Transaction Cycle and Key
Documents
September - November 2011
Mark Okes-Voysey
Transaction cycle
Pre-contractual
negotiations
Exchange
Letter of Intent, Confidentiality Agreement,
Contracts with advisers, Data Room Rules,
Buyer’s Due Diligence
Share Purchase Agreement, Disclosure Letter,
Disclosure Bundle; Escrow Agreement
Conditions
Precedent
Satisfaction/ waiver of agreed conditions prior to
completion
Completion
Share transfer documentation, Shareholders
agreement (if < 100% purchased);
Corporate/Personal Guarantee
Completion accounts, price adjustment,
payment of consideration (if not at completion)
PostCompletion
September-November 2011
Slide 2
Pre-contractual negotiations
Confidentiality agreement
• To keep the dealings confidential
• Often entered into before the Letter of Intent
Letter of Intent (heads of terms, memorandum of understanding etc)
• Usually a non binding document (unless specifically agreed otherwise)
• Signed in the early stages of a potential transaction
• Outlines timetable for transaction
• Contains main terms of transaction agreed in principle
• Exclusivity
• Confidentiality (unless dealt with in the confidentiality agreement)
• Care to be taken to ensure that non-binding terms do not create contractual
obligations
September-November 2011
Slide 3
Pre-contractual negotiations
Due Diligence
• Identifies the risks affecting the target
• Allows to decide whether to proceed with the transaction
• Leverage for the buyer to negotiate the price and transaction terms
Data Room
• Established by the seller to provide information in organized manner
• Access is granted after the Data Room rules are prepared by the seller
• Often used in the auction sale
• May be virtual
Due diligence results
• Representations, warranties and indemnities in the SPA
• Conditions precedent in the SPA
• Post-completion integration
September-November 2011
Slide 4
Major elements of a term sheet (based on transaction with
PE)
Lock-up period:
Fixed period of time when the parties are not allowed to buy or sell their shares in the
company
Right of first offer:
In the case one of the shareholders wants to sell its stake to the third party, the stake
should be first offered to the existing shareholders on the same terms and conditions.
Drag-along clause
(conditional/
unconditional):
If one of the parties receives a bona fide offer from a third investor, the receiving party
shall have the right to require the other party to sell its shares.
•
Conditional drag-along right: The offer received has to exceed a certain amount (in
terms of EBITDA multiples)
•
Unconditional: If a liquidity event does not occur before the 5th anniversary after the
completion
September-November 2011
Slide 5
Major elements of a term sheet (based on transaction with
PE)
Tag-along clause:
If one of the parties intends to sell their shares to a third party, the other party shall have
the right to sell all but not some of its shares in the company to the proposed third party
on the same terms and conditions. However, a partial sale is allowed in case of an IPO.
Liquidity event
Final sale of 100% of the company’s share either to a strategic investor or alternatively
run the IPO-process.
Board composition:
Agreed number of board members from the side of a controlling shareholders and the PE
investor, e.g. 3 and 2.
Veto rights:
Veto right on certain SHA matters, i.e. M&A transaction, changes in the charter of the
entity, bringing debt in excess of a certain threshold, etc.
Exclusivity:
Exclusivity is normally granted once the term-sheet is signed. As an usual practice, in the
case the exclusivity clause is broken, the shareholders have to compensate to the
potential buyer at least due diligence costs. Commonly granted time for the exclusivity is
from 2 to 4 months.
September-November 2011
Slide 6
Share Purchase Agreement
Share Purchase Agreement (SPA)
• Conditions Precedent: actions/events to occur before share transfer
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–
–
Corporate authorizations
Regulatory approvals (anti-trust etc)
Restructuring
Waivers of pre-emption rights
Mitigating issues identified during due diligence
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Pre-completion obligations of the seller vs. conditions precedent
Completion: point of time and procedure for share transfer
Warranties/Representations: statement of facts as to condition of the target
Indemnities: covenant to compensate the buyer in certain events
Limitations on claims and conduct of claims
Non-compete undertaking
Termination for material adverse change (MAC)
September-November 2011
Slide 7
Disclosure Letter
Disclosure Letter:
• Letter from the seller to the buyer with exceptions to the seller’s warranties
• No liability for disclosed facts
• Facts to be fully and fairly disclosed
• General disclosures: public information of which the buyer should be aware
• Specific disclosures: specifically disclosed actual matters, made by
reference to particular warranties
• Disclosure Bundle: copies of documents being disclosed and attached to
the Disclosure Letter
• Buyer’s knowledge
September-November 2011
Slide 8
Completion
Completion of the sale and purchase of shares:
• After the Conditions Precedent have been satisfied or waived
• Transfer of shares by the seller
• Payment of consideration by the buyer (unless a retention is used)
• Other actions:
- Execution of ancillary documents
- Transfer of documents relating to the company
- Termination of powers of governing bodies
- etc.
September-November 2011
Slide 9
Shareholders Agreement
Shareholders Agreement (SHA)
• A part of M&A transaction or an independent JV transaction
• An agreement between shareholders (and usually the company)
• Aimed at regulating the shareholders’ rights and obligations, governance of
the company, exit from the company etc.
• Agreed matters are also reflected in the company’s foundation documents
(subject to confidentiality and legislative restrictions)
September-November 2011
Slide 10
Shareholders Agreement
Limitation of share transfers:
• Pre-emption rights: right of the remaining shareholder to purchase shares
• Lock-in period: restriction on transfer during certain period
• Restrictions on encumbrance of shares
• Tag-along rights: minority shareholder may join the sale of the majority
shareholder’s shares
• Drag-along rights: majority shareholder may require the minority
shareholder to join the sale
September-November 2011
Slide 11
Shareholders Agreement
Other SHA provisions
• Composition and competence of governing bodies
• Reserved matters: to be decided by the shareholders or the board
• Funding of the company: shareholders’ obligation to finance
• Distribution of profit: proportion, no distribution etc.
• Budget and accounts: approval of the budget and compliance
• Put and call options
• Non-compete undertaking
• Termination of the SHA
September-November 2011
Slide 12
Shareholders Agreement
Deadlock
• Failure by the shareholders or the board to reach a decision
Deadlock Resolution:
• Negotiations
• Mediator
• Exit:
- Put/ call options
- Russian roulette
- Texas shoot-out
- Auction
- Joint sale to third party
• Company liquidation
September-November 2011
Slide 13
Dispute Resolution
Disputes under SPA or SHA are often referred to international arbitration (e.g.
LCIA)
In Russia:
• Foreign court’s decision may be enforced if there is an international treaty
• Foreign arbitration decisions may be enforced if there is an international
treaty (NY Convention on the Recognition and Enforcement of Foreign
Arbitral Awards of 1958)
September-November 2011
Slide 14
Thank you!