Merger and Acquisition Agreements
Contract Types
Merger and Acquisition Agreements
Buying or selling a business is one of the most consequential transactions a company or individual will undertake. Merger and acquisition agreements govern the terms of that transaction — who gets what, what is being represented, what happens if something goes wrong, and how the deal closes. Understanding the structure and key provisions of these agreements is essential for any party involved.
What This Contract Is
A merger and acquisition agreement is the primary contract that documents the terms of a business combination or acquisition. The specific form of the agreement depends on how the transaction is structured. A stock purchase agreement transfers ownership of a company by selling its equity. An asset purchase agreement transfers selected assets and, in some cases, specified liabilities. A merger agreement combines two entities into one under applicable state law. Each structure has different legal, tax, and operational implications, and the choice of structure shapes the form of the underlying agreement. M&A transactions are rarely simple — they involve multiple documents, extensive due diligence, and negotiation across a wide range of commercial and legal issues.
When It's Commonly Used
- •A business owner is selling the company to a strategic buyer or private equity firm.
- •A company is acquiring a competitor, supplier, or complementary business.
- •A private equity fund is acquiring a portfolio company or exiting an investment.
- •Two companies are merging to combine operations, eliminate redundancy, or achieve scale.
- •A buyer is acquiring selected assets of a business rather than the entire entity.
- •A company is acquiring a division or product line from a larger organization.
- •An investor group is conducting a management buyout of an existing business.
How the Agreement Is Generally Structured
Recitals and Definitions
Identifies the parties, describes the transaction, and defines key terms used throughout the agreement.
Transaction Structure and Purchase Price
Describes the form of the transaction (stock purchase, asset purchase, or merger), the consideration to be paid, and any adjustments to the purchase price at or after closing.
Representations and Warranties
Statements of fact made by each party about themselves, the business, and the transaction. These are heavily negotiated and form the basis for indemnification claims if they prove inaccurate.
Covenants
Obligations of the parties between signing and closing — typically including operating the business in the ordinary course, obtaining required consents, and cooperating on regulatory filings.
Closing Conditions
Conditions that must be satisfied before either party is obligated to close the transaction, such as regulatory approvals, third-party consents, and the accuracy of representations.
Indemnification
Allocates responsibility for losses arising from breaches of representations, warranties, or covenants. Typically includes caps, baskets, and survival periods that limit exposure.
Termination Rights
Circumstances under which either party may walk away from the transaction before closing, and any fees or remedies that apply.
Post-Closing Obligations
Obligations that survive closing, such as earnout arrangements, transition services, non-competition provisions, and indemnification obligations.
Disclosure Schedules
Exhibits attached to the agreement that qualify or supplement the representations and warranties with specific factual disclosures.
Clauses Commonly Found in This Contract
Representations and Warranties
Each party makes factual statements about the business, its financial condition, legal compliance, intellectual property, and other matters. Inaccurate representations can give rise to indemnification claims after closing.
Indemnification
Allocates post-closing risk between buyer and seller. Sellers typically indemnify buyers for breaches of representations and pre-closing liabilities; buyers indemnify sellers for assumed liabilities and post-closing operations.
Material Adverse Effect
Defines what changes or events would be significant enough to allow a party to walk away from the transaction or constitute a breach of a representation.
Confidentiality
Governs the handling of non-public information exchanged during due diligence and after signing.
Non-Disclosure Agreement
Often executed separately at the outset of discussions, the NDA protects confidential business information shared during the evaluation process.
Governing Law
Specifies which state's law governs the agreement and where disputes will be resolved.
Assignment
Addresses whether either party may assign its rights or obligations under the agreement, and whether the transaction itself triggers assignment restrictions in the target's contracts.
Waiver
Specifies that a party's failure to enforce a provision does not constitute a permanent waiver of that right.
Severability
Provides that if any provision is found unenforceable, the remainder of the agreement continues in effect.
What Stewart Law Looks For
- ✓Whether the purchase price is fixed or subject to adjustment mechanisms such as working capital true-ups or earnouts, and whether the adjustment methodology is clearly defined.
- ✓The scope and accuracy of representations and warranties — particularly financial statements, undisclosed liabilities, intellectual property ownership, and material contracts.
