The Closing Memorandum

The purchase agreement is a collection of terms and conditions, and so does not provide a narrative description of the deal, which can be useful after the deal has closed, in case the parties argue over the intent behind certain aspects of the transaction.  To avoid this problem, write a closing memorandum immediately after the purchase agreement has been finalized, and include it in the front of the purchase agreement binder.  The closing memorandum should describe the background and substance of the transaction, and any unusual issues that arose.  This is written by the buyer’s attorneys, and so views the transaction from the buyer’s perspective.  A synopsis of a closing memorandum follows:

This memorandum summarizes information relating to the closing of the acquisition of Seller by Buyer.

  1. Background:  An earlier version of this transaction was planned for closing on [date].  However, the majority holder of the Seller’s convertible preferred stock, Mr. Smith, objected to the proposed conversion ratio for his stock into that of the Buyer’s common stock.  The parties later negotiated a revised conversion ratio, resulting in a term sheet dated ____, which provided a basis for an agreement with the Buyer.  The term sheet is an attachment to this memorandum, although it was not technically a closing document.  Given the difficulty of dealing with Mr. Smith, the term sheet may provide a useful point of reference in the event of future problems.
  2. Timing of Closing:  The final closing documents were executed on March __, ____ while the articles of merger were actually recorded a day later.  Under our closing provisions, we will take the position that all of the merger transactions occurred simultaneously.  Documents were exchanged by fax and overnight delivery service.
  3. Structure:  The transaction was structured as a reverse triangular merger in order to achieve tax deferred status for the Seller.  Accordingly, 100% of the payment to the Seller was in the form of the Buyer’s stock.  This was accompanied by a one-year lockup agreement.  The parties agreed that a registration rights agreement was not needed, since the seller’s shareholders could register their stock under the SEC’s Rule 144.  The conversion ratio of Seller stock to Buyer stock was set at 0.5532941.  Given the high level of the Buyer’s stock price fluctuation at the time of the transaction, the parties also agreed to a true-up transaction, whereby the Buyer would issue additional shares to the Seller’s shareholders after six months, if the Buyer’s stock price had declined by more than 10 percent.
  4. Options:  A complicating factor was the existence of a large number of Seller options.  The parties agreed to convert the Seller options into an equivalent number of buyer options, using a conversion ratio of 2:1 (Seller options to Buyer options).  Thus, one Buyer option was issued in exchange for the cancellation of two Seller options.  The exercise price for each converted option was set at the current fair market value of the Buyer’s stock, which was $4.50.  Because the new options were issued at fair market value, they should qualify as incentive stock options.
  5. Due Diligence:  The Buyer’s due diligence team reviewed the Seller’s materials on-site during [date range].  One problem area was the need for a bank consent on the Buyer’s line of credit, which was paid off following the transaction.
  6. Employment Arrangements:  All Seller employees were required to sign an offer letter from the Buyer.  Principal employees of the Seller were required to enter a non-competition and confidentiality agreement with the Buyer, while other Seller employees only signed a confidentiality agreement.
  7. Indemnification:  The indemnification provisions in the agreement are somewhat weak and were the subject of extended negotiations on both sides.  There were arguments about escrowing some of the stock, which were rejected.  All Seller stockholders indemnified the Buyer for fraud.