Termination and Effect of Termination
What is the Termination and Effect of Termination section? These two clauses describe when either party (or both) can terminate the Agreement without breaching it and the effect termination would have on their respective covenants and obligations contained in the Agreement.
The Middle Ground: The Termination section allows for termination of the Agreement based on: (1) mutual consent of the parties; (2) only one party being in breach of the Agreement, if the other party sends written notice of the breach and it is not cured within ten days; (3) if one party will not be able to fulfill their Conditions to Closing, and such failure is not the fault of the other party; or (4) the existence or issuance of a Law or Governmental Order prohibiting the transaction. The Effect of Termination section makes clear that, once termination occurs, the Agreement is void and no party is liable to the other except that the Termination and Miscellaneous Articles survive termination, as does the Confidentiality provision, and the parties remain on the hook for any willful violation of any provision of the Agreement.
Purpose: In conjunction with other clauses throughout the Agreement, the Termination provision provides both parties with the opportunity to walk away from the deal without penalty under certain circumstances. By making it easier to walk away, the provision encourages the parties to be on their best behavior. The result is that the transaction is actually more likely to be completed.
Without the Effect of Termination clause, the prospect of abandoning the transaction prior to the Closing would be a difficult decision given concerns regarding confidentiality and the information provided to the other side during due diligence. Furthermore, if claims for willful breach of the Agreement died along with the Agreement, the mere proposal of mutual termination would be grounds for suspicion of bad behavior, and termination by mutual consent would likely only occur when the relationship between the parties is broken beyond repair.
In other words, the termination provisions set the bar for walking away from the transaction at just the right height; the bar is not so high that the parties are forced into completing a bad deal, and not so low that committing significant time and money to the due diligence process simply isn’t worth the risk of the other party walking away on a whim.
Buyer Preference: If there are any specific facts or circumstances that are not encompassed by the middle ground term and would make the Buyer want to terminate the Agreement, the Buyer can include them as grounds for termination. Also, if the Buyer must obtain financing for the transaction and there is no “financing out” in the Agreement, the Buyer may want to include a provision allowing it to pay a reasonable “reverse break-up fee” to walk away from the transaction. If a reverse break-up fee is included, the Buyer may seek to include a traditional break-up fee to be paid by the Seller if it is the one who walks away from the deal. The Buyer may also want to expand the claims that would survive termination to include any breaches of the Agreement whatsoever and any fraud or intentional misrepresentations.
Seller Preference: Because the Seller’s representations and warranties are so much more expansive than those of the Buyer, the Seller does not want to extend the Effect of Termination provision to cover any breach of the Agreement. However, it does want to be able to recover for any willful breaches by the Buyer, so the Seller will typically be content with the grounds for termination provided by the middle ground term. Additionally, while the Buyer prefers a financing out and, in its absence, a nominal reverse break-up fee, the Seller prefers no financing out and a significant reverse break-up fee to compensate it for the time and expense associated with the due diligence process. However, if the Seller insists on a reverse break-up fee it can expect the Buyer to demand a similar fee to be applied if the Seller refuses to close the transaction.
Differences in a Stock Sale Transaction Structure: None.
Certain Limitations
What is the Certain Limitations section? If no limits are set on the right to indemnification it is a tool that can be abused by the parties, especially in situations where there is not a working relationship between the Buyer and Seller after the Closing. Here, the parties implement boundaries around indemnification to avoid the problems caused by abuse of indemnification rights.
The Middle Ground: This provision limits the indemnification claims that can be brought by setting “Caps” and “Baskets” around the right to indemnification. A Basket sets a minimum amount of damages that must be incurred before an indemnification claim can be brought, and it is typically limited to claims based on breaches of the representations and warranties in the Agreement. Typically, the Basket sets a minimum threshold for making a claim and once that threshold is reached the injured party is eligible to receive 100% of the damages it suffered. A Cap may also be included, and it serves as an upper limit on the amount that will be paid in the event of a claim or the aggregate amount that will be paid out for all indemnification claims of a party.
Purpose: The purpose of a Basket is to prevent one party from trying to recapture some of the value given up in the deal by making numerous “nickel and dime” claims against the other side. In other words, it prevents the parties from abusing their indemnification rights. By doing so, the provision protects the parties’ expectations regarding their risk exposure and the value received from the transaction. Caps are also used as a tool to manage overall risk exposure, and they are especially important in situations where there is a reasonable potential for one of the parties to make a large indemnification claim. In addition to their risk management function, Caps and Baskets also increase the chances that the transaction will be completed by encouraging the parties to provide expansive indemnification rights since they know those rights are not subject to abuse and will not create unlimited liability.
Buyer Preference: The Buyer is the party most likely to bring an indemnification claim, which has a number of implications for how it wants to structure this provision. At the most basic level, it wants the Basket to be small (to allow for the payment of moderate claims) and the Cap to either be large or nonexistent. It may also want to tailor the Cap to its specific concerns; if the potential Losses based on one representation are much greater than for the other representations, the Buyer may be better off negotiating for a significantly higher Cap (or no Cap at all) in that area and a smaller Cap in the other areas than for a moderate Cap applicable to every representation. It certainly wants no Cap regarding any liabilities kept by the Seller, as it has no control over those liabilities. It also wants to carve out certain fundamental representations from the Basket and Cap, such as the Organization and Authority representations.
The Buyer wants to resist additional limitations on indemnification payouts, such as a Duty to Mitigate or a requirement to subtract from such payouts any tax or insurance amounts. However, when a Basket is included in the Agreement the Buyer is more likely to seek a “materiality scrape,” which is a provision that removes any materiality qualifiers from the representations and warranties for indemnification purposes. When a materiality scrape is used, the materiality qualifiers used in the representations and warranties still apply to limit what the Seller must disclose in the Agreement, but they do not apply for purposes of determining whether an indemnification claim can be brought and what the damages for the claim will be. The reasoning underlying the use of a materiality scrape in this context is that the Basket already screens out any non-material claims, so including an additional materiality requirement will likely complicate the indemnification process and lead to needless disputes.
