A Beginner’s Guide to Mergers & Acquisitions: Part 3 – The Purchase Agreement

Once you’ve had satisfactory discussions with a potential purchaser or vendor (and perhaps even signed a Letter of Intent), it is time to turn your attention to the Purchase Agreement. Typically, the purchaser’s solicitor will draft the Purchase Agreement and turn it to the vendor’s solicitor for review. Because the Purchase Agreement is the main document which sets out the terms and conditions for the contemplated transaction, a great deal of negotiation between the parties is often required before the Purchase Agreement can be finalized.

To some extent, the complexity of a Purchase Agreement will depend on the size of the transaction. A $50,000,000.00 transaction with Loblaws, for example, will likely yield a lengthier and much more comprehensive Purchase Agreement than a $50,000.00 transaction with the mom-and-pop operation down the street. What is more pertinent than even the scope of the transaction is the structure of the transaction. Different priorities and considerations come into play depending on whether you are the purchaser or vendor and depending on whether the transaction deals with the purchase and sale of assets or shares.

Share Purchase

In a share purchase transaction, the purchaser generally purchases all of the shares of a target corporation and steps into the shoes of the vendor. The share purchase transaction is generally preferred from a vendor’s perspective, as it enables vendors to cleanly dispose of their entire business as a going concern and usually entitles them to more favourable tax treatment. From a purchaser’s perspective, careful due diligence is required to ensure that the purchaser is fully aware of the contents of their acquisition, which includes the historic, present and future liabilities of the corporation. On the other hand, a purchaser may be motivated to push for a share purchase if they place a premium on the business and employment continuity of the corporation.

Asset Purchase

In an asset purchase transaction, the purchaser acquires specific target assets of a corporation, but the ownership of the corporation itself remains with the vendor. This type of transaction is often preferred by purchasers, as it enables them to select the precise business assets they wish to acquire while limiting their risk exposure by avoiding the undesired assets and liabilities of the corporation. Vendors may prefer not to engage in the sale of selected assets, as they could be left with unwanted liabilities and may be subject to more complex tax and accounting implications.

Key Provisions

Here is a brief overview of some common provisions you will find in Purchase Agreements for share and asset purchase transactions alike, together with some considerations from both the purchaser perspective and the vendor perspective:

1. Purchased Assets, Purchase Price and Payment Terms: You will want to be sure that all parties are on the same page with respect to the subject assets and the purchase price payable. The subject assets in a share purchase transaction will be relatively straightforward. In the context of an asset purchase transaction, if you are a vendor, you will want to ensure that any assets you wish to retain are specified as excluded assets. If you are a purchaser in an asset purchase transaction, you will want to ensure that any liabilities which are being assumed (for example, any post-closing performance obligations of the vendor under contracts being assumed) are clearly identified. If there are any post-closing price adjustments or payment obligations, you will want to be sure these adjustments and obligations are precisely defined and the payment mechanisms are set out as clearly as possible.
2. Representations and Warranties: The Representations and Warranties section sets out the assurances made by each party to the other about itself, the corporation and the assets of the corporation. A Beginner’s Guide to Mergers and Acquisitions, Part 4, will cover this topic in greater detail.  
3. Indemnity: Provided the survival period has not lapsed, if any Representation or Warranty made by a party is later found out to be false, or any obligation or covenant under the Purchase Agreement is breached, the aggrieved party may be entitled to bring a claim for indemnification against the party at fault. As a purchaser, you will want to ensure that you are properly indemnified against any claims against the vendor which originated prior to the acquisition of the business and, in an asset purchase, against any claims by third parties over the acquired assets.
4. Closing Deliverables: You will want to ensure that all closing deliverables of the vendor and purchaser are clearly set out, including but not limited to the core transaction documents, any necessary transfer documents, clearance certificates, consents and releases. Closing Deliverables are typically negotiated by the parties and will be tailored to the structure of the particular transaction.

Conclusion

To ensure you are maximizing the tax-planning strategies and legal protections available to you, it is important to speak to your accountants, lawyers and other advisors before deciding how to proceed with a proposal you have received or a proposed offer you intend to make. For strategic guidance on negotiating a Purchase Agreement, kindly contact our firm and stay tuned for additional posts in this M&A series.