Deal Issues Draftingguide

Deal Issues DraftingGuide

DealIssue / Background/Detail / Comments/Notes
1. DealStructure / □Asset☐Stock☐Merger☐Other
2. DealEconomics
2.1 Purchaseprice / Cash $[] Promissory Note$[]
Terms:[Describe]
Equity[Describe] Earnout:☐Yes☐NoIf yes, seebelow
2.2 Escrow/holdback / □None☐Escrow☐Holdback / See MSPA, Vol. II, for amodelform of escrow agreementandaccompanyingcommentary.
2.2.1 Claims for which fundsinescrow/holdback canbeassessed/released / □Closing adjustment
□Indemnification
□Other[Describe]
2.2.2 Dollar amount ofescrow/ holdback / $[]
Will amount vary depending on nature of claim?[Describe]
2.2.3 Duration ofescrow/holdback / [Describe]
2.2.4 Escrowagent/holder / Name and contact information:[Describe]
2.3 Purchase priceadjustment / □Yes☐No, proceed to2.5 / See MSPA, Vol. I, Sections2.5 and 2.6 andaccompanyingcommentary.
DealIssue / Background/Detail / Comments/Notes
2.3.1 Timing ofadjustment: / □Closing only
□Post-closingonly
□Estimate at closing with a post-closingtrue-up
2.3.2 Does buyer have the righttoapprove theestimate? / □Yes ☐No
Permitted period toreview:days
2.3.3 Is it a two-wayadjustment? / □Yes ☐No
2.3.4 What are the financialcriteria
for theadjustment? / □None
□Working capital
□Shareholders’equity
□Indebtedness (Any maximum amount? If yes,$)
□Cash (Any minimum cash balance? If yes,$)
□Other criteria[Describe]
2.3.5 Is an example calculationtobeattached? / □Yes ☐No
2.3.6 Are tax-relateditemsexcluded? / □Yes ☐No
2.3.7 Which party prepares thefirstdraft of the closingadjustmentstatement? / □Buyer☐Seller☐Other[Describe]
2.3.8 What is the methodologytobeutilized? / □PastpracticeconsistentwithGAAP☐GAAP☐Pastpractice
□GAAP together with scheduled accountingpractices(e.g., inventory valuation method,etc.)
□Other[Describe]
2.3.9 Is there a separateescrow or holdback for apurchase priceadjustment? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
2.3.10 How will true-uppaymentbemade? / □True-up payment fromescrow/holdback
□Payment not fromescrow/holdback
□Offset against other payments (e.g., promissorynote)
□Silent
2.3.11 Is there a thresholdamount? / □Yes,$☐No
2.3.12 Is there a cap,floor,
orcollar? / □Yes,$☐No
□Deductible?
□Tipping?
2.4 Who pays transfertaxes? / □Buyer☐Seller☐Split
2.5 Earnouts / □Yes☐No, proceed to3. / See MSPA, Vol. II for amodelform of earnout agreementandaccompanyingcommentary.
2.5.1 Is the earnout linkedto
a nonfinancialtrigger? / □No, proceed to3.
□Yes[Describe]
2.5.2 Metrics for anyearnout? / □Netrevenue☐Grossrevenue
□Combination of revenue andearnings☐Earnings
□Gross profitsor
□EBTDA?)
□Other[Describe]
DealIssue / Background/Detail / Comments/Notes
2.5.2.1 Are thereany
exclusions? / □Intercompanycharges
□Transaction-relatedexpenses
□Changes inGAAP
□Extraordinary gains andlosses
□Impact of tax-sharingarrangements
□Executivecompensation
□Indebtedness from acquisition
□Refinancingcharges
□Changes in inventoryvaluation
□Other[Describe]
2.5.2.2 Is an examplecalculationto beattached? / □Yes ☐No
2.5.2.3 How dothe
metricsapply? / □Entirebusiness
□Specificdivision
□Productline
2.5.3 Measuringperiod? / □Single period:[Describe]
□Multiple periods:[Describe]
2.5.4 Method andlimitsofpayment? / □Cash ☐Equity☐Combination
□Lumpsum☐Multiplepayments☐Carryforwardsallowed
□Minimum payout? (if so,$)
□Capped payout? (if so,$)
□Catch-up provision?☐Claw-back provision?