Seller Preference: Since the Seller is going to be paying out an indemnification claim in most cases, it will typically seek a high Basket and a low Cap. In addition to this basic position, the Seller will also prefer a “deductible” Basket rather than a “dollar one” or “tipping” Basket. The distinguishing factor about deductible Baskets is that the Basket amount is more than just a threshold, it is also the amount deducted from the total damages to determine the required payment. To put it another way, with a deductible Basket the side making the claim is only entitled to the amount of damages exceeding the Basket amount. In lieu of a deductible Basket, the parties could settle on a hybrid approach, in which the amount deducted from the payout is less than the threshold amount but more than zero. Another beneficial option for the Seller is to include one or more “mini-baskets” that require damages from a particular representation to reach a certain amount before they are counted toward the overall Basket.
Over and above changing how the Basket functions, the Seller could also try to have the Basket apply to all representations, warranties, covenants, and obligations contained in the Agreement, not just the selected representations and warranties. Similarly, the Seller can try to negotiate for the Cap to extend to all indemnification claims. If unsuccessful on that front, the Seller can argue that some Cap (e.g. the Purchase Price amount) should be placed on payments for breach of fundamental representations and warranties, as well as the remaining covenants and obligations in the Agreement, even if that Cap is higher than the Cap applied to the non-fundamental representations and warranties.
Furthermore, the Seller can avoid a “double recovery” situation by including language reducing any indemnification payments by the amount of any insurance money paid to the Buyer for the claim, and it can make the language more effective by requiring the Buyer to use its reasonable best efforts to pursue any viable insurance claim. Another way to avoid double recovery is to reduce the amount of any indemnification claims that result in a tax benefit to the Buyer by the amount of the tax benefit. For instance, if the Seller breaches a representation and the Loss from that breach causes the Business to sustain a net operating loss (NOL) for the year, the amount of the indemnification claim would be reduced by the tax value of the NOL. One final way to limit double recovery applies in situations where the Agreement allows for a Purchase Price Adjustment, and the goal is to ensure that any such adjustment is subtracted from the Losses payable based on an indemnification claim. The Seller could also seek to impose on the Buyer a “Duty to Mitigate,” meaning the indemnified party would be required to try to reduce its damages from a breach by taking some sort of corrective action.
Finally, if the Agreement contains an escrow provision, the Seller can negotiate for its money held in escrow to be paid out to satisfy a claim for indemnification before it is required to pay money out of its own pocket to do so.
Differences in a Stock Sale Transaction Structure: None.
Conditions to Obligations of Seller
What are the Conditions to Obligations of Seller? This provision contains a comprehensive list of requirements that must be completed by the Buyer or waived by the Seller in order for the Seller to be obligated to complete the purchase. If the Buyer fails to fulfill any condition included in the list, the Seller can walk away from the deal without penalty.
The Middle Ground: The main difference between this provision and the Conditions to Obligations of Buyer is that there aren’t as many conditions to the Seller’s obligations since its paramount concern in most instances is whether the Buyer can pay the Closing payment. With that said, the typical list of requirements in this provision includes conditions to be completed at (or before) Closing such as:
The Buyer’s representations and warranties are true and correct in all (material) respects at the time of signing the Agreement and at the Closing;
The Buyer has complied with all terms of the Agreement and the Transaction Documents in all material respects;
No Governmental Authority has issued an order or injunction restraining the transaction;
The Buyer has obtained all third-party consents listed in its Disclosure Schedules, if applicable to the transaction;
The Buyer has delivered signed copies of the Transaction Documents;
The Buyer has transferred the Closing payment by wire transfer and the amount to be held in escrow to the Escrow Agent, if applicable;
The Seller has received a signed copy of the Buyer Closing Certificate;
The Seller has received a signed copy of the Buyer’s Secretary’s Certificate; and
The Buyer has provided other documents and instruments reasonably requested by the Seller and that are reasonably necessary to consummate the transaction.
Purpose: If the Buyer does not meet any one of the conditions listed in this provision, the transaction could fall apart instantly. This provision places the risk of that happening on the Buyer. It’s important to note here that the risk allocation scheme created by this provision and the previous one is not unfair to either side; both are afforded the opportunity to walk away if the other side does not meet its obligations, and the obligations each must meet are the product of negotiation and, typically, within the control of the party who must meet them.
Buyer Preference: The Buyer wants as few conditions listed here as possible, with those listed being wholly within its control, if possible. Furthermore, the Buyer will want materiality qualifiers included, particularly relating to conditions (1), (2), (3), and (4). However, this is another area where the requirements applicable to the Buyer will largely mirror those of the Seller, so the Buyer will have to decide what level of accuracy it is comfortable promising regarding its own deliverables. One condition for which it makes sense to have some divergence between Buyer is Seller is the “litigation out” listed in condition (3). With that condition, the Buyer is rightfully worried about any litigation whatsoever affecting the Seller’s Business since the Buyer will undoubtedly be impacted by that litigation. Depending on the Seller’s post-transaction plans and the nature of the litigation, it may or may not be concerned with a lawsuit brought against the Buyer. In regard to the third-party consent condition, it may not be necessary for the Buyer to obtain any such consents, but if it is the Buyer will want the condition limited to those consents which are material to the transaction.
Seller Preference: Here, the Seller is looking for equality. In the Seller’s mind, whatever standards are applied in the Conditions to Obligations of Buyer section should also be applied here. For example, the Seller will want the Buyer’s representations and warranties qualified by materiality only to the same extent that its own are subject to those qualifications. More specifically, it will want any representations or warranties already qualified by a general materiality standard or a Material Adverse Effect standard to not be qualified by any such standard in this section. Going even further, it will not want the Buyer’s representations regarding its organization and authority to conduct the transaction to be subject to any materiality qualifier whatsoever.
While the Seller’s overall goal in this section is parity between the conditions applicable to the Buyer and the conditions that it must meet, to retain its negotiating credibility the Seller only wants to insist upon parity when it makes sense in the context of the transaction. By the nature of the deal, not every condition that the Seller must fulfill will need to be fulfilled by the Buyer. So, the Seller’s best approach is to be aware of its interests, have an understanding of the conditions necessary to meet those interests, and fight for the conditions that matter while not wasting resources on those that don’t.
