: The decision to use an SPA or an APA often hinges on the buyer’s goals, the nature of the target company’s assets and liabilities, and the associated tax and legal implications.

Build your own Share Purchase Agreement (SPA) now!

Foundation

Parties

Sellers

These can be individuals or entities that currently own shares in the Company and are looking to sell them. It’s not uncommon for there to be multiple Sellers in a single transaction, especially in larger corporations or family-held businesses where ownership may be spread among various stakeholders.

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Having more than one Seller can add layers of intricacy to the agreement. From the Purchaser’s viewpoint, it’s imperative that the obligations of all Sellers under the SPA be both ‘joint’ and ‘several’. What does this mean? If the obligations are ‘joint’, it implies that all Sellers are collectively responsible. If they are ‘several’, it means each Seller can be individually liable. This setup ensures that the Purchaser can hold any or all Sellers accountable.

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Purchaser

This is the individual or entity intending to buy the shares in the Target Company. They will typically be at the helm of negotiations, dictating terms they’re comfortable with, especially concerning representations, warranties, and undertakings from the Sellers and the Target Company.

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Company

This is the company in which the shares are being transacted. While not always, the Target Company can also be a party to the SPA, especially if it offers specific representations or warranties about its operations.

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If the Target Company is a holding entity controlling other companies (Subsidiaries), things get more layered. The Purchaser, knowing the implications of subsidiary operations on the main company’s value and performance, will want certain assurances. These assurances often come as representations and warranties about the Subsidiaries. Moreover, the Purchaser might demand specific undertakings related to the operations of these Subsidiaries to ensure value is maintained or enhanced post-acquisition.

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By roping in the Target Company as a party to the SPA, the Purchaser creates an added layer of security. This move allows the Purchaser to demand representations and warranties directly from the company about its operations. If there’s any breach in these guarantees or if the agreed-upon undertakings aren’t met, the Purchaser has the legal standing to take action against the Target Company, not just the Sellers.

Background / recitals

Preamble sections provide insight into the context and objectives of the Share Purchase Agreement (SPA). While they’re not a legal requirement and do not have direct legal implications, they can be incredibly helpful in clarifying the interpretation of the agreement’s operative provisions in the event of a dispute.

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SPAs generally outline essential preamble elements relevant to any sale of shares. Considering the unique nature and terms of the agreement, the parties may choose to incorporate more comprehensive details or opt to exclude some of the basic preamble elements.

Conditions

Within an SPA, certain conditions are specified that must be satisfied (or waived) before the transaction can proceed to closing. These conditions, termed “Conditions Precedent,” act as safeguarding mechanisms, ensuring that specific criteria are met before the transaction’s completion. If these conditions are not satisfied by a predetermined date, often referred to as the “long stop date”, neither party will be obliged to close the transaction. Let’s delve into some of the commonly included conditions:

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Regulatory Approvals:

Depending on the nature and scale of the transaction and the jurisdictions involved, various regulatory approvals may be required.

Competition clearance: In transactions where the combined entity may have a significant market share, competition or antitrust authorities might need to assess and approve the deal to ensure it doesn’t hinder market competition.
Sector-specific approvals: Certain industries, like banking, telecommunications, or energy, have specific regulatory bodies that must greenlight transactions to ensure compliance with sector-specific regulations.

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Approvals from third parties:

Third-party approvals are necessary when external entities have a say in the transaction due to prior contractual arrangements or vested interests.

Consent from creditors: If the Target Company has outstanding debts or loans, creditors might have to consent to the change in ownership, especially if the change could impact the company’s ability to repay.
Landlord approvals: In cases where the Target Company leases property, landlord consent might be required to transfer the lease or ensure its continuity post-acquisition.
Contractual consents: Some business contracts may contain “change of control” provisions that require the other party’s consent if the controlling interest of the company changes hands.

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Other commonly included conditions:

Due diligence satisfaction: The Purchaser often conducts a due diligence exercise to assess the Target Company’s financial, legal, and operational aspects. A common condition is that the Purchaser must be satisfied with the due diligence findings.
Operational conditions: The SPA might include conditions related to the Target Company’s operations between signing and closing, such as maintaining a certain level of working capital or not engaging in significant transactions outside the normal course of business.
No Material Adverse Change: This condition ensures that no significant negative change (be it financial, operational, or legal) occurs in the Target Company between the signing and closing of the deal.
Employee-related conditions: If retaining key employees is crucial for the Purchaser, a condition might stipulate that specific employees remain with the company post-acquisition or that there’s no significant staff turnover.

