UK Business Information / Documentation involved in the deal

DOCUMENTATION INVOLVED IN THE DEAL

Initial Documentation:

Engagement Letter – Formally records the relationship between the client and the professional adviser and the nature of the services to be provided. It is a legally binding document. 

Exclusivity Agreement – As part of the deal, there may or may not be an exclusivity agreement. It is for a fixed period of time and prevents the vendor from negotiating with other interested parties during the exclusivity period.

Confidentiality Agreement – This ensures that any information released as part of negotiations will be kept confidential and out of the public domain. It means information is accessible only to the vendor, acquirer and associated professional advisers and any other agreed parties.  

Letter of Intent / Heads of Agreement – This is an initial agreement summarising the headline terms of the deal. It is not, generally, a legally binding document as it will be subject, usually, to contract and due diligence but often forms the basis of the Sale and Purchase Agreement (“SPA”).

Acquisition process Documentation:  

Information Memorandum ­– This is prepared by the vendor (often aided by M&A advisers) and is the principal sales document for the company, outlining the business and commercial strategy, market information, financial information including historical financial performance and projections and growth opportunities. It should have sufficient information to allow an acquirer to make an informed decision on whether to pursue an acquisition.

Representations, Warranties and Indemnities – These are designed to protect the acquirer and can either be limited or extensive, depending on the nature of the deal and the level of comfort the acquirer requires. They are usually incorporated into the SPA. Warranties are typically given for 2-3 years with tax warranties lasting for anything up to 6 years.

Disclosure Letter – The Disclosure Letter is principally there to highlight any areas not covered by warranties and indemnities. It is there so that the acquirer cannot claim for something that was known by them prior to the completion of the deal.

Comfort (or Side) Letter – This is given by the vendor to the purchaser and simply aims to provide further comfort to the purchaser regarding specific issues. It is not usually, however, a legally binding document.

Due Diligence – The acquirer’s accountants and lawyers will typically carry out financial and legal due diligence respectively on the target prior to acquisition to check that what is said about the target company is accurate and that there are no hidden “deal breakers”. Due diligence reports will usually be produced and these reports can include commercial, environmental or alternative specialist DD topics.

Completion Documentation:

Sale and Purchase Agreement – This document is prepared by lawyers and is the principal sales agreement document, setting out all the terms of the deal in detail. It is a legally binding document. As well as warranties, representations and indemnities (including tax), the SPA can also include vendor protection clauses, setting out the maximum liability of the vendor. However these clauses are often highly restrictive as the purchaser is averse to imposing any limitation on the liability of the vendor.

The Sale and Purchase Agreement is a result of detailed sale negotiations. During negotiations the consideration for the deal and how that consideration is to be paid is agreed. For example, will all the consideration be paid immediately on completion of the deal or will it be deferred? It is often the case that the purchaser will impose contingent consideration/earn out elements that will link the overall consideration paid to certain performance targets being met post acquisition. Furthermore, management ratchet agreements and “good leaver – bad leaver” clauses will be agreed, if applicable, setting out the terms on which the management of the vendor may benefit (or otherwise) during an agreed period post acquisition and how management may be incentivised to achieve certain financial performance targets. These types of agreements are especially common in private equity backed MBOs.   

Financing Documentation:

Term Sheet – This forms the basis of any loan agreements reached with a lender. It is not generally a legally binding document however.

Loan Agreement – This is the principal legal agreement between a borrower and lender and sets out the commercial terms of the lending deal. Loan Agreements often contain financial covenants placing certain conditions on the lender that they must not breach. These covenants can vary and may impose an overall maximum lending limit or can be specified either in absolute terms or based on financial ratios (for example that the D/E must not exceed a certain percentage). Within the Loan Agreement, it is common and sometimes a requirement of the lender to have a “Guarantor”, an associate of the borrower, providing guarantees and indemnities in case of the borrower defaulting on the loan. This gives additional comfort to the lender. The Loan Agreement will also include various loan representations and warranties given by the borrower.