Differences in a Stock Sale Transaction Structure: None.
Conditions to Obligations of Buyer
What are the Conditions to Obligations of Buyer? This provision contains a comprehensive list of requirements that must be completed by the Seller or waived by the Buyer in order for the Buyer to be obligated to complete the purchase. If the Seller fails to fulfill any condition included in the list, the Buyer can walk away from the deal without penalty.
The Middle Ground: Typically, the list states that:
(1) the Seller’s representations and warranties are true in all material respects at the time of the signing of the Agreement and the Closing;
(2) the Seller has complied with the Agreement and any other Transaction Documents in all material respects;
(3) no legal action has been taken that would prevent the transaction;
(4) all third-party approvals, consents, and waivers listed in the Disclosure Schedules relating to the Seller’s representations and warranties have been obtained;
(5) nothing has occurred that would constitute or cause a Material Adverse Effect;
(6) all Closing Deliverables and Transaction Documents have been signed by the Seller (as applicable) and delivered to the Buyer;
(7) the Buyer has received all Permits necessary to conduct the Business as conducted by the Seller;
(8) the Seller has provided the Buyer with title insurance and a Land Title Survey (or other appropriate deliverables) for each piece of Owned Real Property;
(9) written evidence has been provided to the Buyer that all Encumbrances, other than Permitted Encumbrances, have been released;
(10) the Buyer has received a signed copy of the Seller Closing Certificate;
(11) the Buyer has received a signed copy of the Seller’s Secretary’s Certificate;
(12) the Buyer has received a FIRPTA Certificate relating to the Business; and
(13) the Seller has delivered any other documents or instruments reasonably requested by the Buyer that are reasonably necessary to consummate the transaction.
Purpose: This provision provides numerous “outs” for the Buyer that create a relatively painless path out of the deal if the Seller does not meet its obligations, including some obligations that are relatively minor. The fact that the Buyer can walk away without penalty if a condition is not met means the risk of the Seller’s failure to deliver is shifted entirely to the Seller, who is obviously in a much better position to control that risk.
Buyer Preference: In addition to the conditions listed above, any number of requirements can be added to this section through negotiation among the parties. Common additional conditions sought by the Buyer include: (a) a “due diligence out” that allows the Buyer to walk away if it cannot complete due diligence to its satisfaction; (b) a “financing out” that conditions the Buyer’s obligation to close on it being able to obtain financing to fund the deal; and (c) financial or operating targets, such as sales or working capital, that, if not met, provide the Buyer with a way out of the deal. If the Seller operates in a highly-regulated industry, the Buyer may also require a legal opinion from the Seller’s legal counsel regarding the Business’s compliance with applicable laws. In addition to these general additional conditions, the Buyer also has certain preferences regarding the listed conditions, such as:
(1) The Buyer will likely include a materiality qualifier but will not want that qualifier to apply to any representation or warranty that already contains a materiality qualifier (i.e. the Buyer does not want a “double materiality” standard). Some exceptions for which the Buyer will want no materiality qualifier whatsoever include the representation regarding the organization and authority of the Seller, any monetary obligations, and financial statements. The Buyer will typically want this condition to Closing to be satisfied both at the time of signing the Agreement and at the Closing so that it can walk away if it receives materially inaccurate information at either time.
(2) Here, the Buyer once again wants to avoid a double materiality standard.
(3) The Buyer does not want any materiality qualifiers whatsoever in this “litigation out.” The Buyer will want to include any actions brought against it in addition to those brought against the Seller.
(4) The Buyer wants all third-party consents to be obtained as a condition to Closing, not just specifically-identified material consents.
(5) The Buyer may want to eliminate the Material Adverse Event condition altogether and replace it with specific event-based conditions, such as operational or financial benchmarks. Or, it may want to keep the Material Adverse Event condition and merely supplement it with specific benchmarks. In either case, the Buyer should be aware when selecting such benchmarks that financials usually lag behind operations and it is easier to manipulate the financial measurements than to inaccurately represent that an operational benchmark was met.
(8) To determine which conditions relating to real property need to be included here, the Buyer should consult a real estate attorney. If the transaction involves Leased Real Property, the Buyer will seek estoppel certificates from the landlord of the property.
(9) If the Buyer knows which documents are necessary to release Encumbrances associated with the Seller’s property, it will want to specify the documents and include a general statement like the one seen above to cover any documents needed but not listed. If the only way the Seller can have the Encumbrances released is to pay the creditor using the Closing payment, the Buyer will want to have the release documents placed in escrow until the creditor is paid.
Seller Preference: In general, the Seller wants to avoid allowing any conditions in this section that are not within its control, such as a due diligence out and a financing out. More specifically, the Seller will generally have the following preferences regarding the listed conditions:
(1) The Seller wants to go beyond a general materiality standard and require that, in order for the Buyer to walk away, a false representation or warranty must have a Material Adverse Effect on the Business. The Seller also wants this condition to apply only at the Closing so that it can cure any inaccuracies that exist when the Agreement is signed.
(3) The Seller wants to limit this condition to legal actions that are reasonably likely to succeed on the merits as a way of excluding frivolous claims that do not have any practical chance of preventing the transaction. Regarding any legal actions taken by a Governmental Authority, the Seller will want only those that prevent a material transaction contemplated by the Agreement to qualify as a litigation out for the Buyer.
(4) The Seller wants to limit this condition to specifically-identified material third-party consents, especially if there are a significant number of third-party consents to be obtained.
(5) Because it is difficult to prove that an event had a Material Adverse Effect on the Business, and because the burden is on the Buyer to prove a Material Adverse Effect, the Seller wants that standard to be applied here, rather than using specific financial or operational benchmarks. If the Buyer insists on specific benchmarks, the Seller will likely favor financial metrics over operational ones.
(8) The party customarily held responsible for paying survey and title insurance costs varies by jurisdiction, but regardless of convention the Seller will want the parties to split any costs related to these items (unless, of course, local custom says the Buyer pays).