2.5.5 Is earnout eligibility tiedtoemployment orconsultingarrangements? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
2.5.6 Are there buyercovenantsregarding operationof
the acquiredbusiness post-closing? / □Yes ☐No
If yes,describe:
2.5.6.1 If no, is thereexpress language that buyermayoperate thebusiness without a dutyto
theseller? / □Yes☐No, proceed to2.5.7
2.5.6.2 If yes, whatkind
ofcovenants? / □Run business consistent with pastpractice
□Not to make major business decisions without sellerapproval
□Maintain business as a separate accountingentity
□Run business to maximizeearnout
□Maintain separate books andrecords
□Adequately capitalizebusiness
□Impact of add-onacquisitions
□Other
2.5.7 Does earnout everaccelerate? / □Yes ☐No
2.5.8 If yes, whattriggersacceleration? / □Change of control
□Buyer breach
□Frustration ofpurpose
□Other[Describe]
2.5.9 Can buyer offsetanypayments againstearnout? / □Yes ☐No
2.5.10 Is there an expressdisclaimer
of fiduciaryduty? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
2.6 Is there a disputeresolutionmechanism applicablesolely
to the purchase priceadjustmentorearnout? / □No☐Yes[Describe]
2.7 Is there a specificallynamed
arbitrator in the event of adispute? / □No☐Yes[Describe]
3. PervasiveQualifiers
3.1 Material adverse effect(MAE) / □Yes☐No, proceed to3.2 / See MSPA, Vol. II, Section1.1, definition of “MaterialAdverse Change” and Section 3.12andaccompanyingcommentary.
3.1.1 Is MAEdefined? / □Yes ☐No
3.1.2 Are target’sprospects included? / □Yes ☐No
3.1.3 Is itforward-looking? / □Yes ☐No
3.1.4 Is target’sabilityto consummatethe
transactionincluded? / □Yes ☐No
3.1.5 Is buyer’s ability tooperatetarget’s businesspost-closing included? / □Yes ☐No
3.1.6 Is there adollarthresholdamount? / □Yes,$☐No
3.1.7 Are there carveouts? / □Yes☐No, proceed to3.1.8
DealIssue / Background/Detail / Comments/Notes
3.1.7.1 If yes, what carveouts areincluded? / □Actions required byagreement☐Announcementofdeal
□Changes inaccounting☐Changes inlaw
□General economicconditions☐Financialmarketdownturn
□Industryconditions☐Waror terrorism
□Other[Describe]
3.1.7.2 Are anycarve-outsqualifiedby disproportionateeffect? / □Yes ☐No
3.1.8 Does MAE apply totarget’s individualsubsidiaries? / □Yes ☐No
3.1.8.1 If yes, howdoes
MAEapply? / □Target and subsidiaries together only
□Target and subsidiariesindividually
3.1.9 Are theretarget-relatedtriggering events inadditionto or in lieu of anMAE? / □Loss of majorcustomers
□Decline inrevenues
□Casualty loss
□Other[Describe]
3.2 Are there knowledgestandards? / □Yes☐No, proceed to4. / See MSPA, Vol. I, Section1.1, definition of “Knowledge”and accompanyingcommentary.
