Sale & Purchase Agreements

Part One

SPA Structure & Interpretation Issues

• The skeleton structure of the sale and purchase agreements (SPA): overview

• Interpretation of contracts UK & common law vs Europe (civil law)

Case Review: Approach in England: Arnold v Britton

Case Review: Approach in Civil jurisdictions: the 'Haviltex' principles in the Lundiform judgement (Holland)

The spectrum of “endeavours/efforts” – Best vs Reasonable other variants

Dispute Resolution

Choice of law and jurisdiction clause

Title to the (sale) of the shares

Full vs Limited title guarantee - ramifications

• UK/ Common law approach

• Position in civil law (e.g. Holland, Germany, France)

Calculating the Price: The Equity Bridge (Cash-Free /Debt-Free)

• Overview of the “Equity Bridge”

• The cash-free, debt-free approach (the equity bridge M&A)

• What does ‘cash-free/ debt-free’ mean in practice? Defining ‘Cash’ – review of contentious issues (e.g. trapped cash)

• Defining “Debt” – review of contentious issues (e.g. Leases, deferred revenue, capex)

Deriving the working capital Target or PEG

• What is “working capital”

• Setting the working capital Target or PEG

• What is the ‘right’ Target? – normalised, average, core, other? (buyer vs seller perspectives)

Practical tips on how to minimise disputes in the SPA re definitions of Cash, Debt and Working Capital

Other adjustments to the price – warranties & indemnity claims

Completion Accounts Approach

• Key milestones in the "Completion Accounts" process

• What comprises the Completion Accounts No IFRS or GAAP definition of Completion Accounts

• What should the Completion Accounts comprise

What are the key issues in using Completion Accounts

• Form & content of the Completion Accounts

• The accounting conventions and definitions

• Using a “hierarchy” of accounts to clarify matters (sellers vs buyers’ approach)

• IFRS/GAAP 'override'

• Who is responsible for compiling the Completion Accounts

• Issues in split Exchange/Signing and Completion/Financial close

• Dealing with delays in setting the Completion Accounts

Main areas of dispute & how to avoid them

• Using the “Wrong” hierarchy of accounts

• Poor/inadequate definitions of cash, debt and working capital

• Ambiguous accounting policies

• Poor access for a seller post close

Tips on how to minimise/ eliminate potential for disputes

Case Review: Mehiel (Delaware)

Case Review: Shafi v Rutherford

Locked Box Approach

• Review the Locked Box timeline and key milestones

• Rationale of Locked Box – where and why it evolved

• The ‘theoretical’ approach to Locked Box

• Buyer risks & how to mitigate Leakage in the locked box period

• Deteriorating trade during the locked box period

• Adverse events in the locked box period

• Composition of the Locked Box balance sheet

Dealing with the ‘Leakage” issue

• Agree Permitted Leakage

• Agree which items of Permitted Leakage will impact the price & which ones will not

• “typical” items (ordinary course of business, payroll)

• Typical areas of disagreement – transactions costs, capex

Which 'Accounts" are used - management, audited other?

• The accounts are stale

• What policies were used to compile the Locked Box Accounts

• Practical solutions

Risks for the Seller (the value accrual)

• Original approach to value accrual

• Other market approaches – use of “ticker”

• How is “ticker” derived

Comparing Completion Accounts vs Locked box from buyer and seller perspectives

• Pros and cons of each approach

• Key considerations in deciding which approach is best

Part Two

Deals Based on Net Asset Value (NAV)

• Which sectors use NAV

• Potential problem areas & risk mitigants Valuation of illiquid or complex financial instruments

• Overstated assets

• Understated liabilities

• Off-balance sheet items

• Intangible valuation

• Inventory - what is 'cost' and WIP?

• Potential problem areas with Receivables

• Long-term contracts, esp WIP

Representations & Misrepresentations

• Representations vs warranties vs indemnities What are ‘representations” & how do they differ from warranties

• Representations vs warranties – key differences

Dangers of ‘giving both Reps and Warranties

Representations & remedies under English / common law

Representations & remedies in Civil law

Excluding liability for (mis)representations –

• Use of “Entire Agreement” clauses – what do they cover What about 'implied' terms

Role of ‘non-reliance’ statement

How effective is the “exclusive remedies” carve-out

Problems with “Entire Agreement” clauses in civil jurisdictions

• How effective are they

• How can parties mitigate this risk

Duty to Negotiate in Good Faith (civil law vs English law)

• Where, why and how it matters

Warranties

• Warranties in the share purchase agreement Dual role of warranties

Warranties and interaction with the Disclosure process

Limitations

• Duty to mitigate losses (English & civil law)

• Remoteness exclusion

• Indirect or consequential damages – when are they recoverable?