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The Long Stop Date:

This is the ultimate deadline by which all conditions precedent must be satisfied or waived. If any condition is not met by this date, the transaction will typically not proceed, and neither party will have the obligation to close. The long stop date acts as a safeguard, ensuring that the transaction doesn’t remain in limbo indefinitely and that parties have clarity on the transaction’s timeline.

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In conclusion, conditions precedent in an SPA play a pivotal role in ensuring that specific criteria are met before ownership changes hands. They offer both the Purchaser and Seller the reassurance that key elements, whether regulatory, operational, or third-party related, are addressed before the deal’s completion.

Sale and purchase

Next the SPA must include provisions relating to the sale of the Shares and the Purchase Price.

When it comes to determining the Purchase Price of the Shares, there are a couple of different ways the parties may approach this aspect.

Closing Accounts transaction
This method is akin to a “wait and see” approach. The purchase price is determined based on the financial position of the Target Company at the close of the transaction. It involves preparing the closing balance sheet and adjusting the initially estimated price based on specific financial metrics (like net assets or working capital) at the closing date.

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The Closing Accounts mechanism, as discussed, determines the final purchase price based on the financial position of the Target Company at the close of the transaction. This is often centered around specific financial metrics such as net assets or working capital at the closing date.

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Example 1

Suppose Company A wants to buy Company B. The initial agreed-upon price is R10 million, based on Company B’s estimated net assets. However, both parties agree to adjust this price based on the actual net assets of Company B at the closing date.

Initial Agreement:
Estimated net assets of Company B = R5 million
Agreed purchase price = R10 million
Closing Date Accounts:
Upon a detailed financial examination at the close of the transaction, the net assets of Company B are determined to be R6 million.
Price Adjustment:
For simplicity, let’s say that the agreement was to adjust the purchase price by R1 for every rand difference in the estimated net assets. As the actual net assets are R1 million more than the estimated value, the final purchase price would be adjusted upwards by R1 million.

Final purchase price = Initial purchase price + Adjustment
Final purchase price = R10 million + R1 million = R11 million

Locked Box transaction
Under the locked box mechanism, the purchase price is set using a historical set of financial statements as of a specific date (the “locked box date”). There are no subsequent adjustments for changes in assets or liabilities after this date. Essentially, the economic benefits and risks transfer to the Purchaser from the locked box date, even though the transaction might close later. This approach offers certainty in terms of price but requires both parties to be clear on any “leakages” (i.e., value moving out of the company) between the locked box date and closing.

One of the main features of the locked box mechanism is its focus on “leakages.” Leakages refer to any value extracted from the Target Company after the locked box date, which is not agreed upon or permitted under the terms of the agreement. The SPA will typically set out a list of permitted leakages (e.g., dividend payments made in the ordinary course of business) and any other value extraction would need to be returned to the Purchaser.

Example 2

Consider Company P aiming to acquire Company Q. They choose the locked box pricing mechanism with a set locked box date of 1st March 2023. The financial data on this date indicated a net asset value for Company Q at R7 million. Based on various factors and this net asset value, they agree upon a purchase price of R15 million.

Between the locked box date and the eventual conclusion of the transaction on 1st September 2023, there is a notable financial activity – Company Q declares dividends amounting to R1 million on 1 June 2023, exclusively for the benefit of its existing shareholders (the sellers). This was not listed as a permitted leakage in the SPA.

Given this unauthorized leakage, adjustments would need to be made:

Final purchase price = Initially agreed price – leakage = R15 million – R1 million = R14 million

Thus, Company P would end up paying $16 million to acquire Company Q, with the additional amount accounting for the dividends declared to the seller post the locked box date.

By employing the locked box mechanism, parties ensure a clear, transparent pricing structure, eliminating the need for extensive post-completion adjustments. The key focus is to monitor and ensure that no unanticipated value exits the business in the interim period between agreement and completion.