Differences in a Stock Sale Transaction Structure: In a stock sale, the Buyer wants any representations and warranties relating to the shares of the Seller to be true and correct in all respects or, in other words, not subject to any sort of materiality qualifier. If the Buyer in a stock purchase is going to replace the directors and/or officers of the Business, receipt of their resignations should be included as a condition to the Buyer’s obligation to close. The Buyer in a stock purchase will also need a certificate of good standing for the Business from the appropriate Governmental Authority in the company’s state of organization.
Conditions to Obligations of All Parties
What are Conditions to Obligations of All Parties? Certain events will make a transaction impractical or even impossible, and this clause is included to give both parties a legal “out” of the deal if one of those events occurs.
The Middle Ground: This provision lists the conditions that must be met at or prior to Closing for both sides to be obligated to move forward with the transaction. The conditions include: (1) all required filings under the HSR Act have been made and any applicable waiting periods have expired (if the Act applies to the transaction); (2) no Governmental Authority has taken any action that would cause the transaction to be illegal or that would otherwise prevent it from becoming and remaining effective; and (3) all consents, authorizations, etc. required to be obtained by either party from any Governmental Authorities were received and have not been revoked.
Purpose: The intent of this provision is to allow both sides to walk away from the deal without penalty if the government interferes with the transaction (or if their approval is required but not given). While there is a very low probability that any Governmental Authority would implement a law or ruling preventing an acquisition in the lower middle market, if it were to happen it would certainly put an end to the transaction. Similarly, it is highly unlikely that either side would fail to obtain a necessary authorization or consent absent sheer incompetence or severe procrastination. Yet, if such failure were to occur it would also be an almost-certain death knell for the deal. Because of the low probability, high magnitude dynamic at play, the provision is worth paying attention as the Closing approaches, but it is not something that is likely to eat up negotiation time or cause significant disagreement.
Buyer and Seller Preference: None, other than deleting certain inapplicable conditions such as the HSR Act filing requirements or obtaining governmental approvals.
Differences in a Stock Sale Transaction Structure: None.
Public Announcements
What are Public Announcements? The timing and content of acquisition announcements can be important to each side for various reasons, but it is not so critical that the parties should spend valuable time on it before the deal is closed. Instead of agreeing on the specifics of the announcement pre-Closing, the parties use this covenant to agree more generally about who will draft the announcement and who must consent to its release.
The Middle Ground: Both parties agree that they will not publicly announce the acquisition without the cooperation and consent of the other party (unless required to do so by law, as determined by the reasonable advice of legal counsel). The Agreement may also stipulate that the consent required here cannot be unreasonably withheld or delayed.
Purpose: This provision allows both sides to control how and when interested third parties find out about the acquisition. In the lower middle market context, this covenant is aimed less at controlling the media coverage around the transaction and more at limiting its disruptive effect on employees. However, since limiting such disruption is in the best interests of both sides, in the absence of this provision, these transactions would be consummated as planned 99% of the time.
Buyer and Seller Preference: This clause will likely make it into the Agreement unaltered since it is usually not worth the time for either party to bring it up during negotiations. If the parties do address it directly, the discussion will probably focus on when and how the deal announcement will be made. With that being said, some buyers may not want to qualify the consent requirement, and there may be minimal negotiations devoted to that issue. Whether the consent requirement is altered, or even instituted in the first place, will likely be an outcome determined by the level of trust between the parties. Additionally, the “cooperation requirement” may not be included if the parties trust one another and one side has significantly more PR-related resources than the other.
Differences in a Stock Sale Transaction Structure: None.
Closing Conditions
What are Closing Conditions? Both the Buyer and Seller will have various tasks they must complete prior to the Closing in order to get the deal across the finish line. While those tasks are listed out elsewhere, this covenant sets the minimum standard of effort that must be used to achieve them.
The Middle Ground: Both parties promise to use their reasonable best efforts to satisfy their respective closing conditions.
Purpose: This provision is intended to increase the likelihood that the parties complete the transaction, and it does so by serving as a “catchall” provision that applies the “reasonable best efforts” standard to all closing conditions. Without this provision, one party could decide it doesn’t want to complete the transaction after it has already signed the Agreement, and it could avoid liability for failing to perform by simply not meeting its closing conditions. At that point, the other party would have to decide whether to abandon the transaction or waive those conditions and move forward, and neither of those options is very attractive. This covenant helps avoid that situation by requiring the parties to use a certain level of effort to satisfy the closing conditions, and if that level is not met it is considered a breach of the Agreement.
Buyer Preference: None.
Seller Preference: None.
Differences in a Stock Sale Transaction Structure: None.
Governmental Approvals and Consents
What are Governmental Approvals and Consents? The lack of an important governmental approval or third-party consent can kill a deal despite the Buyer and Seller both wanting to move forward. To avoid that situation, the parties list out the necessary consents and approvals and split up the work in a way that makes sense for both sides. They also use this covenant to set boundaries around how far they must go in order to obtain a consent or approval.
The Middle Ground: This covenant requires both the Buyer and Seller to make all filings necessary to consummate the transaction, and to use their reasonable best efforts to obtain all the requisite consents from governmental authorities and third parties (e.g. customers and suppliers). It then lists out specific actions that the parties must carry out or avoid in order to obtain the necessary consents, such as litigating any order blocking the transaction, again modified by a reasonable best efforts standard. It also requires the parties to share certain information regarding communications with Governmental Authorities. Lastly, it expressly states that the Buyer is not required to sell off any part of its business or change the terms and conditions of the transaction to appease a Governmental Authority seeking to halt the transaction based on antitrust concerns.
Purpose: Once a potential deal reaches the exclusivity stage, it’s unlikely that a third party will prevent it from going through unless that third party is the government or has an important contract with the Seller and won’t consent to a change of control. This covenant seeks to deal with those two threats by allocating the serious risks they present between the parties.
Buyer Preference: The Buyer’s main concern with this clause is the application of the “reasonable best efforts” standard. The Buyer wants the standard included, but in defining what it means the Buyer needs to be aware of what it is willing (and unwilling) to do to close the transaction. For anything that it is unwilling to do, the Buyer will want an express statement to that effect included in the definition of reasonable best efforts. Given that the Seller will be the one that has the pre-existing relationships with important third parties other than the government, the Buyer generally wants the risk of not obtaining a third-party consent to fall on the Seller, with the risk of not obtaining Governmental Approval shared equally.