• Best practices in drafting re indirect damages (buyer v seller)

• Civil law approach to mitigation, remoteness and indirect loss Position varies in Europe

Main warranties (what to look for)

• The Accounts

• Assets

• Inventory

• Material Contracts

• ESG compliance

• Compliance with all laws (sweeper clause) Very broad areas of coverage (ESG, Employment/Labour laws, Data protection, Bribery/corruption, Tax, H&S)

• Drafting considerations (materiality, knowledge & time qualifiers, jurisdictional scope)

Other warranties

Interaction of the Tax Covenant with the Tax Warranties (UK)

Calculating the measure for damages in Warranty claims

• Difference in the market value of the shares with and without the breach

• What is Market Value

Case Review: Review Cardamon Case

• UK vs Civil law approach

• The difference between different types of damages

Case Review: ADT Case

Who provides the warranties in share purchase agreements – problem areas & how to mitigate them

• Issues with multiple sellers, limits on liability

• Sales by "Shell" companies

• Private equity issues - managers (not owners)

Disclosure

• General vs specific disclosure

• The disclosure “standard” required to exclude liability

• The disclosure “standard” impact post Infiniteland case

• Risks in not specifying a disclosure standard q.v. Levison

• Current market practice “Fair or Fairly disclosed”

• Position in civil law systems (varies) – drafting tips

• How can the buyer react to “aggressive” disclosure

• Impact of a failure to disclose – civil and criminal aspects

Indemnities

• Purpose of & rationale for Indemnities

• Indemnification as the exclusive remedy (carve-outs)

• Main areas of Indemnity coverage Environmental

• Product liability

• Litigation (esp. IPR)

Potential problem areas with indemnities

Case Review: Padre Island Case

Case Review: "Eurus" Case

Position in civil law (varies)

• Indemnities not considered a distinct legal concept separate from general damages

• Indemnities are often treated as a form of contractual damages or guarantee

Limitations on Liability Under the SPA

• Financial caps on Sellers’ liability - is there a ‘market’ standard? Overall cap on liability – does it cover all claims

• differential caps for differing types of claims

• Dealing with deferred consideration

• Proportional limits for each seller (contribution agreements)

• De minimis caps for individual claims

• What happens if these exceed a high level?

• Tipping Basket vs Deductible Basket: what’s the market?

Time limits (what do they apply to)

• Notice periods for bringing claims

• Differing time periods for differing types of claims (e.g. tax, environment, capacity/title)

Onerous notification requirements

• Truncated time limits post ‘ becoming aware ’

• Bringing claims (what does ‘served’ mean?)

Buyer’s knowledge

• Matters disclosed in the ‘disclosure bundle’ / data room

• Buyer’s “knowledge” – coverage (actual, constructive imputed?)

Case Review: “Eurocopy vs Infiniteland Cases

Sellers’ Knowledge (‘Awareness’ carve-outs)

• Rationale for carve-out

• What constitutes the seller’s “knowledge” – actual vs constructive vs imputed

• What is the seller’s optimum position

• How should buyers respond

• Sellers ‘deemed’ knowledge

• Seller obliged to make due and careful enquiry

Case Review: William Sindall case

Case Review: Triumph Controls case

• Other limits

• Provisions in the ‘Accounts’ - Case Review: Brim Holdings Case (Delaware)

• Recovery from other sources (insurance/ Third parties)

• Contingent liabilities

• Changes in Law

• Changes in Accounting policies post completion

• Acts by the buyer (post completion) or acts on the buyer’s instructions

• Disregard post-Completion actions (by the buyer)

Case Review: Teoco case

Case Review: Zaygo case

Retentions and Escrow accounts

• Who gets the interest?