Fixed Price transaction
As the name suggests, this method involves both parties agreeing on a set purchase price at the outset, regardless of any subsequent changes in the company’s financial position. This method is straightforward and eliminates potential disputes over adjustments. However, it might not account for unforeseen financial shifts in the Target Company.

Earn-outs
An earn-out is a provision wherein a portion of the purchase price is contingent on the Target Company achieving certain future performance benchmarks, often over a set period post-acquisition. This mechanism aligns the interests of the Seller and Purchaser, especially in situations where future profitability or growth is uncertain. It offers the Seller an opportunity to realize a higher price if the company performs well post-sale, while also providing a safeguard for the Purchaser against overpaying for a company that doesn’t meet expectations.

Escrow
To manage the risks associated with potential breaches of warranties or other post-closing liabilities, parties may employ an escrow arrangement. Under this setup, a portion of the purchase price is deposited into an escrow account and is only released to the Seller after certain conditions are met or after a specified period. If there’s a breach or claim, funds can be withdrawn from the escrow to settle it, providing added security for the Purchaser.

Closing
The closing (or “completion”) of the SPA signifies the finalization of the transaction, where shares are transferred, and the purchase price is paid. The provisions related to closing will specify the conditions that need to be met for the transaction to conclude. This could include regulatory approvals, third-party consents, or other agreed-upon milestones. The SPA will detail the sequence of events, documents to be exchanged, and any final representations or warranties to be made at closing.

Primary Blocks

Warranties

In Share Purchase Agreements (SPAs), Seller warranties and representations serve as statements of fact or promises about the condition, operations, or prospects of the Target Company. They provide a basis for the purchaser to understand the exact status of the target and act as safeguards against potential undisclosed issues.

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Qualification of Warranties

Warranties and representation are often heavily negotiated and scrutinised. From the Seller’s perspective, warranties and representation must not be given lightly and qualified where possible:

Warranties might be qualified by what the seller “knows” or “reasonably ought to know”. For example, the statement, “To the best of the seller’s knowledge, there are no pending litigations against the target company.” This qualification limits the scope of the warranty to what the seller is actually aware of.
The effectiveness of warranties can be limited by specific disclosures made against them. A comprehensive Disclosure Schedule can detail exceptions to the general warranties, which can shield the seller from future claims related to disclosed items.
Some warranties might be qualified by materiality, implying that the representation only holds for issues above a certain significance or threshold.
Warranties can also be restricted in their duration, by the use of sandbagging clauses (which deal with issues the buyer knew about pre-closing but still makes a claim post-closing), or through other specific conditions agreed upon by both parties.

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Importance of Target Company & Subsidiaries making warranties:

While the seller might be the shareholder, they may not be involved in the day-to-day operations. The target company itself will have more intimate knowledge of its operations, assets, and liabilities. Therefore, it’s crucial for the target company to provide warranties, especially concerning operational matters.

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If the target company is a holding entity with various subsidiaries, these sub-entities might have their own set of assets, liabilities, and operational intricacies. It’s essential for subsidiaries to provide warranties, especially if they form a significant part of the target company’s value proposition.

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Timing of Warranties

It’s crucial that the SPA outlines when the warranties and representations are made. Typically, they are given as of the signing date of the SPA.

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It’s often beneficial for the Purchaser to ensure that warranties are repeated on the Closing Date. This provides comfort that the state of affairs of the target company hasn’t materially changed between signing and closing. If there’s a significant gap between signing and closing, the risk of changes in the company’s state increases.

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Warranties and representations in SPAs play a vital role in bridging the information gap between the seller and purchaser. Given the potential risks and high stakes involved in M&A transactions, it’s essential that these provisions are clearly defined, appropriately qualified, and diligently negotiated to protect the interests of both Parties.

Indemnities

The following parts must be configured for the indemnity block:

The Indemnified Event and Indemnified Claims

Indemnity claims arise on the happening of a specified event. For example, when there’s a breach of warranty provisions or undertakings provided by the Seller in the SPA. The SPA needs to clearly provide for which type of events and claims the indemnity is provided for.

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Party being indemnified

Typically, it’s the Purchaser that is indemnified. However, in certain cases, both the Purchaser and the Company (being the target of the purchase) might be indemnified. This is significant because there might be certain liabilities or claims that directly impact the Company’s financial standing, and not just the Purchaser’s interest in the Company.

