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This is the final part in a three-part series that is a very basic, and lively, introduction to the typical structure of a stock purchase agreement in a transaction involving the sale of control of a private company. (For more information about the series, see the first post, Part 1, and the second post, Part 2.)
As a refresher, a stock purchase agreement for a privately-held target often includes the following parts in some variation on the following order:
The final post in this series will describe the provisions that are often included in the agreement when the closing (the day when the parties exchange the stock for cash) does not happen at the same time that the parties sign the agreement. This is called a separate signing and closing.
In a separate signing and closing, the buyer essentially agrees at the signing of the document to pay at the closing a certain price for the business. Parties use the interim period to wait for the expiration of the Hart-Scott-Rodino Act waiting period (or receive other approvals), arrange financing or receive other consents required from third parties, among other things. Both parties are concerned about what might happen in the meantime that would make them change their minds about the deal. The buyer is also concerned, in particular, that the seller may exert inadequate effort in running the business or take actions that would extract value from the business at the expense of the buyer.
The interim provisions of a stock purchase agreement describe how the parties must act (or refrain from acting) during the interim period, when one party can make the other close the deal and when one of the parties has the right to walk away from the deal entirely.
If the closing will occur at the same time as the closing, then none of these provisions should be very relevant for the transaction.
Pre-Closing Covenants — Agreements on How the Buyer and Seller Will Behave Between Signing and Closing
If there is a separate signing and closing, the document will include covenants (promises) about how the buyer and seller will behave between signing and closing. A common set of covenants will describe what actions the seller must or must not take in operating the business during the period. This is important, because the buyer wants to ensure that the seller continues to run the business in the same manner until the business is transferred at closing.
Other common covenants will prohibit the seller from trying to sell the business to other parties (a “no shop” provision — which becomes a much more complicated concept/provision in the sale of a public company); require the parties to seek regulatory approvals; require the buyer to secure financing and require the seller to cooperate in that endeavor and/or require the parties to work toward the closing (which in the public company sale context could include specific filings and other steps in the solicitation of shareholder approval).
Conditions to Closing — When Do the Parties Have to Close this Deal
When the agreement has been signed, the parties have agreed to complete a sale in the future. However, the parties are generally only required to complete the transaction if and when certain conditions are met, and if one of the parties fails to close the deal at that point, that party would generally be in breach of the agreement. There are conditions both to the buyer's obligation to close and the seller's obligation to close, some of which will be similar. The most common conditions for each party are expiration of the Hart-Scott-Rodino Act waiting period (or other receipt of approvals), the absence of any injunctions prohibiting the transaction, obtaining certain third-party consents and a “bring-down” of the reps. The “bring-down” is a timing concept that means that the reps are still true as if made on the closing date (e.g., as of the signing date, nobody was suing us and nobody is suing us now). Several other conditions will often appear in contracts, based on the unique circumstances of that deal. However, sellers will generally find contracts with fewer conditions to be more favorable.
Termination — It’s Not You, It's Me
Transactions with a separate signing and closing will also have section that will give either party a right to cancel the deal and walk away without closing the deal in certain limited circumstances.
Sometimes, the termination provisions will require one party to pay the other a material fee or penalty in the event of termination. For example, if the buyer is unable to close the deal because it did not obtain debt financing for the deal by a certain date, the seller may be able to terminate the deal and collect a fee from the buyer. In the public company context, it is common that the would-be buyer may be entitled to a fee if the seller cancels the deal in order to complete a similar deal with a different buyer.
We hope the summary in this series has provided a basic orientation to the typical structure of a stock purchase agreement. Within each section of the agreement, there are multiple variations and considerations from a legal and negotiation standpoint — which in turn evolve based on changes in law and the deal markets. We hope, too, that you get as excited about doing deals as we are and can use this summary as a jumping off point into learning more about the nuances of the craft of doing deals.
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Among the DealStage features available to lawyers and other deal participants are document status and responsibility tracking, signature page signing and delivery and deal closing-book creation. DealStage can be used internally by one team or across all parties to the deal. Visit www.dealstage.com to learn more about DealStage and to request a demo.