A merger and acquisition (“M&A”) transaction involves at least two parties, the seller and the purchaser, coming together to negotiate on the terms and conditions of the sale and purchase of the target company or asset (“Target”). The agreed terms and conditions are then set out in a sale and purchase agreement (“SPA”).

The following are some of the common issues encountered by lawyers in M&A transactions:

1. Potential contentious issues

The following are some of the issues which are typically heavily negotiated in M&A transactions. Engaging the counterparties to address the following areas early in the negotiation stage may help to avoid last minute hiccups which may delay the transactions.

• Guarantor

Both the seller and purchaser may want the other party’s obligations under the SPA to be guaranteed by another party. This is usually the case if the purchaser is a special purpose vehicle which is newly incorporated to acquire the Target or does not have much worth or if the seller is left with few assets after the M&A transaction. In the event of dispute, instead of bringing an action against the seller or purchaser who may not have the financial means, it would be better to have another party with deep pockets to guarantee the performance of the seller’s or purchaser’s obligations under the SPA. Where the seller and purchaser are corporate bodies, typically the guarantors for the seller are the ultimate owners of the Target and the guarantors for the purchaser are its shareholders.

• Representations and warranties

An SPA typically includes representations and warranties given by the seller in relation to the nature and condition of the Target and the seller. The seller typically seeks to qualify such representations and warranties to the extent of the seller’s knowledge or subject such representations and warranties to matters which have been disclosed to the purchaser during the due diligence process. On the other hand, the purchaser typically wants such representations and warranties to be subject to as few limitations as possible to get the full benefits of the seller’s representations and warranties.

• Limitation of liability

There are various ways the seller may limit its liability in an M&A transaction such as excluding events under which the seller would be liable, limiting the period a claim is allowed, capping the maximum amount claimed or allowing a claim only if the amount claimed exceeds an agreed minimum sum. The purchaser obviously would want to push back on such limitations.

• Indemnity

The purchaser typically requires the seller to indemnify the purchaser in certain circumstances such as when the seller breaches any of its representations and warranties or when there is a claim brought against the Target which is due to the seller’s fault prior to the completion of the M&A transaction. The seller may want to limit the indemnity events and reduce the number of parties it is required to indemnify to as few as possible while the purchaser’s interest lies in doing the opposite.

• Non-competition

The purchaser may acquire the Target because of the goodwill of the Target or reputation of the seller. An SPA typically contains non-competition provisions which prevent the seller from competing with the Target upon completion of the M&A transaction. The purchaser needs to be cautious as an overzealous non-competition provision may be rendered unenforceable under the laws. 

2. Missing out the details

An M&A transaction is sometimes negotiated in a fast-paced and stressful condition. The possibility of overlooking details (which may seem minor at first but may carry grave consequences) is higher when the parties involved are under pressure to complete the transaction by a certain deadline. A case in point- an SPA usually contains a provision which sets out all the expressions or defined terms used in the SPA. The word “Company” has been defined in this provision to refer to the Target only. However, the word “Company” is redefined again in a schedule to the SPA, which contains the representations and warranties given by the seller, to refer to the Target and its subsidiaries. It would be to the seller’s detriment if such detail is missed out because the representations and warranties given by the seller are not limited to only the Target but extended to the Target’s subsidiaries and the possibility of misrepresentations may be higher.

3. Vague or unclear instructions

The instructions and comments on draft SPA from the clients may not be clear at times. A client’s intention may be lost in emails which the client sends in a hurry. The client may expect the lawyer to provide a revised draft SPA urgently but does not read to confirm whether the revised wordings reflect the client’s intention. In such instance, it would be prudent for the lawyer to speak to the client and clarify any instructions or comments which are vague or unclear to avoid any miscommunication.

4. Conflicting instructions

A corporate client may have more than one team focusing on different areas of an M&A transaction. Issues arise when the teams could not agree on the terms of the SPA and give conflicting or inconsistent instructions to external lawyers working on the transaction. Tact is required to deal with such circumstance.

5. An opponent who picks on everything

In addition to unclear or conflicting instructions from a client, there may also be an opponent lawyer who is overzealous in protecting his client’s interest or overly argumentative. A standard boilerplate clause in a draft SPA may come back with numerous comments from the opponent lawyer, which may be trivial and do not serve to facilitate the transaction. One solution is to ask for the rationale for such comments so that both parties’ lawyers can come to an understanding. 

6. Completion

An SPA typically provides for certain deliverables such as resolutions to be delivered by a party to the other party upon completion of the transaction which shall take place on an agreed date. The SPA may provide that the contents of such resolutions or other deliverables must be agreed between the parties. Issues arise when parties want to complete the transaction under tight timeline but could not agree on the contents of such deliverables or the directors of the parties are not available to sign the necessary resolutions. Parties should take into account the time required to prepare the deliverables for completion.

7. Inconsistent public disclosures

Under the Listing Requirements in Malaysia, public listed companies are required to make the necessary disclosures if the M&A transactions undertaken by such companies trigger the thresholds specified in the Listing Requirements through (i) announcements; or (ii) announcements and circulars, depending on the thresholds. If both the seller and purchaser are public listed companies, issue may arise if there is inconsistent information in their disclosures. To avoid such situation, the SPA usually provides for the parties to consult with each other or requires the contents of the disclosure to be agreed by the other party.

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.