3.2.1 How is knowledgedefined? / □Actual☐Constructive☐Silent
3.2.1.1 Ifconstructive
knowledge, howis
constructivedefined? / □Express investigation: Reasonable or dueinquiry
□Express investigation: Other[Describe]
□Role-based deemed knowledge
□Other[Describe]
3.2.2 Who is included ifknowledge is imputed totarget? / □Noidentifiedpersonsortitles☐Identifiedpersonsor
titles[Describe]
DealIssue / Background/Detail / Comments/Notes
3.3 Is “materiality”defined? / □Yes ☐No
3.3.1 Is “notice”qualified? / □Yes ☐No
3.3.2 If qualified, howis noticequalified? / □Writtennoticeonly☐“Knowledge”ofnotice
□Other:
4. Target’sRepresentations, Warranties, andCovenants
4.1 For financial statements,is there a “fairpresentation”representation? / □Yes ☐No
4.1.1 If yes, is it GAAPqualified? / □Yes ☐No
4.2 Is there a “noundisclosed liabilities”representation? / □Yes☐No, proceed to4.3. / See MSPA, Vol. I, Section 3.9andaccompanyingcommentary.
4.2.1 Is it knowledgequalified? / □Yes ☐No
4.2.2 What liabilities does itcover? / □Allliabilities(buyer-favorable)☐GAAPliabilities(target-favorable)
□Excludes ordinary course (with or without reference to balancesheet?)
□Excludes immaterialliabilities
□Excludes liabilities common to the industry for similarly situatedcompanies
4.3 Is there a compliancewithlawrepresentation? / □Yes☐No, proceed to4.4.
4.3.1 Is it knowledgequalified? / □Yes ☐No
4.3.2 Is present andpast complianceincluded? / □Yes ☐No
4.3.2.1 If yes, is there atimelimit as to how farpast? / □Yes [Describe] ☐No
4.3.3 Is notice ofinvestigationincluded? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
4.3.4 Is notice ofviolationincluded? / □Yes ☐No
4.3.5 Is itqualified? / □MAE ☐Materiality
4.4 Is collectability of A/Rguaranteed? / □Yes ☐No
4.5 Is there a “10b-5” and/orfulldisclosurerepresentation? / □Fulldisclosureonly☐10b-5only☐Both☐None
4.5.1 If 10b-5 only, is itknowledge
qualified? / □Yes ☐No
4.5.2 Does it exclude businessplans
and financialprojections? / □Yes ☐No
4.5.3 Is it limited torepresentationsin the agreementanddeliverables atclosing? / □Yes ☐No
4.6 Is there a buyerfinancing
representation? / □Yes ☐No
4.7 Is there a covenant for updatingof disclosure schedules beforeclosing? / □Required☐Permitted☐Expresslyprohibited☐Silent
4.7.1 If required orpermitted,what informationshouldbeupdated? / □Pre-signingonly☐Post-signingonly☐Both
4.7.2 If required orpermitted,is the buyer’s righttoindemnificationlimited forupdates? / □Yes ☐No
4.7.3 If required orpermitted,can buyer terminatefor certainupdates? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
4.8 Is there a covenant fornoticeof breaches ofrepresentations,warranties andcovenants? / □Expresslyrequired☐Notexpresslyrequired
4.9 Is there a covenant for operationinthe ordinarycourse? / □Yes ☐No
4.9.1 If yes, is “ordinarycourse”
defined? / □Yes ☐No
4.9.2 If yes, is there aqualification? / □Best/reasonableeffortsstandard☐Consistentwithpastpractice
□Noqualification
4.10 Is there a covenant for noshop/notalk? / □Yes ☐No
4.10.1 If yes, is there afiduciary
outexception? / □No☐Yes[Describe]
