Understanding some of the key language (and documents) used in M&A transactions

HOT – Heads of Terms / LOI – Letter of Intent / Offer Letter

Often referred to by different names, this document sets out the key terms of the deal before it is actually formally signed, including price and the other terms and conditions for the deal. While largely non-binding, certain provisions – such as giving the buyer exclusivity for a period of time and confidentiality – are often required to be legally enforceable. Although it should be carefully reviewed, buyer and seller should avoid over-negotiating details at this stage, as the detail will be addressed in subsequent agreements. That said, this document establishes the framework and creates commercial pressure to adhere to agreed principles later in the process – so there is a careful balancing act required for this step in the process.

SPA / Share Purchase Agreement

The SPA is the principal transaction document, typically running to 100–140 pages. Among all the many pages it covers:

• Price payable and how this is allocated among more than one seller and the mechanics of payment.
• Price adjustment/confirmation mechanisms for final price determination and adjustments – sometimes referenced as completion accounts or locked box (both of which terms are in themselves a mystery to all but the advisers).
• Warranties: these are contractual statements by the seller about the company and its business, for example, ownership, assets, and absence of litigation. Breaches can lead to claims by the buyer against the seller, subject to agreed limitations and other protections for the seller.
• Indemnities: these are promises made by the seller to cover specific risks (usually financial) identified during due diligence, offering stronger protection than warranties.
• Seller Protections: these include caps on seller liability, financial thresholds (amounts above which buyer claims can only be made), disclosure provisions, and time limits for buyer claims.
• Restrictive Covenants: non-compete and non-solicit obligations given by the seller to protect the business that the buyer has acquired, usually lasting 2–4 years post-completion.

Disclosure Letter

This document qualifies the detailed warranties given in the SPA. Rather than deleting any inaccurate warranties, a seller will disclose exceptions to each warranty – such as any ongoing disputes – to prevent future claims by the buyer. Disclosures must be detailed and accurate to meet the SPA’s usual definition of “fair disclosure.” Though repetitive of due diligence, this step is critical for seller protection.

Deed of Contribution

Where there are multiple sellers, joint and several liability under the SPA means any one or more seller(s) could be liable for the full amount of a claim by the buyer. A deed of contribution allocates liability proportionately among sellers, ensuring fairness if one party is pursued for more than the fair allocation of that liability.

Service Agreements

New agreements for individuals remaining with the business setting out their new terms of engagement post-completion of the acquisition. These are often negotiated alongside the SPA to ensure continuity.

Ancillary Documents

Beyond the core agreements, numerous supporting documents – such as board minutes, shareholder resolutions, and regulatory filings – are required to implement the transaction. Lawyers maintain a comprehensive checklist to track progress and avoid omissions – often called the documents list.

Equity Rollover and Related Documents

Where part of the consideration for the sale involves shares in the buyer (or its group) to be issued to the seller, additional documents govern the structure. These include:

• Articles of Association: covering share rights, valuation mechanisms, board powers, transfer restrictions, and exit provisions.
• Shareholders’ Agreement (SHA): a private agreement complementing the articles, setting out governance, transfer restrictions, financing arrangements, and main shareholder protections.
• Loan Notes / Put & Call Agreements: common in private equity deals, these documents facilitate the exchange of loan notes for equity at different levels of the buyer group structure.

Conclusion

Each document serves a distinct purpose in balancing risk and ensuring clarity between buyer and seller. While some, like heads of terms, are largely indicative and non-binding, others – such as the SPA and disclosure letter – carry significant legal weight. Understanding their function is essential for navigating a successful transaction and will help you keep pace with the process.

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