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Type of Losses recoverable

Indemnities in SPAs usually cover direct losses and, depending on the negotiation, can also cover consequential losses. Be clear on exactly which types of losses and damages can be claimed in terms of the indemnity.

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Limitations

Often, there are de minimis thresholds below which claims won’t be entertained to avoid trivial disputes.

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The indemnified party might be required to notify the indemnifying party within a specific timeframe or provide detailed documentation for a claim to be valid.

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There could be a set duration post the completion of the transaction within which claims should be made.

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Mitigation and reduction

The Seller may require the Purchaser to mitigate their losses on the happening of an Indemnified Event. Make sure the SPA addresses this issue.

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Tax treatment

Depending on the jurisdiction, indemnity payments can have tax implications. It’s crucial to understand whether such payments are treated as compensatory (and potentially not taxable) or as additional purchase price (which might have capital gains implications).

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Exclusive remedy

The indemnity can be set as the exclusive remedy availably to the Purchaser on the happening of an Indemnified Event. In other if an Indemnified Event occurs, the Purchaser will not be able to institute action based on any other remedy.

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Interplay between the indemnity and limitation of liability provisions

While indemnities provide a remedy for Indemnified Losses, the limitation of liability clause can cap the amount recoverable. It’s essential for Parties to be clear about how these clauses interact. For instance, if there’s a cap on the aggregate liability under the SPA, it’s crucial to ascertain whether indemnity claims are counted towards this cap or are treated separately.

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In conclusion, indemnities in SPAs play a pivotal role in safeguarding the interests of the Purchaser against identified risks or breaches by the Seller. Given their significance, these provisions are often negotiated meticulously, and both parties should be clear about their rights and obligations under such clauses.

Undertakings

Undertakings or covenants are promises made by parties in an SPA to act (or refrain from acting) in a certain way. These undertakings may relate to conduct during the closing phase as well as conduct after the closing phase.

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Exclusive dealings

The seller agrees not to negotiate or engage with any other potential buyer for a specified period. This provides the purchaser with assurance that they have exclusive rights to pursue the transaction without competition. Sometimes, an arrangement might include a “break fee”, where the seller would need to pay the purchaser a certain amount if they breach the exclusivity covenant and go with another party.

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Conduct of business (Interim Period Undertakings)

With these undertakings, the Seller and the Target Company promise to operate the business “in the ordinary course,” ensuring that there aren’t any drastic changes that might affect its value or operations of the Target Company. For example, the Seller and the Target Company may need to obtain the Purchaser’s consent before taking significant actions, like acquiring assets, taking on large debts, or making substantial operational changes or the Seller and the Target Company must ensure that relationships with suppliers, customers, and employees remain intact and that assets aren’t sold off or encumbered.

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Notification of changes

With these undertakings, the Seller has an obligation to promptly notify the Purchaser of any material changes, events, or circumstances that could affect the Target Company’s value or the integrity of the sale.

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Reasonable assistance

With these undertakings, the Seller agrees to assist the Purchaser in some way, for example, to cooperate and assist the Purchaser in obtaining rep and warranty insurance.

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Non-Competes and Non-Solicitations

With these undertakings, the Seller agrees not to enter into or start a similar business for a specific period within a defined geographic area, ensuring the Purchaser doesn’t face immediate competition from them. Also, the Seller may agree not to solicit the Target Company’s employees, suppliers, or customers for a defined period.

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Conclusion

The undertakings in an SPA form a crucial framework ensuring that both parties act in good faith and that the interests of the Purchaser are safeguarded from the signing to the closing of the deal. Each of these covenants should be carefully negotiated and articulated to ensure clarity and enforceability.

Limitation of liability

In the context of Share Purchase Agreements (SPAs), limitation of liability is an essential component. It defines the extent to which a seller can be held responsible for claims arising from or relating to the Agreement. The following parts need to be addressed in the limitation of liability provisions:

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Types of Claims that will be limited

Most of the time the Seller will aim to limit all types of claims arising from or relating to the Agreement. From the Purchaser’s perspective, you should try to only limit claims relating to breach of contract excluding any breach which relates to the Seller Warranties, Indemnities or Undertakings.