4.11 Is there a “break-up”fee? / □No ☐Yes$
4.12 Is there a reverse terminationfee? / □No ☐YesIf yes, $
4.13 Is there expense reimbursementon termination forbreach? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
4.14 Are there covenants for anyof thesematters? / □Access for post-closing adjustments, taxes/audits, claims,etc.
□Non-compete
□Non-solicitation of employees
□Non-solicitation of customers
□Furtherassurances
□Litigationsupport
□IP rightssupport
□Taxmatters
□Transitionalservices
□Maintain separate existence(years)
□Namechange
5. Conditions toClosing
5.1 Accuracy oftarget’s representations / See MSPA, Vol. I, Section 8.3andaccompanyingcommentary.
5.1.1 When must they beaccurate? / □Atsigningandclosing☐Atclosingonly☐Atalltimes
5.1.2 How accurate must theybe? / □Accurateinallrespects☐Accurateinallmaterialrespects
□MAEqualification
5.1.2.1 If a MAE qualifier,is there acapitalizationcarveout? / □Yes ☐No
5.1.2.2 Is there a“doublemateriality”scrape? / □Yes ☐No
5.2 Buyer’s materialadverse changecondition / □Yes ☐No
5.2.1 If yes, what kind ofcondition? / □Stand-aloneonly☐Backdooronly☐Both
DealIssue / Background/Detail / Comments/Notes
5.3 No legal proceedingschallengingthetransaction / □Yes☐No, proceed to5.4.
5.3.1 What types oflegalproceedings areincluded? / □Governmentproceedingsonly☐Anymateriallegalproceedings
5.3.2 What types ofchallengesareincluded? / □Pendingonly☐Pendingandthreatened
5.4 Legal opinions (non-tax)of target’scounsel / □Required☐Notrequired
5.5 Consents andapprovals? / □Yes ☐No
5.5.1 If yes, material levelonly? / □Yes ☐No
5.6 AppraisalRights / □Yes ☐No
5.6.1 If yes, to whom aretheappraisal rightsavailable? / □Not exercised by morethan% of holders
□Not available to morethan% ofshares
6. Indemnification / See MSPA, Vol. I, Section 11andaccompanyingcommentary.
6.1 Is “sandbagging”addressed? / □Pro-sandbagging☐Anti-sandbagging☐Silent
6.1.1 If pro-sandbagging, what kinds ofremediesareprovided? / □Indemnification rightsonly☐Walkrights only
□Indemnification and walkrights☐Other[Describe]
6.2 Is there a “nootherrepresentations andwarranties”/nonrelianceprovision? / □Only“nootherrepresentationsandwarranties”☐Onlynonreliance
□Both “no other representations and warranties” andnonreliance☐Neither
6.3 Is there a stipulatedsurvival/time within whichto
assertclaims? / □ months☐Nosurvival☐Silent
DealIssue / Background/Detail / Comments/Notes
6.3.1 If there is survival, arethereany carveouts?
Rep / Months / StatuteofLimitations / Indefinite
☐ / Broker’s/finder’sfees / ☐ / ☐+days / ☐
☐ / Capitalization / ☐ / ☐+days / ☐
☐ / Title tosecurities / ☐ / ☐+days / ☐
☐ / Dueauthority / ☐ / ☐+days / ☐
☐ / Noconflicts / ☐ / ☐+days / ☐
☐ / Materialcontracts / ☐ / ☐+days / ☐
☐ / Financialstatements / ☐ / ☐+days / ☐
☐ / Undisclosedliabilities / ☐ / ☐+days / ☐
☐ / Employeebenefits/ERISA / ☐ / ☐+days / ☐
☐ / Title to/sufficiency ofassets / ☐ / ☐+days / ☐
☐ / Environmental / ☐ / ☐+days / ☐
☐ / Intellectualproperty / ☐ / ☐+days / ☐
☐ / Cybersecurity, privacyanddataprivacy / ☐ / ☐+days / ☐
☐ / Taxes / ☐ / ☐+days / ☐
☐ / Breach ofcovenants / ☐ / ☐+days / ☐
☐ / Fraud / ☐ / ☐+days / ☐
☐ / Other / ☐ / ☐+days / ☐
6.3.2 Express limitation oftheapplication of longerstatuteoflimitations? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
6.3.3 Is the definitiveagreement “under seal” or is aparticularperiod specified forthe purpose of extendingtheotherwise applicablestatuteoflimitations? / □Yes ☐No
