What Are Some of the Necessary Legal Documents Involved in the Sale of an Arkansas Business?
Company acquisitions, mergers, and other business transactions tend to vary in structure, some complex and some far more straightforward, which makes it essential to partner with a legal team well-versed in the intricacies of business acquisitions and mergers. The mergers and acquisitions attorneys of our Arkansas law firm are highly skilled at representing the unique goals of all our clients. Learn more about our legal services and how we may assist you.
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Depending on the type of business and the complexity of the proposed business transaction, different legal documents may be required for a merger or acquisition.
Among the most common examples of key legal documents is a confidentiality agreement, sometimes called a nondisclosure agreement (NDA). This legally binding contract protects the seller’s confidential information in a business transaction. This sort of legal agreement helps facilitate an open exchange of information between the buyer and seller.
A letter of intent (LOI) is a nonbinding document that outlines the basic terms of the transaction, such as the purchase price, closing date, and any potential terms of financing. Letters of intent usually cannot be enforced in court, but they serve to document a shared understanding of high-level business deals.
The purchase agreement is the primary legally binding contract that establishes the terms of a merger or acquisition. Purchase agreements are the documents that are most carefully negotiated between all interested parties, and it is recommended that those parties retain legal counsel for professional mergers and acquisitions when going through negotiations. Purchase agreements could be drafted to reflect sales of business assets or the sale of business equity. There are many reasons why the purchase agreement is the most critical legal document in mergers and acquisitions, including the fact that it allocates liabilities between the buyer and seller.
In some cases, the buyer in a merger or acquisition may desire that the seller retain a temporary role within the business after closing. Such a relationship is often dictated by the terms of a post-closing employment agreement or non-compete agreement, which are usually signed at the closing of a business transaction.
What Should Be Included in the Purchase Agreement?
There are several types of purchase agreements, including asset and shareholder purchase agreements.
A typical Arkansas purchase agreement includes the following sections:
- Preambles and recitals, which act something like an introduction to the proposed deal
- Definitions, which would provide a detailed list of key terms used throughout the document
- Detailed descriptions of the proposed transaction, which would explain the proposal of this transaction in intimate detail, including business structure, asset sale, stock sale, and merger and acquisition assets and liabilities
- Purchase price and any considerations, which are arguably the most critical part of the purchase agreement
- Representations and warranties, which establish statements and guarantees by the parties involved in the transaction
- Indemnification causes, such as sandbagging clauses, survival ranges, and baskets and deductibles
- Covenants, which could be affirmative or restrictive
- Terms for termination
- Conditions, which can state certain contingencies or conditions that must be satisfied before closing can take place
- And any miscellaneous provisions, including severability, attorney fees, mediation measures, and notes on governing laws
The first draft of the purchase agreement helps set the tone for all future negotiations. It is customary for the buyer in an M&A to prepare the initial draft.
Are Covenants Necessary for an M&A Purchase Agreement?
Covenants are either promises to do something (a positive covenant) or guarantees not to do something (a negative or restrictive covenant). In an M&A purchase agreement, covenants define the parties’ legal obligations between the signing and closing and sometimes after closing.
A pre-closing covenant requires that the seller operate business as usual until the sale can go through. Essentially, this requires business operators to continue to make their most motivated efforts to maintain the goodwill of customers, suppliers, and all other business partners.
A post-closing covenant may ask the buyer to offer employment to a certain number of the seller’s employees or provide specific benefits. It may also require that the seller assists in collecting any outstanding debts receivable. This is the only type of legal covenant that persists after using our post-closing covenants.
What is a Definitive Agreement?
A definitive purchase agreement (DPA) is a document that records the terms and conditions between the companies that agree to a merger, acquisition, joint venture, or other form of strategic alliance for business purposes. DPAs are mutually binding contracts between buyers and sellers that include the terms and conditions involved in the deal. The DPA supersedes all prior agreements and understandings, whether oral or written. A DPA is sometimes referred to as a definitive merger agreement.
What is a Shareholder Agreement?
A shareholder agreement is a legally binding contract between all company or business entity owners. The document establishes each shareholder’s rights and obligations, the terms and conditions of their involvement, and how any future decisions will be made within the company. Such an agreement is essential for safeguarding the interests of shareholders, particularly in instances involving the negotiation of power between the majority and minority shareholders and mergers and acquisitions.
What Steps Should Be Taken Before Purchasing or Selling a Business?
You should retain qualified advisors before a merger or acquisition to assist you throughout the process.
We recommend three types of advisors:
- Professional legal counsel, such as mergers and acquisition attorneys, will provide legal guidance throughout the structuring of the transaction, negotiations, drafting contracts, due diligence, and closing. Our Little Rock law firm has extensive experience in these regards, and we would be proud to represent your interests
- Accountants or CPAs assist with the financial and tax aspects of the proposed transaction. Transactional CPAs provide dedicated assistance with the preparation of financial statements and financial due diligence. Your accountant or CPA can also assist you in making sure that there are no hidden tax issues
- Investment bankers or business brokers can help you find a business partner or buyer. Brokers also aid with the determination of your fair market value and can help get the transaction to the closing stage
Schedule an In-Depth Consultation with Our Little Rock Business Attorneys
When involved in acquisitions and mergers, it is highly recommended that you retain professional legal representation from experienced business law attorneys. Our Little Rock business lawyers can help explain the importance of purchase agreements and assist you in drafting an agreement that suits your needs and protects your interests.
To learn more about how our legal team can help you throughout the process, please contact our Arkansas attorneys to schedule a case evaluation today.
Please book a consultation by calling us at 501-988-3302.
