Although the specific terms and provisions of the various agreements used for corporate acquisitions are custom drafted, depend on the form of the transaction, and are unique to each deal, all such agreements usually contain similar provisions.

Purchase Price and Deal Points.

The agreement will contain the “deal points.” These provisions will identify the assets or stock to be sold, the purchase price, and when, where, and how it will be paid, as well as such other terms as the closing date, methods of transferring the assets or stock purchased, earnout provisions, employment contracts, financing provisions, non-compete agreements, and the like.

Due Diligence.

The agreement usually will have a provision requiring the seller to deliver certain items to the buyer for its review as a part of the buyer’s research and investigation of the corporation to be acquired. This process is called seller’s due diligence. A cautious buyer will want to review such items as the following:

Documents.

Insurance policies, leases, rental agreements, notes, mortgages, deeds of trust, maintenance agreements, service agreements, utility contracts, warranties, guaranties, employment contracts, waivers, licenses, approvals, authorizations, certificates, and any other available documents, agreements, and contracts affecting the seller’s stock, assets, and business.

Inventories.

An inventory of all property.

Employees.

A list of all employees and their position or duties, pay scale, social security number, term of employment, accrued but unused vacation pay, and whether covered by a written employment agreement or union contract.

Tax Statements and Certificates.

Most recent ad valorem tax statements and tax returns for the past three to five years.

Operating Schedule.

Schedule for the past twelve months setting out the amount paid for all taxes; insurance premiums; ordinary business expenses; capital expenditures; deferred maintenance or other reserves or projected costs anticipated for the next 12 to 24 twenty-four months; and the total revenues collected during the past 12 months.

Permits.

Certificates of occupancy and all waivers, approvals, licenses and permits required to operate the seller’s business.

Title Search and UCC Searches.

A current survey and title report covering all real property and a search of all the offices of the secretary of state and county clerk of all states and counties in which the seller owns real or personal property.

Access to Books and Records;

Confidentiality. As an additional part of the buyer’s due diligence, the buyer should obtain a provision giving the buyer and its representatives access to the seller’s business, books and records and a commitment from the seller to furnish any additional information the buyer may request. Normally the seller will require the buyer to treat such information as confidential.

Covenant Not to Compete.

The buyer may want the seller and its shareholders to execute a covenant not to compete with the business being acquired, for a time and distance that will be negotiated by the parties.

Representations, Covenants, Conditions, and Indemnities.

Normally, an acquisition agreement contains representations, covenants, conditions, and indemnities. Representations are the seller’s way of saying what the condition of its business is at the time of the signing of the agreement and again at the time of the closing. They represent a snapshot of the business at the time referred to in the agreement and are a method of risk allocation. There is no limit to the subjects that can be covered. A typical agreement will cover such areas as seller’s legal compliance, good title, bills paid, authority, undisclosed liabilities, condition of assets, financial information and statements, leases and contracts, employees, truth and correctness of documents, lawsuits, dangerous substances, full disclosure, organization and standing, liabilities, permits, licenses, employee compensation plans, customer list, reports to governmental authorities, tax returns, effect of agreement on other obligations, absence of changes and events, authorization of agreement, stockholders’ approval, and no untrue statements. Needless to say, this is not an exhaustive list, but merely a sampling of items.

Board of Directors' and Shareholders' Meetings.

The agreement will normally require the seller to hold meetings of its board of directors and its shareholders to approve the agreement. Destruction, Damage, or Taking Prior to Closing. The agreement normally contains a provision requiring the seller to be responsible for any risk of loss to assets from the time of signing to the closing. If there is a loss, the buyer usually is given the option to terminate the agreement or require seller to convey the assets and assign to buyer the insurance proceeds. Another alternative is to reduce the purchase price by the value of the assets that were damaged or destroyed.

Termination. A typical agreement will contain a provision allowing the buyer to terminate the agreement if all of the buyer’s conditions of closing are not satisfied, or if the seller breaches the agreement.

Breach by Buyer or Seller.

The agreement should also address buyer’s or seller’s refusal to close.

Indemnity.

