sale and purchase agreement covenants covenants are contractual promises that require the parties in an SPA to take or refrain from taking specific actions before or after transaction closing and are typically made by the seller in favor of the buyer covenants.
May describe actions that a party is required to take affirmative covenants or actions of party must avoid negative governance.
The primary purpose of pre-closing covenants is to ensure that at closing the buyer finds the Target and substantially the same state as at signing of the espa.
The primary purpose of post-closing covenants is to restrict the seller from taking actions over a defined period of time that would harm the competitiveness or destroy value at the Target company.
Failure to comply with the pre-closing Covenant results in a breach of contract with remedies available to the aggrieved party ranging from termination of the SPA to seeking damages.
A failure to comply with a post-closing covenant also represents a breach of contract with remedies available to the aggrieved party limited to seeking damages only.
Examples of a pre-closing covenant could be to conclude an ongoing legal dispute.
While a post-closing covenant could be that the seller does not try to compete against the business. That was so Indemnification indemnification Provisions set out monetary remedies that protect a party to an SPA from losses associated with identified risks of a business.
These Provisions provide both the buyer and seller with certainty. Yes to their legal rights and responsibilities in the instance of a specific breach removing the uncertainty of pursuing a legal claim in court or arbitration.
Indemnification Provisions typically apply to breaches of Cellar reps and warranties or post-closing covenants related to the performance of the target company.
And provide monetary remedy limited to a maximum dollar amount to the buyer.
These Clauses are thus key drivers for allocating risk post-closing as the sellers liability for losses sustained by the business post-closing are typically Limited.
To ensure that the seller has sufficient funds to satisfy any Indemnity if needed the buyer typically pays part of the purchase price into an Indemnity escrow account at closing.
Conditions precedence CPS are specific events or states of Affairs that must be satisfied or waived for the transaction to proceed.
The SPA assigns responsibility to either the buyer or the seller to satisfy a CP on a best efforts basis.
If a CP is not met the other party can choose to walk away from the transaction or wave that right.
The main consideration regarding CPS for the buyer and seller is to ensure that the other party does not have too much flexibility to walk away from a transaction.
pre-closing covenants form the basis of CPS in an SPA for example a standard CP for mid-sized and larger transactions are antitrust and other regulatory approvals needed from relevant governmental agencies.
material adverse Change Mac a Mac Clause provides a buyer with the right to terminate the SPA in case of a material event that impairs the value of the target company before completion the specific definition of what constitutes a Mac at the Target company varies from transaction to transaction.
And is formalized in the definitions section of an SPA.
Buyers seek to define a Mac and Broad terms to maximize optionality while the seller seeks narrow terms to limit. The buyer's ability to terminate the SPA.
An example of a Mac Clause is a material fall in revenue or profitability of the target before closing.
termination rights termination Provisions describe the circumstances that allow a party to terminate the acquisition agreement prior to closing some of the most common circumstances are Mutual written consent of both parties a material breach of the Reps and warranties failure to perform a covenant a legal impediment of the failure to have met all the closing conditions by the long stop date the SPA sometimes includes Provisions that impose Financial penalties on the party terminating the agreement referred to as breakup or break fees in the case of termination by the cellar.
Or reverse breakup fees in the case of termination by the buyer.
These fees are intended to cover the transaction costs of the party not terminating the transaction.
There are also legal and accounting sections or appendices in the SPA which will outline aspects such as the payment mechanism completion steps.
Governing law and organizational charts of which entities are included in the deal.
