21/01/2022 Types of M&A contracts
After the due diligence phase, which we already analysed in other posts from both the buy-side and vendor standpoints, it is followed by the contract drafting phase in which the purchase is formalised. We will comment on the most usual types of contracts below, describe them in general in this article and analyse their main clauses in the next articles in this series.
- Share purchase agreement (SPA):
This is the main type of contract used and its purpose is to buy a company’s shares or equity units, including its business, assets and liabilities.
We say that this is the main type of contract used since it allows the transfer of all the assets and liabilities and, because of its features, its execution implies greater ease compared with the APA (described in the next section).
This type of contract allows the purchase of any percentage, from minority to majority positions, including all the shares or equity units, depending on what the buyer is looking for in each specific case. If 100% is not acquired, a shareholders’ agreement (SHA) is usually signed to regulate the partners’ relations.
The usual clauses in this type of contract are those regarding the purpose (i.e. the purchase of a company’s shares or equity units), the price and payment method, the parties’ representations and warranties, the liability framework (and its timing and quantitative limits), the guarantees regarding the representations and warranties, the claims procedure, and the post-contractual obligations such as the non-compete and non-solicitation clauses. In the same way, they also contain the usual clauses of confidentiality, notices, assignment, and the applicable jurisdiction and law.
- Asset purchase agreement (APA):
Unlike the SPA, the purpose of the APA is the purchase of the assets.
This type of contract is used less since it allows only the transfer of assets, so special care must be taken when defining the transaction’s scope. It also implies greater risks in terms of execution since it requires third-party waivers and filing at the corresponding public registers.
The differences in clauses with respect to the SPA are that its purpose is the transfer of assets (real estate, facilities, chattel, contracts, licences, employees, etc.) and it tends to envisage express provisions regarding third-party consent and the conditions for the actual transfer of each asset included within the transaction’s scope.
- Investment agreement (IA):
This contract is aimed at materialising an investment whereby an investor buys into a company’s capital (i.e. it becomes a partner or shareholder), usually through a cash-in transaction, which tends to be executed through a capital increase in any of its forms, although this can be carried out using formulas combining a capital increase with the purchase of shares or equity units.
Like the SPA, when 100% of a company is not acquired, the investment agreement tends to be signed together with a shareholders’ agreement (which is usually the same document in this case).
The usual clauses in this type of contract refer to the investment amount, the payment method, the milestones that may be applied, and the cap table. If the IA also has a shareholders’ agreement, it tends to include clauses referring to corporate governance, the composition of the governing body, the decision-making process at a shareholders’ meeting or board meeting (qualified majorities), the share transfer system (drag and tag-along rights), the incentive plans for key employees (stock option plans, phantom plans) and other features.
As can be seen, there are many ways in which to materialise an M&A transaction, whose form and content should conform to the needs in each specific case. Here we have described those that, according to our experience, are more common.
If you have any questions or require further information, please contact our M&A specialists.