Another typical provision deals with seller and the shareholders indemnifying the buyer for any damages incurred by buyer for any breach of the agreement.

Obligations of Seller Pending Closing.

The agreement can contain agreements from the seller setting out certain actions that the seller must take before closing. These provisions typically provide that seller shall:

Operation of Assets.

Operate the business in its usual, regular, and ordinary manner and preserve its business organization;

Maintain Assets.

At its expense, maintain the assets in customary repair, order, and condition, reasonable wear and use excepted and not commit or permit any waste to the assets;

Compliance.

Duly comply with all governmental requirements;

Disposal of Assets.

Not sell, mortgage, lease, or dispose of the assets or any part thereof, except in the ordinary course of business;

Prohibition of Certain Contracts.

Maintenance of Insurance.

Maintain insurance in such amounts as is customary in the ownership and operation of the assets, but not less than that presently carried by it;

Notice of Adverse Change.

Give buyer written notice of any material adverse change in the assets or the business;

Prohibited Agreements.

Not enter into any agreement or instrument or take any action which would encumber or bind buyer or the assets after the closing, or which would be outside the normal scope of maintaining and operating the assets;

Prohibited Removals.

Not remove any property unless it is replaced with an item of at least equal value that is properly suited for the intended purpose;

Compliance with Agreement.

Take any and all actions required to be taken by seller;

Inspection of Assets.

Grant to buyer the right to inspect its records and to consult with its officers, employees, attorneys, and agents to determine the accuracy of the representations and the compliance with covenants.

Preservation of Business Organization.

Preserve its business organization intact; keep available to buyer its employees; and preserve the goodwill of seller's suppliers, customers and others having business relations with it;

Absence of Contractual Obligations.

Not become obligated on any contract or commitment or incur any liability beyond the closing date, or make any capital expenditures; and

Other Obligations of Seller Pending Closing.

Perform all of its obligations under all agreements relating to seller's business and assets; notify buyer in writing of any claims; legal, administrative, or other proceedings, suits, investigations, notices of violation, against that could adversely affect seller; not increase the compensation to any employee; and not negotiate any proposal concerning any acquisition of seller. Buyer's Conditions of Closing. Most agreements provide that before the buyer is obligated to close, all its conditions of closing must be satisfied. These conditions usually require that:

Seller's Performance.

The seller has timely complied with all of the terms of the agreement and have delivered a certificate to that effect.

Satisfaction of Terms.

All of the representations, warranties, and covenants of seller shall be true and correct at the date of closing, as set forth in a certificate to such effect.

Permits.

Buyer has obtained all necessary permits and approvals for the acquisition and operation of the business.

Audit and Subsequent Events Review.

The Seller has provided updated financial statements.

Seller's Stockholder Approval.

The seller’s stockholders have approved the agreement.

Obtaining of Funding.

Buyer has obtained the proceeds of a loan in a designated amount, on such terms and conditions as have been agreed to by the parties, if the deal is contingent on financing.

Closing.

The agreement will set out the date and location of the Closing and what must happen at the closing. It will normally provide what documents will be exchanged, such as share certificates, deeds, bills of sale, assignments, certificates concerning representations and warranties, updated operating statements; originals of documents, certified copies of resolutions of the seller’s board of directors and shareholders approving the transaction, a certificate that the warranties and representations of the seller are true as of the closing date, and that all the terms, covenants and conditions have been complied with and performed. The closing provision will usually provide for the delivery of other closing documents, such as a consulting agreement, covenant not to compete, certificate from seller that no material adverse change in the operations or financial condition has occurred, and seller has not suffered any material loss or damage to any of the assets.

Prorations.

In an asset sale, the agreement will also describe how expenses are prorated. Typically these are prorated as of the day of closing. The agreement will also set out how the expenses of closing are paid.

For additional information, please see the accompanying articles:  How Do You Buy a Company, Some General Considerations in Buying or Selling a Business, Asset Purchase, Stock Purchase, Mergers

This informational memorandum from the law offices of Thomas D. Solomon, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the corporate acquisition area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.