Page 20 - M & A Disputes

Signing a Letter of Intent

Eventually, negotiations may advance to the drafting and signing of a letter of intent. The letter of intent
is a written statement detailing the preliminary understanding of parties who plan to enter into a contract
or some other agreement. fn 7 The letter of intent, which is typically nonbinding, ordinarily represents the
starting point of contractual negotiations, outlining the agreement of the parties to that point regarding
the purchase price, timing, structure, planned representations and warranties, and conditions for con-
summating or terminating the transaction.

Additional Due Diligence and Drafting of the Acquisition Agreement

After the parties have agreed in principle to the terms of the transaction, due diligence continues, and the
drafting of the acquisition agreement proceeds. With respect to due diligence, the buyer will often ex-
pand its evaluation of financial and operational areas and conduct legal due diligence. Simultaneous
with this effort, the buyer will begin drafting the acquisition agreement to reflect the terms described in
the letter of intent and any negotiated modifications thereto.

Changes to the purchase price sought by the buyer, postclosing purchase price adjustment mechanisms,
representations and warranties of the parties, conditions to closing the transaction, and indemnification
terms are all areas that receive significant attention from both parties during the negotiation of the de-
finitive acquisition agreement.

Closing the Transaction

At the closing date of the transaction, the parties cause the closing process described in the acquisition
agreement to occur. In either an asset purchase or a stock purchase, this means that the seller causes the
respective assets or stock to be delivered to the buyer in return for the consideration defined by the ac-
quisition agreement. In a merger, this means that the parties cause the merger to be effected as a matter
of law. Such activities necessary to close the transaction are commonly outlined in the "Conditions to
Closing" section of the acquisition agreement, which is discussed later in this practice aid.

Postclosing Activities

Subsequent to the closing of the transaction, several activities remain open with respect to both parties,
including postclosing due diligence, the calculation and settlement of postclosing purchase price adjust-
ments and earnouts, and business integration. Following the close of the transaction, postclosing due dil-
igence is conducted by the buyer. This phase of due diligence is to ensure that the buyer has acquired a
business consistent with its understanding and the acquisition agreement. As part of this process, the
buyer may learn of information important to its integration efforts, material information that was previ-
ously undisclosed, or information impacting the preparation of the closing balance sheet. When acquisi-
tion agreements incorporate postclosing purchase price adjustment or earnout clauses, both the buyer
and seller may have contractual obligations postclose with respect to the preparation of materials neces-
sary to calculate contractual adjustments to the purchase price. "The Purchase Price Adjustment" section
addresses these elements of the acquisition agreement. For strategic buyers, integrating the acquired
business with other operations may be among the most important and complicated postclosing activities.

fn 7 See footnote 2.

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