It’s this practical application of business law that has allowed us to understand the intricacies of business acquisition agreements. Different from standard contracts, business acquisitions include key features that should be understood before making any commitments.
Key Features of Business Acquisitions
In the majority of business acquisitions, the purchaser and seller may come to initial agreements without officially finalizing the closing. Since acquisitions require a certain amount of due diligence, certain pre and post-closing covenants will outline the allowed actions of both purchaser and seller.
The conditions applied to the seller are generally more extensive since any drastic actions on their part would change the dynamics of the acquisition.
The following are some of the more standard pre-closing covenants applied to the seller:
- Supportive assistance to buyer on due diligence efforts,
- Maintain confidentiality of acquisition details,
- Maintain legal business practices according to the law,
- Refrain from amending corporate documents,
- Not sell additional equity,
- Refrain from entering into negotiations with potential buyers, and
- Obtain required consents on details outside of closing agreements.
Overall, the pre-closing covenants applied to the seller are designed to not allow any drastic changes to the original impressions that piqued the buyers’ interest.
The buyer will also have a certain code to abide by before the official closing, including:
- Obtaining required consents on details outside of closing agreements,
- Apply best efforts to fulfill agreed upon conditions and expedite closing, and
- Maintain confidentiality on terms of sale.
Additionally, any details that both purchaser and seller deem as a priority can be included in the pre-closing covenants.
These stipulations are designed to protect both parties in working towards successful closing conditions.
Aside from the pre-closing terms, the closing itself is open to conditions that must be met before parties are required to confirm and close the acquisition.
In most cases, closing conditions are centered on deliverables from either party, supplied to the other, including:
- Board and stockholder consents with full authorizations of acquisition,
- Required regulatory approvals,
- Evidence that any liens have been legally released, and
- Considerations outlined in terms, including stock, cash or others.
As mentioned previously, acquisitions differ from standard buy/sell contracts, one example being the level of detail that can be included in post-closing obligations.
The post-closing behavior of both purchaser and seller are a great concern in finalized acquisitions. The purchaser may be concerned with any future competitive activities by the seller, while the seller may stipulate certain obligations to employees, property or general reputation of the company’s history.
From the legal standpoint, both sides will be required to file certain post-closing documentations, filings, SEC reportings and other requirements by the particular state or province in which the acquisition was finalized.
Lee Shome & Kennedy
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