If there will be a delay between the signing of the Purchase Agreement and the closing requirements of the Transaction, then the Purchase Agreement will include certain pre-closing covenants. Most of these will be made by the Seller in favor of the Buyer and are intended, generally, to give assurances to the Buyer that there will be no surprises during the interim period or at closing. The Buyer may also give the Seller pre-closing covenants. These are usually limited to the Buyer agreeing to obtain all applicable governmental and third party approvals and consents and perhaps to secure financing to fund the purchase price.
Among the covenants from the Seller are that it will continue to operate the business in the ordinary course and will not take any major actions without the prior consent of the Buyer. Also, the Seller promises to give the Buyer notice if there are any events that might cause a material adverse effect to the Company or its business or assets. Additionally, the Seller will agree to provide the Buyer reasonable access to Seller’s premises, personnel and assets to allow the Buyer to continue its due diligence. The Buyer will also want the Seller to covenant that it will work to obtain all required governmental and third party approvals and consents. Depending on the amount of time between the signing and closing, the Buyer may also require the Seller to provide monthly financial statements. Finally, the Seller may agree to a “no shop” clause where Seller agrees not to enter into any competing negotiations with another buyer.
Both parties will generally make a number of post-closing covenants. These include restrictive covenants made by the Seller and Owners in favor of the Buyer regarding confidential information of the Target, non-competition and non-solicitation of employees and customers for a limited number of years (usually between two and five) and non-disparagement. In an asset deal, the Buyer may agree to offer employment to each of the Target’s employees for at least the same compensation and benefits being paid by the Seller. The Buyer may require the Seller to pay accrued and unpaid compensation and benefits to employees prior to Closing, unless those amounts were included in the balance sheet calculations and already reflected in the purchase price adjustments.
The parties will also agree on how taxes for the Target will be filed and paid. If the Transaction is an asset purchase, they will also agree on how the assets will be allocated for tax purposes. The Seller will generally prefer an allocation that emphasizes capital gain over ordinary income, while the Buyer will generally prefer an allocation that allows it to maximize depreciation and amortization of the assets it is acquiring. The parties will also agree how to handle any applicable transfer taxes and will generally waive compliance with any applicable bulk sales laws (although the Buyer may still want to make any requisite filings with state and local authorities). In an asset deal, the Seller will generally be required to make filings to change the Target’s name with its state of formation and wherever it may be qualified to do business, so that the Buyer entity can use the same name after closing. Finally, the parties may agree that any press releases or other public statements will need to be mutually acceptable to both parties.
The closing of the Transaction may either be concurrent with the execution of the Purchase Agreement (a “sign and close”), or it may occur after a period of time, typically after certain negotiated conditions are satisfied. These closing conditions generally include requirements that: (i) each party’s representations and warranties remain accurate as of the closing date; (ii) neither party is in breach of any of its obligations under the Purchase Agreement; (iii) all required governmental and third party consents have been obtained; (iv) there are no legal proceedings affecting the Target or any of the parties’ ability to close; (v) the Buyer is satisfied with its due diligence; (vi) the Buyer has obtained sufficient financing; and (vi) all ancillary agreements and closing deliveries have been delivered. Regardless of whether the Transaction is an asset or a stock deal, the ancillary agreements and closing deliveries will usually include:
If the Transaction is an asset deal, there will be a number of additional deliveries and instruments that are required to transfer the assets:
If the Transaction is a stock deal, deliveries will include:
Rob is a member of Levenfeld Pearlstein, LLC’s Corporate & Securities Group and has been with the firm since its inception. Rob helps clients structure, negotiate and close complex business transactions. He also serves as outside general counsel for a number of businesses in the middle market across a variety of industries, including: technology, cloud…
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