6.4 Are damages/lossesdefined? / □Yes☐No, proceed to6.5. / See MSPA, Vol. I, Section 11andaccompanyingcommentary.
6.4.1 Is it limited to “out ofpocket”damages? / □Yes ☐No
6.4.2 Is diminution invalueaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.3 Is multiple-basedrecoveryaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.4 Are incidentaldamagesaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.5 Are consequentialdamagesaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.6 Are lost profitsaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.7 Are punitivedamagesaddressed? / □Expresslyincluded☐Expresslyexcluded☐Silent
6.4.8 Are any of theexcludeddamages included ifawarded to athird-party? / □Yes(☐onlytotheextentthatindemniteewasnotbadactor?)☐No☐Silent
6.5 Is there abasket? / □Yes☐No, proceed to6.6.
6.5.1 What type ofbasket? / □Deductible☐Firstdollar☐Combination
6.5.2 Whatamount? / ☐$
DealIssue / Background/Detail / Comments/Notes
6.5.3 What is coveredby thebasket? / □Breaches of target’s representations andwarranties
□Breaches of target’scovenants
□Other[Describe]
6.5.4 Is there an eligibleclaimthreshold ormini-basket? / □Yes,$☐No
6.6 Is there a “doublemateriality”scrape? / □Yes ☐No
6.6.1 If yes, for whatpurpose? / □Determinationofbreach☐Calculationoflosses/damages☐Both
6.7 Are there caps onindemnification? / □Yes, lower cap for certain representations that is less than purchaseprice,
$(see below)
□Yes, second, higher cap for certain other representation that is still lessthanpurchase price,$(see below)
□Yes, equal to purchase price (seebelow)
□No capswhatsoever
DealIssue / Background/Detail / Comments/Notes
6.8 Are there carve outs for thebasket?Are there carve outs forcertainrepresentations, or differentcaps for differentrepresentations? / □Yes☐No If yes, completethefollowing:
Rep / BasketDoesNotApply? / SubjecttoLowerCap? / SubjecttoHigherCap? / No Cap?
☐ / Broker’s/finder’sfees / ☐ / ☐ / ☐ / ☐
☐ / Capitalization / ☐ / ☐ / ☐ / ☐
☐ / Title tosecurities / ☐ / ☐ / ☐ / ☐
☐ / Dueauthority / ☐ / ☐ / ☐ / ☐
☐ / Noconflicts / ☐ / ☐ / ☐ / ☐
☐ / Materialcontracts / ☐ / ☐ / ☐ / ☐
☐ / Financialstatements / ☐ / ☐ / ☐ / ☐
☐ / Undisclosedliabilities / ☐ / ☐ / ☐ / ☐
☐ / Employeebenefits/ERISA / ☐ / ☐ / ☐ / ☐
☐ / Title to/sufficiency ofassets / ☐ / ☐ / ☐ / ☐
☐ / Environmental / ☐ / ☐ / ☐ / ☐
☐ / Intellectualproperty / ☐ / ☐ / ☐ / ☐
☐ / Taxes / ☐ / ☐ / ☐ / ☐
☐ / Breach ofcovenants / ☐ / ☐ / ☐ / ☐
☐ / Fraud / ☐ / ☐ / ☐ / ☐
☐ / Other / ☐ / ☐ / ☐ / ☐
6.9 Is indemnificationthe
exclusiveremedy? / □Exclusive☐Non-exclusive☐Silent
6.9.1 If exclusive, aretherecarveouts? / □Yes ☐No
6.9.1.1 If yes, whattype? / □Intentionalmisrepresentation☐Equitableremedies
□Fraud☐Breach of covenant
DealIssue / Background/Detail / Comments/Notes
6.9.1.1.1 If fraud, howis
frauddefined? / □Undefined☐Includesconstructiveornegligent
□Limited to actualfraud☐Limitedtointentionalmisstatement
or omission
□Requires “badfaith”
□Limited to “fraud or intentional misrepresentation oromission”
