The Merger and Acquisition Agreement (MAA) is the definitive, legally binding contract that finalizes the sale and purchase of a business. It is the culmination of months of negotiation, due diligence, and structural planning between the buyer and the seller. This document governs every aspect of the transaction, establishing the rights, obligations, and liabilities of the parties involved long after the deal is completed. Understanding the structure of the MAA is fundamental for anyone involved in corporate transactions, as it dictates the mechanics of how a company changes ownership.
Defining the Merger and Acquisition Agreement
The MAA represents a significant escalation in commitment compared to earlier, non-binding documents like a Letter of Intent (LOI) or a Term Sheet. While those documents outline the high-level deal structure, the MAA transforms these intentions into fully enforceable contractual obligations, detailing every term necessary to execute the transaction.
The contract may be referred to by different names depending on the specific legal structure chosen. When a buyer purchases the equity shares of a company, the document is typically titled a Stock Purchase Agreement (SPA). If the transaction involves only the acquisition of specific assets and the assumption of certain liabilities, the formal document becomes an Asset Purchase Agreement (APA).
Preliminary Steps Leading to the MAA
The signing of an MAA is the direct result of a rigorous, multi-stage process. Before finalizing the agreement, the buyer undertakes a thorough investigation of the target company known as due diligence. This phase involves reviewing the company’s financial records, legal compliance, operational processes, and commercial contracts to verify the seller’s representations.
The findings from due diligence directly inform the negotiation of the MAA’s specific terms, including adjustments to the purchase price or the inclusion of protective clauses. The parties negotiate primary business terms, such as the overall valuation and the proposed payment method. These agreements are then translated into the precise legal language of the MAA, ensuring all informal understandings are clearly codified.
Core Commercial Terms of the Transaction
The MAA defines the financial and structural specifics that govern the transfer of ownership. Foremost among these terms is the purchase price, which may be a fixed dollar amount or calculated based on a formula tied to financial metrics, such as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The agreement specifies the exact composition of the consideration, which can be paid entirely in cash, entirely with the buyer’s stock, or through a combination of both.
The document also details mechanisms for calculating and adjusting the final price at closing, often including adjustments for working capital. A target working capital figure is established, and if the actual working capital at closing deviates from this target, the purchase price is adjusted dollar-for-dollar. This mechanism ensures the buyer receives a business with a normal level of operating liquidity.
The MAA clearly delineates the legal structure, distinguishing between a stock purchase and an asset purchase. In a stock purchase, the buyer acquires all outstanding shares, obtaining the entire entity, including all assets and liabilities. Conversely, an asset purchase requires the parties to specifically enumerate the individual assets being acquired and the specific liabilities being assumed, leaving all unlisted items with the seller. This structural choice holds significant implications for tax treatment and the scope of liability assumed.
Structuring Risk Allocation and Liability
The MAA allocates post-closing risk and defines liability between the buyer and the seller. A primary element of this allocation involves the Representations and Warranties (R&Ws), which are specific statements of fact made by the seller about the condition of the target company as of a specified date. These statements cover various aspects, including the accuracy of financial statements, the status of litigation, legal compliance, and the ownership of intellectual property.
If an R&W proves untrue after closing, the seller has breached the MAA. The mechanism for compensating the buyer for such a breach is known as indemnification. The indemnification section outlines the procedures, scope, and limitations under which the seller must reimburse the buyer for losses arising from breaches of the R&Ws or other specified liabilities.
To limit the seller’s exposure, the MAA introduces contractual safeguards defining the extent of the indemnification obligation. A “basket” sets a minimum threshold of losses the buyer must incur before making an indemnification claim against the seller. For example, if the basket is set at $\$500,000$, the buyer must suffer losses exceeding that amount before the seller is obligated to pay.
An additional protective measure is the “cap,” which establishes the absolute maximum financial liability the seller faces under the indemnification provisions. The cap is often set as a percentage of the total purchase price. Furthermore, the MAA specifies survival periods, which limit the time frame (often 12 to 24 months) during which the buyer can bring a claim for a breach of a specific representation or warranty.
Conditions for Closing and Termination Rights
The execution of the MAA, or “signing,” creates a binding obligation to close the transaction at a later date, but does not immediately transfer ownership. The period between signing and closing is the “interim period,” during which both parties must satisfy agreed-upon conditions precedent. These conditions ensure the fundamental assumptions underlying the deal remain true and that necessary third-party approvals are secured.
Standard conditions for closing typically include obtaining required regulatory approvals, such as antitrust clearance, and securing specific consents from landlords, major customers, or creditors. A frequent condition is the requirement that no Material Adverse Change (MAC) has occurred concerning the target company’s business or financial condition since the MAA was signed. A MAC clause protects the buyer from being obligated to purchase a company whose value has significantly deteriorated during the interim period.
The MAA also defines the limited circumstances under which either party may legally terminate the agreement before closing. Grounds for termination often include a failure to satisfy a condition precedent by a specified “outside date” or a material breach of a covenant by the other party. If a party terminates the agreement under specific circumstances, such as the seller accepting a superior offer, the MAA may require the terminating party to pay a “breakup fee.”
Post-Closing Covenants and Integration
The MAA establishes a series of post-closing covenants designed to govern the relationship and the integration process. These obligations are divided into affirmative covenants, which require specific actions, and restrictive covenants, which prohibit certain activities. An affirmative covenant might require the seller to assist the buyer in transitioning customer relationships or transferring necessary permits for a specified period after the deal.
Restrictive covenants are important for protecting the value of the acquired business, often including non-compete clauses. These clauses prevent the seller from starting a similar business within a defined geographic area and time frame, ensuring the goodwill purchased by the buyer is not eroded by competition from the former owners.
The MAA is also the legal vehicle for establishing an “earn-out” structure, which links a portion of the purchase price to the future financial performance of the acquired business. Earn-outs function as conditional payments, often based on the company hitting specific revenue or profit targets within one to three years post-acquisition. This structure is employed when the buyer and seller disagree on the current valuation, allowing the seller to realize a higher price if their projections prove accurate.
Why Expert Legal Review is Essential
The Merger and Acquisition Agreement is a complex legal instrument that determines the financial success and future liability of all involved parties. Due to the interplay between purchase price adjustments, the scope of Representations and Warranties, and the limitations embedded in the indemnification schedules, specialized legal counsel is necessary.
Both buyers and sellers require experienced transaction attorneys to tailor the MAA language to their specific risk tolerance and to prevent unintended liabilities from emerging post-closing. Relying on generalized contract templates or inexperienced advice can expose a party to financial risk that may not be apparent until after the transaction has been completed.