Seller Preference: The Seller wants to place the risk of not obtaining necessary Governmental Approvals on the Buyer, and it can do so by replacing the reasonable best efforts standard with a more demanding one. The Seller’s main concern is avoiding governmental interference with the deal, so it wants to place the burden relating to any such interference on the Buyer. The Seller can allocate that risk to the Buyer by requiring the Buyer to either divest assets to satisfy regulators or litigate any Governmental Order blocking the transaction. If the Buyer objects, the Seller can suggest putting caps on the amount of assets the Buyer must divest or that the parties list out specifically which assets would be subject to divestiture.
Differences in a Stock Sale Transaction Structure: None.
Notice of Certain Events
What is Notice of Certain Events? The Buyer makes its decision to invest based on the information available to it, but new or changed information could lead to a different decision. The Buyer can use this section to identify the types of information that may change its decision and to ask the Seller to communicate such information as it is received.
The Middle Ground: This covenant requires the Seller to notify the Buyer if certain events occur and provides a list of events for which notice is required. That list includes events that would or have had a Material Adverse Effect on the Business, anything that would make a Seller representation or warranty untrue, and anything that prevents the Seller from satisfying its Conditions to Closing, among others. The covenant also explicitly states that providing notice of the listed events does not result in the Buyer losing its right to make an indemnification claim or terminate the Agreement.
Purpose: Without this notice requirement, the Buyer would be forced to spend considerable time and money checking on the status of its potential investment at a point in time when someone else (the Seller) has much better knowledge and access. In that scenario, the cost and risk are all on the Buyer, who would likely pass along some of those costs to the Seller by lowering the Purchase Price. With this covenant, the Seller monitors the Business and the Buyer’s cost of obtaining the information is eliminated, as is some of its risk, which means more money in the Seller’s pocket and a safer investment for the Buyer.
Buyer Preference: The Buyer does not want a disclosure under this covenant to prevent it from claiming indemnification or terminating the Agreement, so an explicit statement that the covenant does not affect those rights is in the Buyer’s best interest (and may be necessary, depending on the circumstances and governing state law). If the Seller insists on limiting the Buyer’s indemnification rights for information known prior to the Closing, the Buyer can compromise by negotiating for a Cap and/or Basket on the indemnification rights stemming from any such information.
Seller Preference: If notice is given based on this covenant that corrects an inaccuracy or breach of one of the Seller’s representations or warranties, the Seller wants the notice to serve as a cure for that inaccuracy or breach to prevent an indemnification claim. If the Buyer wants to reserve its right to terminate the Agreement or bring an indemnification claim, the Seller can try to negotiate (1) for a limited time period to terminate the Agreement or make a claim, (2) to impose a materiality or Material Adverse Effect standard on cured representations and warranties, or (3) to institute a procedure for resolving these disputes before the Buyer is allowed to terminate the Agreement.
Differences in a Stock Sale Transaction Structure: None.
No Solicitation of Other Bids
What is This? As the Buyer spends more resources on the transaction, it wants to know that the Seller is serious about completing the deal. Agreeing not to ask for or facilitate competing bids is a signal of the Seller’s intent, and from a practical standpoint it lowers the chances that a successful competing bid will be made.
The Middle Ground: This covenant restricts the Seller from encouraging third parties to provide a competing bid by actively soliciting bids, negotiating with third parties, or providing those third parties with information that would be useful in preparing and making a bid. It is essentially an exclusivity clause aimed at preventing the Seller from trying to increase the Purchase Price by encouraging competitive bids. However, it does not prevent the Seller from accepting an unsolicited, superior offer should one be made.
Purpose: This covenant is essential if there is a meaningful time period between the parties signing the Agreement and closing the deal. That is because this covenant provides the Buyer with some assurance that the Seller is serious about the deal and is not using the Buyer’s interest as a bargaining tool with other buyers. Such exclusivity removes one major source of deal risk and empowers the Buyer to commit further time and resources to conducting due diligence and closing the transaction. Typically, the parties will agree on exclusivity as part of the letter of intent, but the time period will be limited to a set time frame or will expire once the Agreement is signed, so an exclusivity provision in the Agreement itself is necessary to protect the Buyer’s interests.
Buyer Preference: The Buyer wants this provision to be as strict as possible, and some even go so far as to prohibit acceptance of unsolicited, superior offers. Others will require the Seller to inform the Buyer of any unsolicited offers so the Buyer can either match the offer or limit its spending in connection with the deal. Additionally, the Buyer can include a specific performance provision that requires the Seller to move forward with the deal even if it breaches this clause and obtains a higher offer, on the grounds that the damages to the Buyer for the Seller’s breach would be impossible to quantify. One alternative to a specific performance provision would be a liquidated damages provision that sets a monetary amount to be paid upon the Seller’s breach. If using a liquidated damages clause, the Buyer wants to avoid setting the amount too high to avoid characterization as a “penalty clause.”
Seller Preference: The Seller likely wants to exclude this provision, or at the very least include one or more exceptions within it. For example, it may want to be able to negotiate with third parties with the understanding that it would only move forward with them if the deal with the Buyer falls through. Or it may seek a “fiduciary out” (common in public company acquisitions) that requires it to accept the highest offer even if that offer is made during the exclusivity period.
Differences in a Stock Sale Transaction Structure: None.
Access to Information
What is Access to Information? For many issues that the Buyer will investigate during due diligence, the best or only source of information is the Business itself (e.g. financial statements). So, in order to conduct its investigation, the Buyer needs access to the Business’s records, employees, and advisors. This section grants that access under certain agreed upon conditions.
The Middle Ground: In this covenant, the Seller promises: (1) to allow the Buyer full access to the books, assets, and properties of the Business (including regulatory and tax filings); (2) to provide reasonably requested financial and operating data of the Business; and (3) that its Representatives will cooperate with the Buyer in its investigation of the Business. In return, the Buyer promises not to conduct its investigation in a way that unreasonably interferes with the Business (or other businesses of the Seller). The covenant also states that no investigation by the Buyer or other information received by the Buyer will act as a waiver or otherwise impact the representations, warranties, and other agreements made within the Agreement.