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Calculation of limitation

The calculation of the limitation is also important. In some SPAs, the total liability is limited to a set percentage of the overall Purchase Price. This provides a clear and quantifiable maximum liability for both Parties to consider.

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Qualifications

The Seller may consider making certain disclosures relating to the Warranties. In this is this case, claims relating to breach of a Warranty may be qualified. In other words, if a fact has been properly disclosed in the Disclosure Schedule of the SPA, it may limit a Claim under the Agreement despite a Warranty stipulating the contrary. Let’s look at an example.

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Imagine that Company A is selling its shares to Company B. In the Share Purchase Agreement (SPA), Company A provides a warranty stating that it owns all the intellectual property (IP) rights used in its business operations.

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However, in the Disclosure Schedule (which is a document attached to the SPA that lists specific exceptions to the warranties), Company A discloses that it licenses a particular software (let’s call it Software XYZ) from a third party and does not actually own the IP rights to that software.

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After the transaction is completed, Company B realizes that Software XYZ is not owned by Company A and considers this a breach of the warranty provided by Company A.

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Normally, this would be a straightforward breach of the warranty. However, since Company A had already disclosed this fact in the Disclosure Schedule, the breach claim by Company B would be “qualified”. This means Company B may not have a valid claim for this specific breach because it was properly disclosed, even though the warranty suggests otherwise.

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By disclosing the fact about Software XYZ in the Disclosure Schedule, Company A has effectively limited or qualified its liability in relation to that specific warranty.

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Excluded Claims

Most SPAs will explicitly state that any limitation of liability does not apply in cases of fraud, willful misrepresentation, or dishonesty on the part of the seller. This ensures that deceitful actions are not shielded by contractual terms. A Purchaser may also argue that any indemnity claims must not be limited by the limitation of liability provisions.

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Other aspects

Many SPAs will include a threshold below which claims cannot be brought, to prevent trivial claims.

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There might be stipulated time frames within which claims can be made post-completion.

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Purchasers may be obligated to take reasonable steps to mitigate any loss before making a claim.

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Clauses may be included to prevent a Purchaser from recovering the same loss under multiple provisions of the SPA (e.g., under both warranty and indemnity clauses).

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In summary, limitation of liability in SPAs offers a balance of protection for purchasers while providing sellers with a clear framework of their potential exposure.

Confidentiality

Confidentiality provisions in Share Purchase Agreements (SPAs) are critical components designed to protect the sensitive information of the parties involved, primarily the target company, during and after the transaction process.

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Given the nature of M&A activities, a lot of proprietary, financial, operational, and sometimes undisclosed information is shared, which can be detrimental if leaked. Here’s a breakdown of the key aspects of confidentiality provisions in SPAs:

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Purpose

The primary goal of confidentiality provisions is to protect non-public, sensitive data from unauthorized dissemination or use. Leaks can lead to stock price fluctuations, employee unrest, customer mistrust, and competitor advantage. It is, therefore, important to accurately define the Purpose for which Confidential Information may be used. In an M&A context, the Purpose is generally limited to evaluating transaction. Any other use of the Confidential Information will constitute a breach of the confidentiality provisions.

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Scope of Confidential Information

The SPA should provide a clear definition of what constitutes “confidential information.” This can range from financial data, business plans, customer lists, intellectual property, to specific transaction terms. Not everything shared is confidential. Common exclusions are information already in the public domain, previously known to the receiving party, or independently developed without reference to the confidential information.

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Obligations

Parties must agree not to disclose confidential information to unauthorised third parties.

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Parties should only use confidential information for the purpose of the transaction and not for any other benefits or purposes.

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Taking reasonable precautions to safeguard the information, such as storing in secure locations or encrypted digital formats.

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Limiting access to the information to individuals on a “need-to-know” basis, often bound by similar confidentiality undertakings.

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Confidentiality obligations don’t last indefinitely. The duration, commonly ranging from 2-5 years post-closure of the transaction, should be stipulated. However, certain types of information, like trade secrets, might be protected for longer periods.

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Permitted Disclosures

There might be scenarios where the receiving party is compelled to disclose, like due to regulatory requirements, court orders, or legal obligations. The provision should outline such exemptions, usually with the stipulation that the disclosing party gives prior notice and takes steps to ensure confidential treatment of the information.

