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Purchase Agreement Essentials – Boilerplate Provisions Terminology

Learn the Lingo of M&A Agreement Provisions

The purchase agreement will contain a section that might be titled “General” or “Miscellaneous” or something similar. It may also include a section containing certain definitions for terms used throughout the Purchase Agreement. These purchase agreement provisions are sometimes called “boilerplate provisions.” However, they can be just as critical to the parties as the sections described above. These provisions typically help answer the following questions:

What is Included in the Purchase Agreement?

These provisions specifically tell each party how certain terms in the contract are amended or enforced, so that the terms of the agreement are clearly followed and mutually agreed upon.

  • Amendments – Amendment provisions determine how the parties can amend the Purchase Agreement in the future. Amendments are typically presented in an additional contract signed by all parties.  usually with another contract signed by all parties).
  • Waivers – This provision states that a party’s action or inaction will not be deemed to be a waiver of a condition or another party’s breach, unless the waiving party confirms in writing that it is waiving the condition or breach. This is to help avoid inadvertent waivers.
  • Severability and Reformation – If a judge were to rule that one or more provisions of the Purchase Agreement were not enforceable (for example, the non-compete was too broad), then these provisions will allow the enforceable provisions of the purchase agreement to remain and, if possible, to reform the unenforceable provisions to make them enforceable (e.g., reducing the scope of the non-compete).
  • Counterparts – This specifies that each party can sign a separate copy, and all of the separate signature pages can be attached together to form one agreement. This allows each copy to be treated as an original copy.

Who Has Rights Under the Purchase Agreement?

Purchase agreements use boilerplate provisions to specify who has obligations to the contract or the ability to enforce the terms of the contract. The verbiage will also determine what happens contractually if a party assigns its rights to a new party.

Below are three common provisions:

  • Assignment and Delegation – Will either of the parties be allowed to assign their rights and delegate their obligations to a third party? Boilerplate provisions may specify if the entire contract can be assigned to a third party or just individual rights within the contract.
  • Successors and Assigns – This clause relates to the assignment and delegation provision. If a party assigns the agreement to a third party through a permitted assignment, then that third party will be deemed to be a successor and can enforce its rights under the agreement against the other party.
  • Third-Party Beneficiaries – This provision will usually provide that no one other than the parties to the agreement (or their permitted assignees) will be entitled to enforce the agreement. However, if a party will be indemnifying the other party’s “officers, directors, employees,” etc., then those might be considered third-party beneficiaries.

How Do Parties Communicate After Signing the Purchase Agreement?

When parties need to communicate notices about issues relating to the contract, they specify the means of communication through a notice provision. Notice  provisions list the address and contact information for the parties and their attorneys. They also list the methods in which notices may be delivered (e.g., overnight courier, hand-delivery, registered mail, etc.).

How Do Parties Deal with Disputes?

When there is a contractual disagreement, how and where will disputes be remedied? In this case, a purchase agreement will include the following provisions:

  • Governing Law – This provides which state’s law will govern the interpretation of the purchase agreement.
  • Forum Selection – This clause indicates the jurisdiction and venue for where lawsuits may be filed. This might require mediation or arbitration in lieu of a bench trial. It may include a waiver of a jury trial, which is often preferred in complex commercial transactions.
  • Cumulative vs. Exclusive Remedies – The Buyer may not want to limit its remedies in the event there is an issue with the purchased equity or assets. The Seller, on the other hand, will want to limit its exposure as much as possible. Often, the parties will agree that the indemnification section, along with the right to seek injunctive relief and specific performance, will be the parties’ exclusive remedies. Although, if the Buyer will be financing a portion of the purchase price through a promissory note or contingent consideration, then it will also want the right to set-off future payments against amounts the Seller owes as a result of a breach of the purchase agreement.
  • Payment of Attorneys’ Fees – The purchase agreement might also provide that the prevailing party in a lawsuit will be entitled to recover its attorneys’ fees and costs from the non-prevailing party.

Boilerplate Provisions Help Parties Interpret the Purchase Agreement

Clauses that guide the interpretation of a purchase agreement can be as small as a clarification of a party’s gender, and it can be as large as defining a threshold for acceptable events that may change the condition of the business.

  • Section Headings – This clause will make it clear that the section headings are for convenience only and will not be interpreted as having substantive meaning.
  • Usage – There may be provisions that provide some usage guidance to help in the interpretation of the agreement, such as plural vs singular beneficiaries, gender of the party or parties and other clarifications.
  • Defined Terms – The defined terms can be a critical section of the purchase agreement, and a number of the defined terms may be subject to much negotiation between the parties. These include definitions for the target company’s “business,” “indebtedness,” the Seller’s “knowledge,” what constitutes a “material adverse effect” or “material adverse event” (i.e., a limit of accepted occurrences that can negatively affect a business) and the “permitted liens” that the Buyer will assume.

So, while these boilerplate provisions may seem like fine print in a “General” or “Miscellaneous” section of a purchase agreement, it is clear that the implications of their language are much more impactful on an M&A transaction.

[Editor’s Note: If you want to read more about how to sell or otherwise exit a business, be sure to read “Business Transition and Exit Planning: Welcome to the Jungle!” It will lead you step-by-step through what you need to know.

To learn more about this and related topics, you may want to attend the following webinars: The M&A Process: Understanding the Lifecycle of a Deal & Basic Deal Documents, Key & Common Negotiated Provisions- Part 1 and Key & Common Negotiated Provisions- Part 2. This is an updated version of an article originally published on April 2, 2015.]

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