Purpose: By allowing the Buyer to take an inside look at certain aspects of the Business, this covenant significantly lowers the Buyer’s transaction risk without increasing the risk to the Seller. Buyers will invariably be more comfortable making an investment after conducting its own investigation rather than relying on the promises of the person that stands to benefit from the investment, and this provision gives buyers that opportunity without interfering with the Seller’s operations.
Buyer Preference: The Buyer wants to ensure that the language used here (and in any affiliated definitions) is broad enough to permit the desired level of access. For example, if there are environmental concerns relating to the Business and the Buyer plans to engage an environmental specialist to conduct an investigation, the Buyer can insert language into the covenant detailing the specialist’s rights of access. The Buyer may also want to include language regarding access to the customers and suppliers of the Business, so long as there are no confidentiality-related issues and the Seller does not object to providing such access.
Seller Preference: The Seller’s main concern here is preventing the Buyer’s investigation from interfering with the Business (or any of Seller’s other businesses), especially if the fact that the Business is being sold has not been disclosed to the employees. To prevent problems, the Seller may want to limit the covenant in one or more ways, including: restricting the hours of access, requiring advance notice of visits, requiring any visitors representing the Buyer to be supervised by personnel of the Seller, requiring all communications to be funneled through one or more designated employees, requiring the Buyer to obtain written consent before contacting customers or suppliers, limiting the Buyer’s right to physically inspect the Seller’s properties without advance notice, and prohibiting disclosure of information that is either privileged or could cause competitive harm if the deal does not close.
Differences in a Stock Sale Transaction Structure: None.
Absence of Certain Changes, Events, and Conditions
What is This? In this section, the Seller provides information regarding the current state of the Business. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: In this provision, the Seller represents that certain aspects of the Business (e.g. accounting practices) have not changed, or certain events or conditions have not occurred, since the Balance Sheet Date. The most important inclusion in this section is the representation that nothing has occurred since that date that could reasonably have a Material Adverse Effect on the Business. The representation excludes changes, events, and conditions that occur in the ordinary course of business and are consistent with the Seller’s past practices.
Purpose: A Buyer’s decision to invest in a business involves the consideration of dozens of different factors, and sometimes it is just one of them that tips the balance from a “pass” to a “buy.” If the Business undergoes a significant change after the investment decision is made, the Buyer may want to reassess its calculation. This clause allows the Buyer to identify the changes it is most concerned about, and in doing so, it requires the Seller to disclose such changes or represent that they have not occurred.
Buyer Preference: The Buyer wants the list of prohibited changes, events, and circumstances to be comprehensive. It may also want to prevent changes to the Seller’s cash management and accounting practices, especially if the deal involves a Purchase Price adjustment that could be manipulated by varying such practices. In defining Material Adverse Effect, the Buyer wants to strike a balance between a broad definition that encompasses the Buyer’s major concerns and a definition that is relatively easy to measure and enforce. Many buyers are uncomfortable with the vague nature of the materiality standards used, and instead use dollar amount thresholds to qualify certain aspects of the list.
Seller Preference: The Seller wants a short list of prohibited changes, events, and circumstances, especially if they are not likely to affect the Buyer or the Purchased Assets after Closing. The Seller is typically more comfortable with the Material Adverse Effect standard than is the Buyer because it is difficult to enforce, and the same can be said for the other materiality standards in this section. However, if the Buyer insists on dollar thresholds, the Seller will want those thresholds to be as high as possible.
Differences in a Stock Sale Transaction Structure: The list of prohibited changes is likely to be longer in a stock sale because the Buyer is purchasing the entire business instead of certain assets.
Legal Proceedings (Buyer)
What are Legal Proceedings? In this section, the Buyer provides information regarding its involvement in legal proceedings that could interfere with or prevent the transaction. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: The Buyer represents that, other than those disclosed in the Disclosure Schedules, there are no legal actions, pending or threatened, that would prevent or delay the transaction. It also represents that no events have occurred and no circumstances exist that could lead to such an action delaying or preventing the deal.
Purpose: Even when a Buyer and Seller are in complete agreement on terms and want to move forward, a legal action can dismantle the entire acquisition. Including this representation shifts the risk associated with a legal challenge to the party that is most likely to have knowledge of it, which in this case is the Buyer.
Buyer Preference: Other than the representation regarding pending legal actions, the Buyer wants its representations in this section to include knowledge qualifiers. If part of the Purchase Price includes a transfer of the Buyer’s stock or a seller note, the Buyer may also have to include a statement regarding its property or assets, as the Seller did in its Legal Proceedings representation. If not, the Buyer will want to avoid making any extraneous representations that do not directly relate to the acquisition.
Seller Preference: The Seller wants to avoid including knowledge qualifiers as a way to encourage the Buyer to investigate whether any potential claims could be made that would stop the transaction. If the future success of the Buyer’s company is relevant to the Seller’s payout, either in terms of the payout level or the Buyer’s ability to make the payments, the Seller may also seek a representation relating to the assets and property of the Buyer.
Differences in a Stock Sale Transaction Structure: None.
Sufficiency of Funds
What is Sufficiency of Funds? In this section, the Buyer provides information regarding its ability to fund the acquisition. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: Here, the Buyer represents that it has enough cash on hand, or immediate access to funds from other sources, to be able to pay the Purchase Price and take the other necessary steps to complete the transaction. If the Buyer is financing the acquisition instead of paying the Purchase Price out of its available cash, this representation should be revised accordingly.
Purpose: The portion of the Purchase Price to be paid at Closing is typically a substantial share of the overall Purchase Price, and it is often the most anticipated payment from the Seller’s perspective. By obtaining this representation, the Seller is provided some assurance that the Buyer has the capacity to follow through on its most important commitment. Furthermore, it’s essential that the Buyer is able to make the payment as a way to build trust if the parties will continue to work together after the Closing. In short, few things, if any, will cause the Seller to abandon the transaction quicker than the Buyer failing to make the Closing Payment.
