Except for the purchase and sale agreement the most important agreement is the nondisclosure agreement (NDA). This is generally the first agreement entered into. The NDA establishes the framework by which parties disclose sensitive, proprietary, and confidential information. The basic elements of the NDA are: 1) definition of confidential information, 2) exceptions to what is included within the definition of confidential information, 3) a covenant or agreement to keep matters confidential, 4) noncompetition provisions, and 5) miscellaneous matters. Definitions are crucial because sellers will want to make them as broad as possible to protect proprietary information whereas buyers would have a less inclusive definition to reduce exposure to liability.
A common feature of transactions in which either the financing source, the seller, or the buyer are holding some asset of the seller or buyer is an escrow agreement. Among other things, an escrow arrangement ensures that a party’s obligation to deliver money or property in a transaction will not be impeded, for example by the party’s insolvency. An escrow agreement can be used to hold in trust monies, securities, or other documentation required to be delivered to a designated party upon the triggering of an agreed upon condition. It is essential that an escrow agreement define the circumstances under which escrow property will be delivered. By providing the manner in which the parties should act, the amount of discretion that can be exerted by one party is reduced thereby facilitating harmonious completion of the transaction.
Promissory notes have also become common in purchase and sale transactions. Promissory notes are an integral part of the financing documents when there is debt financing associated with the transaction. These agreements are often short and simple because the lender’s substantive requirements are set forth in the loan agreement and other contracts. An acquirer’s lender is likely to dictate the form of the finance notes. Asset based lenders usually provide financing on the basis of a percentage of the liquidation value of the assets of the acquired business. However, they will insist on a first priority lien against the collateral securing the loan and a clear field of action if they have to foreclose.
In a stock purchase where the buyer is not acquiring 100 percent of the shares, the buyer and remaining stockholders may want to execute a stockholders agreement. The stockholder agreement governs the relationship between the company and the stockholders. By establishing ground rules for the relationship up front there is less chance of dispute in the future. However, these agreements take on even more importance for small closely held corporations. A closely held corporation is a corporation with generally fewer than 5 shareholders. Family businesses are usually structured in this manner. To preserve the character of the business, a stockholder agreement can restrict a stockholder’s ability to sell its shares to a third party outsider.
These are just a few of the ancillary agreement that can accompany a purchase and sale agreement. Further agreements may be warranted depending upon the circumstances of the transaction.
