41224669 - close-up image of a firm handshake between two colleagues after signing a conntract
The purchase and sale agreement is the centerpiece of the transaction that serves the expectations and needs of the parties both during and after the process. This final expression embodies the compromises and understandings that have arisen from the process preceding it and governs the interactions of the parties moving forward. Purchase and sale agreements, like most contracts, are drafted to fit the transaction at issue. However, certain provisions and recitals have become standard practice. These agreements begin with preliminary facts (parties, date, definitions, etc.) and then go on to substantive descriptions of the assets or stock to be acquired, the purchase price, representations, warranties, covenants, conditions to closing, indemnification, and other legally significant items (various schedules, exhibits, etc.).
Two of the more heavily negotiated items included in the purchase and sale agreement tend to be the price and the representations and warranties. Although at time of drafting the price is often settled, several factors should be considered. For instance the tax issues, earnouts (additional compensation for future achievement), setoffs, and indemnification should all be taken into account. As a corollary, the representations and warranties (statements/promises made relating to past, present or future facts) should instill confidence in the parties to see the transaction through to completion. If the transaction brakes down it is these provisions that will most dramatically affect life after the transaction.
Many times transactions are structured so that the purchase and sale agreement is signed in advance of the closing. Covenants address the interim by obligating the parties to take or refrain from taking certain actions. To illustrate, a buyer will want a business to be operated in the ordinary course before he or she takes control. A covenant stating that the seller must continue to run the business in ordinary course ensures the buyer will receive exactly what was purchased. Conditions such as the above example need to occur after the acquisition agreement is signed and until the closing in order for the parties to be obligated to complete the transaction.
The last major component of the purchase and sale agreement is indemnification. At its most basic level, indemnification is a method of allocating and shifting foreseen and unforeseen risks. The party agreeing to indemnify is obligated to compensate the other party in the event he or she suffers a loss as a result of performing the contract. Without indemnification provisions, the parties recourse for failures of the representations and warranties or other breaches is limited to a lawsuit for breach of contract or some form of fraud. Indemnification provisions will vary depending on the type of transaction the parties are pursuing but will usually designate the scope of indemnification.