The Purchase and Sale Agreement (PSA or SPA in the case of a Share Purchase Agreement) is one document in a set of final documents that completes a company divestiture transaction. Other documents typically include employment agreements, escrow agreements, non-competition agreements, releases, and more depending on the type of transaction being contemplated.
The closing documents are most efficiently prepared after a detailed LOI (Letter of Intent) has been agreed upon. Remember that an LOI normally seeks exclusivity for the potential buyer as they will then commit to proceeding in the time-consuming and expensive due diligence and legal closing process. For the seller it is critical that all potential “deal-breaker” issues are addressed in the LOI because exclusivity requires them to no longer engage with other interested parties. It will be difficult to re-engage these parties should the exclusive closing process fail. I noted before that a CIM should be positioned to present a company in a most positive manner but must not over-promise or leave less than flattering facts out because it forms the basis of an LOI and a PSA. Due diligence will verify the assertions made in the CIM and the reps and warranties in the PSA will hold the seller to them.
A PSA is a sizable (typically more than 50 pages) document and will contain many common sections such as definitions, purchase price, representations and warranties of the vendor(s), the company and the purchaser, covenants and closing arrangements. There are various studies on common PSA parameters. Here are select Canadian parameters for 64 PSAs closed in 2010 and 2011. It should be noted that this is a small sample of reporting company acquisitions primarily in the resource and financial sectors.
- 54% of the deals were all cash purchases and 53% were share, as opposed to asset, purchases
- 21% of the deals included an earn-out and 38% of these tied this earn-out to either revenues or EBITDA for a period of 1 to 3 years
- 70% of the deals included post-closing adjustments and 70% of those included working capital as an adjustment metric
- 47% of the deals included an escrow between 5% and 10% and 86% did not create a separate working capital escrow
- 83% of the deals included a Material Adverse Change (MAC) clause and 86% of those included general economic and financial market downturn carve outs
- 40% of the deals included caps on claims equal to the purchase price
- 78% of the deals included full disclosure reps such as a “no undisclosed liabilities” rep
- 47% of the deals included a survival time to assert claims of 2 years
- 40% of the deals included breach of rep or covenants minimum basket amounts in the 0.5% to 1.0% range of the deal value
This sample provides a preview of the many legal issues to be tackled in negotiating a PSA. While the percentages are not absolute, they should guide expectations. If you want to achieve parameters substantially different from the parameters noted above, it would be wise to bring these to the attention of the counter-party at the LOI stage rather than spending a lot of time and money on the PSA and, ultimately not closing a transaction.