Posted in Newsletter Archive
December 21, 2018
The Share Purchase Agreement (SPA), or Asset Purchase Agreement (APA) if an asset sale, is the key legal document in a transaction which details the terms & conditions and representations & warranties agreed to by buyer and seller. There are numerous points to be considered in these agreements but following are a couple that can have a significant impact on a seller’s outcome.
In most agreements the sellers will have to represent that the financial information presented to the purchasers meet specific accounting guidelines such as ASPE or GAAP. However, most companies don’t perfectly adhere to these rules and deviations can sometimes be material – such as: not accruing for vacation time, warranties, etc. As such, it is important to include a ‘past practice’ qualifier which states that financial information is in line with ASPE and past practice so that purchasers cannot make claims post-closing for deviations from ASPE the vendor has always had and which the purchaser should be aware of through due diligence.
Baskets and Caps
Another important element of the SPA or APA are indemnities which spell out how much liability the vendor will carry post-closing and for how long. Purchasers will push for unlimited indemnities – i.e. the ability to claw back 100% (or more) of the sale proceeds if the vendor breaches representations and warranties laid out in the agreement. Market, however, is for most of these indemnities to be limited in scope – often by way of ‘baskets’ and ‘caps’. For example, if the transaction value is $10M then there may be a basket of $100k which means that the purchaser must prove over $100k in verifiable claims (breaches of reps, etc) before the vendor is on the hook for any reduction in whatever holdback has been agreed. Additionally there would be a cap or limit on total claims with something in the range of 25% of the transaction value being quite common. This means that total claims by the purchaser could not exceed 25% except for specific ‘carve-outs’ – usually for items such as tax or environmental liabilities. But every transaction has its specifics so one size most certainly does not fit all.