- ✓Indemnification caps, baskets, and survival periods — and whether they are appropriate given the size and risk profile of the transaction.
- ✓Whether closing conditions are achievable and whether any condition gives one party an unreasonable ability to walk away.
- ✓The treatment of existing contracts — whether they require consent to assignment and whether key relationships survive the transaction.
- ✓Employee matters, including retention arrangements, benefit plan treatment, and any change-of-control obligations.
- ✓Tax representations and any tax indemnification provisions.
- ✓Whether post-closing obligations such as earnouts are clearly defined with objective measurement criteria.
- ✓Termination fee provisions and whether they are proportionate to the transaction.
- ✓The adequacy and accuracy of disclosure schedules.
Areas That May Deserve Closer Attention
- ⚑Broad or vague representations that are difficult to verify or that expose a seller to claims for matters outside their knowledge.
- ⚑Indemnification provisions with no cap or an unusually high cap relative to the purchase price.
- ⚑Earnout provisions with subjective performance metrics or that give the buyer broad discretion over the business post-closing.
- ⚑Closing conditions that are within one party's control and could be used to delay or avoid closing.
- ⚑Contracts in the target's business that contain change-of-control provisions that could be triggered by the transaction.
- ⚑Representations about intellectual property ownership that have not been verified through due diligence.
- ⚑Broad non-competition provisions that may restrict the seller's future business activities beyond what is commercially reasonable.
- ⚑Asymmetric termination rights that favor one party without a corresponding fee or remedy.
Party Perspectives
Buyer
- •Wants broad representations and warranties to maximize post-closing indemnification rights.
- •Prefers a lower indemnification basket and higher cap to preserve recourse for discovered problems.
- •Seeks clear closing conditions to ensure the business delivered matches what was represented.
- •Wants restrictions on how the business is operated between signing and closing.
- •May seek a representation and warranty insurance policy to backstop seller indemnification.
Seller
- •Wants to limit representations to matters within actual knowledge and narrow the scope of indemnification exposure.
- •Prefers a higher basket, lower cap, and shorter survival period to limit post-closing liability.
- •Seeks a clean break at closing with limited ongoing obligations.
- •May resist earnout provisions that leave compensation subject to buyer's post-closing decisions.
- •Wants certainty of closing and may resist conditions that give the buyer excessive discretion to walk away.
Related Contract University Terms
When to Have an Attorney Review It
Attorney review is particularly important in M&A transactions because the stakes are high and the documentation is complex. Representations and warranties, indemnification provisions, and closing conditions all require careful analysis. A reviewer should examine the agreement before signing, not just before closing — many of the most important terms are set at the letter of intent stage. If the transaction involves regulatory approvals, third-party consents, or complex tax considerations, legal counsel should be involved early in the process.
Frequently Asked Questions
What is the difference between a stock purchase and an asset purchase?
In a stock purchase, the buyer acquires the equity of the target company and takes on all of its assets and liabilities — including unknown or contingent liabilities. In an asset purchase, the buyer selects which assets to acquire and which liabilities to assume, leaving the rest with the seller. Asset purchases generally provide more flexibility but require more documentation and may trigger consent requirements in the target's contracts.
What are representations and warranties, and why do they matter?
Representations and warranties are factual statements made by each party about themselves and the business. If a representation proves inaccurate after closing, the party that made it may be required to indemnify the other for resulting losses. They are one of the most heavily negotiated parts of any M&A agreement.
What is an earnout, and when is it used?
An earnout is a provision that ties a portion of the purchase price to the post-closing performance of the business. Earnouts are often used when buyer and seller disagree on valuation, or when the business's future performance is uncertain. They can be a source of post-closing disputes if the metrics and measurement methodology are not clearly defined.
What is a representation and warranty insurance policy?
Representation and warranty insurance (RWI) is a policy that covers losses arising from breaches of representations and warranties in an M&A agreement. It is commonly used in private equity transactions to provide the buyer with recourse without requiring the seller to hold back a portion of the purchase price in escrow.
How long do indemnification obligations typically last?
Survival periods for indemnification obligations vary by transaction and by the type of representation involved. General representations often survive for 12 to 24 months after closing. Fundamental representations — such as those relating to authority, capitalization, and title — often survive longer. Tax and environmental representations may have their own extended survival periods.
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