Buyer Preference: The Buyer will likely be satisfied with this representation as written if no financing is required. However, if the Buyer is utilizing acquisition financing it will want the representation to reflect those terms, and it may want additional covenants such as a requirement for the Seller to take any reasonable actions necessary to assist the Buyer in obtaining such financing. It may also want to add, as a condition to Closing, that a failure to obtain financing allows it to walk away from the deal. Most sellers will strongly resist that sort of condition, but may agree to a “reverse break-up fee” that allows the Buyer to pay a specified amount and abandon the transaction if it’s not able to find financing. If the Buyer is required to make a solvency representation (which it generally wants to avoid doing), it will want to explicitly include certain assumptions to minimize its potential liability for a breach, such as that the Seller’s representations and warranties are true, the target company has not suffered a Material Adverse Effect, and that any financial projections regarding the Business are still reasonable at the time of Closing.
Seller Preference: If the Buyer is using acquisition financing, the Seller will want assurances that the Buyer has satisfied all the conditions to obtaining the financing and is not in breach of its agreement with the lender. If the Buyer is using the Purchased Assets as collateral for the financing, the Seller will want to include a solvency representation so that it is protected if the Buyer is unable to repay its creditor(s). The Seller may also want to consider a covenant requiring the Buyer to use reasonable best efforts (or some other effort standard) to find alternative financing if the arrangement with the initial lender falls through.
Differences in a Stock Sale Transaction Structure: None.
No Conflicts; Consents (Buyer)
Significance: Deal Driver
Section: Representations and Warranties of Buyer
Negotiation Time: Minimal
Transaction Costs: Insignificant to Intermediate
Major Impact: Risk Management and Transaction Completion
What is the No Conflicts; Consents section? In this section, the Buyer provides information regarding its ability to complete the transaction without third-party interference. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: Much like the Seller’s reciprocal representation, here the Buyer represents that performance of its obligations under the Agreement does not conflict with its organizational documents or any law or Governmental Order. It states that execution of the Agreement does not require notice to or consent from any party that has a contract with the Buyer, other than the parties listed in the Disclosure Schedules. It also represents that no consents, approvals, permits, or Governmental Orders are required from the government, and no notice or filings are required to be provided to the government, to consummate the transaction (other than those required by the HSR Act, if applicable).
Purpose: The rationale for classifying this representation as a Deal Driver mirrors that of the Seller’s “No Conflicts; Consents” representation. Both indicate there are no legal roadblocks to completing the deal, which, if true, makes it much more likely that the transaction will be finalized. This representation also has a substantial effect on the allocation of risk between the parties because the Buyer is assuming responsibility if the transaction doesn’t go through based on a failure to obtain necessary consents.
Buyer Preference: Depending on the situation, the Buyer may want to include a materiality qualifier regarding the consents, approvals, and notices contemplated by this section. It may even want a Material Adverse Effect standard to limit its required disclosures. However, the Buyer must keep in mind that any qualifiers it insists upon will almost always be mirrored in the Seller’s representation. So, the Buyer wants to weigh its desire to limit its own disclosures against its need for full disclosure from the Seller. Most buyers will opt for full disclosure in this section since anything short of that has the potential to reduce the value of the deal or put the entire acquisition at risk.
Seller Preference: The Seller wants the Buyer to disclose any conflicts, consents, Governmental Orders, etc. that could interfere with the transaction. Although this is a reciprocal representation, the Buyer’s representation may be somewhat more limited than that of the Seller since the Seller is not concerned with the post-Closing operation of the Buyer’s business. The Seller should find a more limited representation acceptable, so long as the concerns it does have regarding conflicts, consents, and Governmental Orders are addressed.
Differences in a Stock Sale Transaction Structure: None.
Authority of Buyer
What is Authority of Buyer? In this section, the Buyer provides information regarding its legal ability to enter into the Agreement. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: In this representation, the Buyer states that it has the power and authority to enter into the Agreement, and that it has taken the necessary corporate action to authorize the transaction.
Purpose: In order for the Seller to be paid the agreed upon amount of cash at Closing, the Buyer must have the power and authority, and take the requisite corporate procedural steps, to transfer the payment. This representation provides the Seller with assurance that the Buyer will make the Closing payment in a legally valid way, ensuring that it will not be recalled later on the grounds that it was never properly approved.
Buyer Preference: If the Seller’s “Authority” representation was changed in any way from the middle ground term, the Buyer wants the same change(s) made to this representation.
Seller Preference: The Seller is likely content with the middle ground term for this representation, but it does want any changes that were made to the Seller’s own Authority representation to also be made here.
Differences in a Stock Sale Transaction Structure: None.
Compliance with Laws; Permits
What is the Compliance with Laws; Permits section? In this section, the Seller provides information regarding the Business’s compliance with legal requirements. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: The Seller represents that it is currently in compliance with all laws applicable to the Business and that it has previously complied with all such laws for a specified period (e.g. the previous three years). The Seller also represents that it has all permits necessary to conduct the Business, all fees related to those permits are paid, the permits are in full force and effect, and nothing has occurred that would result in their limitation or revocation.
Purpose: The Seller’s current and past compliance with laws applicable to the Business is obviously a significant issue; the Buyer will not want to purchase a business operating outside the confines of the law or be stuck with liabilities created by the Seller. However, whether the parties will spend a substantial amount of time during due diligence and negotiations to cover legal compliance depends largely on the industry in which the Business operates. In a highly regulated industry, the Buyer will find it worth the time to inquire about specific laws and negotiate over the extent of the Seller’s compliance representations. On the other hand, if any potential penalties are minuscule and/or the chances of enforcement are remote, the parties may insert this clause into the Agreement and leave it at that.
Buyer Preference: The Buyer wants a clause that does not limit the Seller’s representation regarding past compliance. Regardless of when the bad act occurred, the Buyer does not want to be liable for someone else’s misconduct. The Buyer also wants to avoid materiality qualifiers for both sets of representations included here.