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Upon conclusion of the transaction or if the deal falls through, there’s usually an obligation to either return or destroy all confidential materials. Some provisions might allow parties to retain copies for compliance or archival purposes.

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The provision should outline consequences for breaches, which can include:

Immediate court orders to stop further breaches;
Compensation for any loss suffered due to the breach;
Indemnity covering costs, including legal fees, resulting from the breach.

Dispute resolution

While court litigation is one path to resolution, it can be time-consuming, expensive, and potentially damaging to reputations. This has given rise to the inclusion of alternative dispute resolution (ADR) clauses in SPAs. One specific method, especially relevant for technical disputes like those involving Closing Accounts or earn-out calculations, is Expert Determination.

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Expert Determination is a process where disputing parties agree to appoint a neutral third-party expert to resolve specific issues. The process is usually quicker and less formal than court or arbitration proceedings.

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Disputes over Closing Accounts typically revolve around accounting principles, valuations, and adjustments. Given the specialized nature of these topics, an accounting or financial expert’s opinion can be more accurate and efficient than a protracted legal battle.

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Earn-outs are future payments contingent on certain performance metrics post-acquisition. Disagreements might arise on how these metrics are calculated or whether certain milestones were achieved. Again, given the technical nature, a subject matter expert can provide a more nuanced determination.

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Why opt for Expert Determination?

Expert determination is usually faster than other methods of dispute resolution, with some determinations made within weeks or even days.

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Avoiding court or arbitration can save significant amounts in legal fees and associated costs.

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The determiner possesses specialized knowledge, ensuring the decision is technically sound.

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Proceedings and outcomes are generally kept confidential, protecting sensitive business information and reputations.

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Process

The parties might pre-select an expert or agree on one when a dispute arises. If they can’t agree, they might turn to a professional body (e.g., an accountancy institution) to appoint an expert.

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Each party submits their arguments and relevant documents to the expert.

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The expert reviews the submissions and may ask questions or seek further information. Once satisfied, they make their determination.

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The SPA should clearly stipulate whether the expert’s determination is binding. If binding, it’s typically final, with limited grounds for appeal or challenge.

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Considerations

It’s crucial to clearly define the scope of the expert’s mandate. They should only be resolving the specific technical issue and not broader contractual disputes.

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The chosen expert should be neutral and not have any prior engagements or conflicts of interest with either party.

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Who bears the cost? It can be the losing party, shared equally, or another arrangement.

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Conclusion

Incorporating expert determination clauses in SPAs, especially for technical disputes over Closing Accounts or earn-outs, offers an efficient, cost-effective, and technically sound resolution mechanism. Parties should, however, clearly define its scope, process, and implications in their agreement to ensure clarity and fairness.

Secondary Blocks

Boilerplate

[View the detailed guide on boilerplate ↗]

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Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties’ intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.

Schedules

Warranties

This schedule contains all the warranties and representations made by the Seller. The common warranties and representations that you will find in this schedule include warranties and representations relating to:

ACCOUNTS AND FINANCE

These warranties and representations relate to the accuracy, completeness, and fairness of all financial statements and may also provide that there are no liabilities other than those disclosed in financial statements.

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ASSETS

These warranties and representations relate to the assets of the Target Company and may provide that the Target Company has ownership and right to use all tangible and intangible assets. These warranties and representation may also provide that assets are in good working condition, subject to normal wear and tear.

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BROKERS OR FINDERS

These warranties and representations generally provide that there are no obligations to pay any brokers, finders, or similar fees in connection with the transaction.

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COMPETITION

These warranties and representations generally provide that the Company hasn’t breached any competition laws or that there are no ongoing or anticipated investigations by competition authorities.

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COMPLIANCE WITH LAWS

These warranties and representations generally provide that the Target Company complies with and has complied with all applicable laws.

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COMPANY

These warranties and representations generally provide that the Target Company is duly organized, validly existing, and in good standing, and all subsidiaries are identified and details provided.

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CONTRACTS

These warranties and representations generally provide that all contracts the Target Company has entered into are legally binding and enforceable and that there are no breaches or defaults on any significant contracts.

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CUSTOMERS AND SUPPLIERS

These warranties and representations generally provide that there have been no material adverse changes in relationships with key customers or suppliers, and there are no unusual terms in contracts with major customers or suppliers.