6.10 Are individual sellersresponsible for misrepresentations,omissions or breaches by othersellers? / □Yes ☐No
6.11 Are thereescrows/holdbacks? / □Yes ☐No
6.11.1 If yes, who pays theescrow agentfee? / □Buyer☐Seller☐Split
6.11.2 If yes, are theythe
firstrecourse? / □Yes ☐No
6.11.3 If yes, are theytheexclusiveremedy? / □Exclusive☐Non-exclusive☐Exclusivewithearnoutsetoff
6.12 Are there stand-aloneindemnities? / □Yes ☐No
6.12.1 If yes, forwhat? / □ERISA☐Environmental☐Taxes
□Other[Describe]
6.13 Does indemnificationexpressly
cover third partyclaims? / □Yes ☐No
6.13.1 If yes, doesindemnificationcover third party claimsevenif they are notsuccessful? / □Yes ☐No
6.14 Is the indemnifying partyentitledto defend third partyclaims? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
6.14.1 If yes, are thereconditions? / □Yes ☐No
6.14.1.1 If yes, whattype? / □Counsel acceptable to indemnifiedparty
□Monetary damagesonly
□Claim does not relate totaxes
□Indemnifying party admitsresponsibility
□Indemnifying party must post security if aboveescrow/holdback
□Other
6.15 Are there reductionsagainst
buyer’s indemnificationclaims? / □Silent☐Expresslyincluded
6.15.1 If expresslyincluded,forwhat? / □Reduction for taxbenefits
□Reduction for insuranceproceeds
□Requirement that buyer mitigatelosses
7. DisputeResolution
7.1 Is there a waiver of jurytrialprovision? / □Yes ☐No
7.2 Is there an alternativedisputeresolution (ADR)provision? / □Yes ☐No
7.2.1 If yes, what kind ofADR? / □Bindingarbitration☐Mediation☐Mediationthenbindingarbitration
7.2.1.1 If arbitration, howarethe arbitrator(s)chosen? / □American ArbitrationAssociation
□JAMS
□Other[Describe]
7.2.1.2 If arbitration,is
the mandate ofthe
arbitrator(s)defined? / □No ☐Yes
DealIssue / Background/Detail / Comments/Notes
7.2.1.3 If arbitration,are
location, languageand
applicable lawspecified? / □Yes [Describe] ☐No
7.2.1.4 If arbitration, howareexpenseshandled? / □Loserpays☐ Expenses apportioned ☐Silent
□Evenlysplit☐Determinedbyarbitrator
7.3 Will counsel to the targetrepresentthe target or sellerpost-closing? / □Yes ☐No
7.3.1 Is a post-closingconflicts
waiverappropriate? / □Yes ☐No
7.3.2 Should seller retainattorney-client privilege forpre-closingcommunications withcounselto seller ortarget? / □Yes ☐No
8. MiscellaneousProvisions
8.1 Does the terminationprovision include a “drop dead”date? / □Yes [Describe] ☐No
8.2 Does the confidentialityagreement survive the definitiveacquisition agreement? / □Yes ☐No
8.3 Is specific performanceclearly
preserved? / □Yes ☐No
8.4 Does the agreement addresswhathappens if a party terminates duetoabreach? / □Yes ☐No
DealIssue / Background/Detail / Comments/Notes
8.5 Are there guaranteesby thirdparties? / □Yes ☐No
8.5.1 If yes, of whoseobligations? / □Buyer☐Seller☐Both
8.6 Is the governing lawstipulated? / □Yes ☐No
If yes, indicatejurisdiction:
8.7 Is there a stipulation as tovenuefor resolution ofdisputes? / □Yes ☐No
If yes, indicatevenue: Ifyes,isitexclusive?☐Yes☐No