• What happens to the Retention/Escrow if a claim is pending at the termination of the Retention/Escrow period

Warranty insurance –

• Buyer vs seller policies – key differences

• What can be covered and what is typically excluded

• Where and why it is useful of matters insured

• "Typical" price and terms

Earn-outs – A Tool for Value Arbitrage

• Anatomy of an earn-out Duration Major considerations in deciding the duration

• Examples across different sectors

Choosing the benchmark or metric across different sectors

Frequency of payouts

Clawbacks?

Structuring the consideration – what are the options

Issues for buyers to consider

Issues for sellers to consider

Key areas for negotiation & dispute

Dealing with the early termination of the earn-out

Handling vendors who leave ”early”

Main Issues to Consider are Split Exchange & Completion

• Right to Termination clause Conditions to Completion

• Matters between Exchange & Completion

• Role of “material”

• Impact on Warranties in share purchase agreements – repeat all, some or none at Completion?

MAC/MAE clauses

• What is a MAC (Material Adverse Change)

• Review WPP - Tempus

• Is there a ‘market’ approach

• Issues for the seller

• Issues for the buyer

Please be advised that there is some content overlap between this course and our 'Advanced Negotiation Issues in M&A' and 'Advanced Financial Issues in Acquisition Agreements' courses. If you are considering enrolling in one or more of these courses, we recommend reviewing the course outlines and videos carefully to determine the most suitable combination for your needs.

Training Objectives

Upon completion of this SPA training, participants will be able to:

• Analyse and structure complex SPA transactions, identifying key risk allocation mechanisms across both common law and civil law jurisdictions

• Compare and contrast the approaches to contract interpretation in UK common law and civil law systems, particularly focusing on the 'Haviltex' principles

• Evaluate and negotiate critical clauses in SPA negotiations on representations and warranties from both common law and civil law perspectives, understanding their differing legal implications and enforcement mechanisms across jurisdictions

• Analyse the application of indemnities in M&A transactions, including: Their function and broad application in common law systems

• Their varied treatment in civil law jurisdictions (where they are generally not recognised as a distinct legal concept

• Thirdly, identify strategies for drafting effective indemnity clauses that are enforceable across different legal systems

Assess the implications of using Completion Accounts versus Locked Box mechanisms in different jurisdictions

Develop effective strategies for disclosure and navigate the varying standards required in the UK and civil law countries

Analyse the treatment of indirect and consequential damages across different legal systems and draft appropriate limitation clauses

Design comprehensive warranties that address emerging areas such as ESG compliance, data protection, and cybersecurity

Craft robust dispute resolution clauses that account for jurisdictional differences

Evaluate the use and effectiveness of entire agreement clauses in both common law and civil law contexts

Assess the impact of good faith obligations in contract negotiation and performance, particularly in civil law jurisdictions

Develop strategies for successful earn-out structures that are enforceable across different legal systems

Analyse the approach to MAC/MAE clauses in different jurisdictions and craft appropriate provisions for cross-border deals

Evaluate the use and limitations of warranty and indemnity insurance in international transactions

This course will provide a comparative perspective, enabling participants to navigate the complexities of SPAs in both common law and civil law systems, thereby enhancing their ability to structure and negotiate cross-border M&A transactions effectively.

Training Course Summary

Sale and Purchase agreements lie at the heart of any private acquisition. This course focuses on the key areas of the SPA. In Completion Accounts, the standard definitions of cash, debt, and working capital adopt a very broad-brush approach, paving the way for disputes post-completion. Where a Locked Box is used, the parties face different issues, particularly the definitions of leakage and how to draft sale and purchase agreements, a value accrual (of cash or profits, which is increasingly used).

Warranty claims present another area of potential difficulty, particularly how and when the measure of damages is calculated, and the market is considering ways to enhance the buyer’s recovery for damages. In the UK, Infiniteland Case Review has broken new ground in terms of the disclosure standard and what constitutes the buyer’s ‘knowledge’. This SPA course also considers the areas where civil law differs in its approach; for example, the interpretation and the approach to damages for warranties in share purchase agreements and the approach to disclosure.

Split Exchange and Completion is another potentially controversial area regarding which warranties need repeating and how that dovetails with disclosure and the MAC.

Reference is made during the course to recent or relevant leading Case Reviews. Please note that this Sales and Purchase Agreements course covers material that is also covered in our Advanced Negotiation Issues in M&A course.