Seller Preference: The Seller wants to limit this representation to current compliance only, especially if past violations have already been cured. It can also limit its risk by inserting some sort of materiality qualifier (e.g. requiring a violation or lack of a permit to have a Material Adverse Effect on the Business before indemnification applies). Finally, the Seller may seek to exclude entire areas of law from these representations because they are dealt with elsewhere in the Agreement (e.g. environmental laws and permits).
Differences in a Stock Sale Transaction Structure: None.
Legal Proceedings; Governmental Orders
What are Legal Proceedings and Governmental Orders? In this section, the Seller provides information regarding legal proceedings and Governmental Orders that may impact the Business moving forward. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: The first part of this representation states that, other than the legal proceedings listed in the Disclosure Schedules, there are no legal actions, pending or threatened, relating to the Business, the Seller, or any of the Business’s assets. It also states that no events have occurred that would give rise to any such legal actions. The second part states that there are no outstanding Governmental Orders or judgments against the Business or its assets other than those listed in the Disclosure Schedules. If one or more Governmental Orders are listed in the Disclosure Schedules, there is typically an additional representation that the Business is in compliance with the order and nothing has happened that would constitute or result in a violation of it.
Purpose: Any legal proceedings against the Business, or any events that could lead to such proceedings, have the potential to seriously damage the health of the Business. Some buyers will shy away if there is even the prospect of a significant legal claim against the Business. Similarly, Governmental Orders can lead to future liability or restrictions that most buyers will not want to contend with, or they may even be directed at preventing the proposed transaction. This provision is intended to alert the Buyer to those circumstances so that it can take measures to manage its risk, which may include abandoning the transaction altogether.
Buyer Preference: The Buyer may want to add a provision stating that nothing has occurred that would give rise to a company obligation to indemnify any current or former directors or employees.
Seller Preference: The Seller wants to add a materiality or a Material Adverse Effect qualifier to the Legal Proceedings representation. Some sort of materiality requirement is especially important if the Business operates in an industry where immaterial claims are common. However, if the Buyer’s indemnification rights are limited by a Basket, a materiality qualifier is not as vital. The Seller also wants a knowledge qualifier to apply to the part of the representation that asserts no events have occurred that would result in legal proceedings against the Business or the Purchased Assets.
Differences in a Stock Sale Transaction Structure: None.
Condition and Sufficiency of Assets
What is the Condition and Sufficiency of Assets? In this section, the Seller provides information regarding the usefulness of the Purchased Assets. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: The Condition and Sufficiency of Assets representation asserts that each asset being transferred is in good operating condition and, other than the need for ordinary maintenance and non-material repairs, is suitable for use in the same way as it was being used in the Business prior to the transaction. It also states that the Purchased Assets are sufficient to conduct the Business in the same manner as it was conducted prior to the transaction.
Purpose: This representation gives the Buyer comfort that it is purchasing everything necessary to conduct the Business as previously conducted, and if that’s not the case the risk of loss will fall on the Seller. As the party with vastly superior knowledge on the issue, the Seller is in the best position to take on that risk, and allocating the risk this way also ensures that the Buyer receives the full value of the bargained-for assets.
Buyer Preference: Although the “Sufficiency of Assets” portion of the representation states that the Purchased Assets are sufficient to operate the business as previously conducted, as a safeguard the Buyer may want to add a representation that none of the Excluded Assets are material to operation of the Business.
Seller Preference: The Seller would prefer to limit this representation to the statement that the Purchased Assets are sufficient to operate the Business. Instead of attesting to the condition of the Purchased Assets, the Seller can allow the Buyer to inspect the property and assets. The Seller also wants to omit the representation regarding the Excluded Assets because it addresses the same concern as the Sufficiency of Assets representation.
Differences in a Stock Sale Transaction Structure: In a stock sale where the business being purchased is an independent entity as opposed to being part of a larger group, the Sufficiency of Assets representation is not necessary. However, if the stock purchase relates to a company that is part of a parent/subsidiary structure that shares the use of certain assets, the Sufficiency of Assets representation should be included in the Agreement.
Title to Purchased Assets
What is the Title to Purchased Assets? In this section, the Seller provides information regarding its ownership of the Purchased Assets. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: Here, the Seller represents that it has good and valid title to, or a valid leasehold interest in, all of the Purchased Assets (i.e. it is the legal owner or lessee of all the Purchased Assets). It also represents that the Purchased Assets are free and clear of any Encumbrances other than Permitted Encumbrances. The remainder of the clause is devoted to defining Permitted Encumbrances (usually in list form). Permitted Encumbrances are generally limited to Encumbrances that are not material to the Business or the Purchased Assets, either individually or when taken together.
Purpose: In an asset sale, the Buyer is purchasing every single asset for a reason, so it’s important that the Seller is able to transfer every single asset according to the transaction terms. Its failure to do so could meaningfully alter the value of the deal for the Buyer. This clause and the Indemnification section of the Agreement place the risk of that failure squarely on the Seller’s shoulders so that the Buyer is compensated for any such loss in value.
Buyer Preference: The Buyer wants this section to apply to all the Purchased Assets to avoid receiving assets with Encumbrances other than the Permitted Encumbrances. Furthermore, it wants to limit the list of Permitted Encumbrances to those Encumbrances that do not impede the use or reduce the value of the Purchased Assets. The Seller may insist on excluding Intellectual Property Assets from this representation because they are addressed in a separate section of the Agreement, and if that is the case the Buyer wants to make sure there is a similar representation included in the Intellectual Property section.
Seller Preference: The Seller wants to limit this representation to tangible personal property (which excludes Intellectual Property). If Intellectual Property is included in this representation, the Seller wants to make sure that the representation does not exceed the scope of what is required by the Intellectual Property section of the Seller Representations and Warranties. Also, instead of qualifying the Permitted Encumbrances using a general materiality standard, the Seller may want to argue for the narrower Material Adverse Effect standard. The Seller also wants an expansive definition of Permitted Encumbrances, including a catchall clause for any Encumbrances that would not have a Material Adverse Effect on the Business.
Differences in a Stock Sale Transaction Structure: There is a minor drafting difference when using a stock sale structure, which is that use of the phrase “purchased assets” is not accurate since the entire company, not just the assets, is being purchased.