Over the course of the past few years I’ve been working sporadically on a shortish (16,000 words) manuscript entitled “The Structure of M&A Contracts.” It discusses the function of the different categories of provisions in an M&A contract (representations, pre-closing obligations, conditions, indemnification, and termination provisions), the interplay between those categories of provisions, and the structural issues that routinely arise in negotiating them.
I apply to this topic the same approach I bring to bear in MSCD. The manuscript provides specific guidance regarding what contract language you should use to accomplish a given aim and what contract language you should avoid. Also, it presents some of its analysis in the form of tables, with the aim of making that analysis clearer. And it doesn’t hesitate to depart from the conventional wisdom.
In working on the manuscript, I’ve enjoyed the contrast with MSCD: Clear contract language is, as a general matter, a function of the cumulative effect of countless separate decisions, most of them of modest significance when considered in isolation. By contrast, the structure of M&A contracts is more of a puzzle, with small changes having dramatic consequences.
I’m currently discussing with West Legalworks the notion of doing a series of webinars on this topic or publishing the manuscript as a booklet, or both. And I’m contemplating devoting more of my energies to doing in-house M&A seminars. With that in mind, I thought I’d run by you one of the more interesting topics—as of what date, or dates, should the seller make its representations?
Any set of representations is preceded by an introductory phrase, or “lead-in.” Here’s the lead-in I recommend:
The Seller represents to the Buyer as follows, as of the date of this agreement and as of the Closing:
The wording of the lead-in raises a number of different issues, but what’s relevant for this post is that the recommended representations lead-in states that the seller is making the representations as of the date of the agreement and as of the closing. Review of contracts filed on the Securities and Exchange Commission’s EDGAR system indicates that although some drafters opt for that approach, others prefer not to state when the representations are being made and so use a lead-in such as this one:
The Seller represents to the Buyer as follows:
The latter approach results in the representations being made as of the date of the agreement but not as of the closing—the buyer wouldn’t be able to bring a claim for indemnification based on inaccuracy of the representations as of the closing, because no representations had been made as of the closing. Through the bringdown condition, the buyer might be able to use inaccuracy of any representation as a reason not to close, but that wouldn’t allow the buyer to recover damages.
Consistent with this, Kling & Nugent’s Negotiated Acquisitions of Companies, Subsidiaries and Divisions, at § 14.02, states that “If a representation is not true at closing (but was true at signing), the representing party cannot be sued for it; the other party can merely refuse to close.” But it goes on to say that “This can be resolved in the buyer’s favor if the indemnification provisions are properly drafted or if the representations (either each one or a general representation) provide that the situation as represented is true at signing and ‘at Closing, will be true.'”
But it would be awkward to address this issue through the indemnification provisions, given that it’s standard for indemnification provisions simply to refer to indemnification for inaccurate representations without addressing when those representations were made.
As for including the time of closing as a reference point in a representation, that wouldn’t result in the representation’s being made as of the closing but it presumably would provide the buyer a basis for claiming damages for inaccuracy as of the closing. But if you instead use the version I recommend as your representations lead-in, you would draft more concisely, as you wouldn’t need to include the closing as a reference point in each representation. It would also reduce the awkwardness of having the seller represent at signing as to circumstances at closing.
It’s standard for acquisition agreements to provide for the seller to deliver at closing an officer’s certificate regarding satisfaction of the conditions to the buyer’s obligation to consummate the transaction. Any given officer’s certificate might simply refer to the conditions in question by section number, or it might track their wording. But having the seller deliver an officer’s certificate at closing isn’t equivalent to having the seller make its representations as of the closing. If the officer’s certificate were incorrect, in that a representation that had been accurate as of the date of the agreement was inaccurate at closing, it’s not clear that the officer’s certificate would entitle the buyer to bring a claim for indemnification that it would not otherwise be entitled to bring under the agreement, as opposed to bringing, say, a claim for fraud.
This is something that Jim Freund discusses in § 5.3.2 of Anatomy of a Merger. He notes that if a representation is made only as of the date of the agreement and circumstances have changed by the time the closing occurs, then “although the purchaser might well have a rescission remedy and other rights under Rule 10b-5 (as well as personal claims against the fraudulent officer and the negligent attorney), the purchaser’s right to indemnification under the agreement is questionable—since the representation was true when made, and the lawyer’s opinion, the officer’s certificate, and the reiteration of representations are all merely closing conditions serving a different purpose in the overall scheme of things.”
The Model Asset Purchase Agreement, published by the American Bar Association’s Section of Business Law, attempts to circumvent this problem. It includes representations lead-ins that are silent as to when the representations are being made, which means that the representations are being made only as of the date of the agreement. So it provides for indemnification in the event of inaccuracy of any representation contained in a certificate delivered by the seller and the shareholders to the effect that their representations are sufficiently accurate to satisfy the bringdown condition. But besides being unorthodox, this arrangement seems contrived—it’s not clear that a certificate to the effect that a condition has been satisfied itself constitutes a representation.
Again, the simpler and clearer alternative would be for the representations lead-ins to state that the representations are being made as of the date of the agreement and as of the closing.
One shortcoming of my recommended form of lead-in is that it’s a little awkward to refer to the seller’s making now representations that it will in fact be making in the future, namely representations as of the closing. It would be more accurate to phrase my recommended version as follows: The Seller represents to the Buyer as of the date of this agreement, and will be deemed to have represented to the Buyer as of the Closing, as follows. But given the added complexity, in practical terms this alternative formulation doesn’t represent an improvement.
So that’s a taste of my analysis of the structure of M&A contracts. I’d be interested to hear what you think. And should I continue working to turn my manuscript into a booklet and a series of webinars?