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DISPUTES AND INVESTIGATIONS

These warranties and representations generally provide that no ongoing or anticipated legal disputes, claims, or investigations.

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EMPLOYEES

These warranties and representations generally provide that all employment contracts are valid and in force, there are no ongoing labour disputes or union issues, and all benefits, retirement accounts, and related obligations are funded and compliant.

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ENVIRONMENTAL MATTERS

These warranties and representations generally provide that the Target Company complies with all environmental laws and regulations and that there are no existing or anticipated environmental liabilities or claims.

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IMMOVABLE PROPERTY

These warranties and representations generally provide that the company either owns or has valid leases for all its immovable properties, and these properties are free from encumbrances, liens, or any disputes.

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INFORMATION

These warranties and representations generally provide that all information provided to the Purchaser is accurate, complete, and not misleading and that no material facts have been omitted which might make provided information misleading.

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INSURANCE

These warranties and representations generally provide that the Target Company maintains and has maintained all necessary insurance policies and that all insurance policies are valid, enforceable, and fully paid.

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INTELLECTUAL PROPERTY

These warranties and representations generally provide that the Company is the owner of or has a valid license in respect of all intellectual property required for the business and that there have not been any claims of infringement or unauthorized use of the intellectual property.

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IT SYSTEMS AND DATA PROTECTIONS

These warranties and representations generally provide that the IT systems function correctly and are fit for the purposes for which they are used, that the Target Company complies with all data protection laws, and that there have been no data breaches.

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LICENCES AND CONSENTS

These warranties and representations generally provide that the Target Company holds all necessary licenses, permits, and consents to operate and that the Target Company complies with all terms of its licenses and consents.

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PRODUCTS AND SERVICES

These warranties and representations generally provide that all products and services provided by the Target Company comply with applicable laws and standards there are no known defects or issues that might result in liabilities for the Target Company.

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SHARES

These warranties and representations generally provide that Seller has ownership and title to the Shares, and the Shares are free from any encumbrances, liens, or charges.

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TAX

These warranties and representations generally provide that the Taraget Company has filed all required tax returns and paid all due taxes, and there are no disputes tax disputes or anticipated tax assessments.

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TRANSACTIONS WITH RELATED PARTIES

These warranties and representations generally provide that all transactions and arrangements between the company and the seller (or related parties) have been fully disclosed and any such transactions were on arms-length terms.

Conduct between signing and closing

During the period between the signing of a Share Purchase Agreement (SPA) and the closing of the transaction, there is often a gap which can range from several days to several months. During this “Closing Period” or “Interim Period”, it’s critical to ensure that the Target Company continues its operations without any significant changes, disruptions, or value deterioration. The undertakings relating to this period serve as protective measures to preserve the value and integrity of the Target Company being acquired. Here are some undertakings of included in this schedule:

The Seller, and when applicable, the Company, has the responsibility to ensure that the business continues to operate as usual, in the same manner as it did right before the SPA was signed. This helps the Purchaser ensure they receive what they agreed to buy.
The objective is also to retain the goodwill and business relationships of the company. By maintaining its trade connections, the Seller ensures the business’s value does not decrease due to lost partnerships or client relationships.
Preserving the workforce’s integrity is key. Any efforts to induce employees to leave can be detrimental to the business. A stable workforce ensures continuity of business operations and the preservation of institutional knowledge.
Ensuring no material adverse changes take place in the business’s operations, financial conditions, or assets is paramount. Any significant negative changes could alter the value of the deal or the Purchaser’s desire to proceed with the transaction.
Assets should be maintained appropriately, and any loss or damage should be beyond the Company’s control. This ensures the Purchaser gets the assets in the expected condition.
Restrictions on disposing of crucial assets or altering the company’s capital structure through share transactions preserve the company’s value and composition. The Purchaser doesn’t want the company to sell off valuable assets or dilute the share value before acquiring it.
Governance-related restrictions, such as not appointing new directors or passing shareholder resolutions, ensure stability in leadership and decision-making.
Any transactions with related parties or alterations to material contracts could alter the company’s financial dynamics. The objective is to prevent transactions that might not be in the company’s best interest, especially with parties that have vested interests.
Financial prudence is maintained by restrictions on capital expenditure, loan activities, or entering deferred payment agreements. The Purchaser wants to ensure that the company does not take on new significant liabilities or compromise its cash flows.
Maintaining employee benefits and not making drastic changes to employment conditions ensures stability and prevents potential future liabilities.
Legal proceedings can have significant financial implications. Limitations on starting or settling such proceedings prevent unexpected legal liabilities.
Intellectual Property (IP) is often a valuable asset for companies. Ensuring no alterations or lapses in IP rights preserves the company’s value, especially if IP forms a core part of the business’s value proposition.
Labor relations are crucial. By preventing new or modified agreements with trade unions, the Seller ensures labor stability.
Accounting standards and procedures should remain consistent to ensure financial transparency and reliability.
Finally, maintaining insurance coverage is essential to manage potential risks and ensure that the company remains protected against unforeseen incidents or liabilities.

