The purchase agreement is the legal centerpiece of an acquisition. In it, both parties describe the method of payment and their guarantees to each other, supported by a variety of detailed exhibits.
In some cases, purchase agreements are heavily modified to meet the particular needs of the participants. However, a basic group of sections can be found in most purchase agreements, which are as follows:
- The merger section. Also known as the “business combination” section, it describes the basic structure of the transaction and the form of payment to be made.
- The letter of transmittal section. Describes the contents of the letter sent to all seller shareholders, explaining the purchase terms and their rights to submit their shares for payment, conversion, or to obtain appraisal rights.
- The representations and warranties section. Describes a number of conditions to which both parties state they are in compliance. Though it applies to both parties, the real impact is on the seller, who warrants that its actual operations and financial results are as represented to the buyer.
- The conduct of business section. Requires the seller to conduct its business prior to the closing date in the best interests of the buyer.
- The additional agreements section. Includes miscellaneous provisions, such as mutual agreements to news releases and covenants to assist all steps necessary to complete the transaction.
- The closing section. States when and where the closing will take place.
- The termination prior to closing section. Notes the conditions under which the parties can terminate the transaction prior to the closing.
- The supporting documents section. Itemizes the documents that each party must receive before the transaction can be completed.
- Exhibits and schedules. Includes a broad array of attachments, such as the seller’s articles of incorporation, fixed assets list, shareholder list, and liability and contract itemizations.
The two sections of the purchase agreement over which the most negotiation occurs are the merger section and the representations and warranties section. The first involves the price paid, while the second contains the seller’s assurances that the business being sold is as represented to the buyer (and thereby represents a significant liability to the seller).