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In essence, these undertakings ensure that the company remains in a stable, predictable, and expected state during the interim period. Any deviations could alter the value or attractiveness of the deal, leading to potential renegotiations or even deal termination.

Disclosure Schedule

A Disclosure Schedule is essentially an annexure or attachment to a SPA, wherein the Seller provides specific details or exceptions to the representations and warranties made in the main agreement. It’s a tool for the seller to ‘disclose’ facts or circumstances that might otherwise constitute a breach of a warranty or representation. By disclosing these exceptions upfront, the Seller seeks to avoid potential post-closing claims for breach of warranty.

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Important aspects of a Disclosure Schedule:

It’s crucial that the Disclosure Schedule be specific in its detail. A general reference to external documents or statements like “as available in the public domain” are often insufficient. The more detailed and precise the disclosures, the more protection it offers to the Seller.
Often, the Disclosure Schedule is organized to mirror the sections or warranties of the main SPA, making it easier to cross-reference.
As negotiations progress and due diligence findings come to light, the Disclosure Schedule might be updated multiple times leading up to the closing. It’s a living document until the deal is sealed.
While a Seller might be inclined to disclose everything for the sake of completeness, it’s crucial to focus on material disclosures – those that would have a significant impact on the buyer’s decision-making process.

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Typical contents of a Disclosure Schedule:

Warranted Accounts: This section discloses the financial statements of the company that are being warranted to be true, accurate, and complete. Any anomalies, qualifications, or deviations from the standard accounting practices, or any significant post-balance-sheet events, might be detailed here.
Material Contracts: This is a listing of the key contracts the Target Company has entered into, which might include supplier agreements, customer contracts, lease agreements, and others. Any terms that deviate from market norms or could be potentially unfavorable to the company are highlighted.
Litigation: Details of ongoing or potential litigation, disputes, or claims against the company.
Regulatory and compliance issues: Information about any regulatory inquiries, violations, or potential non-compliance issues.
Intellectual Property: Details of intellectual property owned or licensed by the company, including any disputes or potential infringements.
Employee matters: Details of key employees, any ongoing labor disputes, or significant employment agreements.
Property and assets: Specifics about owned or leased property, including details on any encumbrances, liens, or potential disputes related to them.
Environmental and health matters: Information about the company’s compliance with environmental laws or any potential environmental liabilities.
Transactions with related parties: Details of any transactions between the company and its insiders, which could include the seller, the management team, or other related entities.

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In conclusion, the Disclosure Schedule plays a crucial protective role for the Seller by laying out exceptions to the SPA’s representations and warranties. At the same time, it offers the buyer clarity on the exact state of affairs, allowing them to make an informed decision. Proper drafting, review, and updating of this schedule are pivotal to the successful completion and aftermath of a transaction.

Agreed Principles

In complex commercial transactions such as SPAs, an additional schedule, sometimes termed the “Agreed Principles” or “Accounting Principles Schedule”, can be attached. This schedule provides a framework to ensure that any financial statements, reports, or calculations made in terms of the SPA (like Closing Accounts, earn-outs, or working capital adjustments etc.) are done in a consistent and pre-agreed manner.

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This schedule is essential as it helps avoid potential post-closing disputes. Financial matters, like the calculation of earn-outs or the finalization of closing accounts, can become contentious if there’s ambiguity. By pre-defining the rules of the game, both Parties have clarity and a shared framework to work within.