In an M&A transaction, it is important for a buyer to understand the contractual rights and obligations binding the target company under the contracts entered by the target company.

However, the contracts may be voluminous and it is easy to get drowned in the details.

Some key points to look out for in a contract entered by the target company:

1.    Parties to the contract

2.    Consideration- amount, mode of consideration, payment term

3.    Recitals usually explain the nature of the contract

4.    Term and termination
·      When does the contract expire?
·      Are there are any extension or renewal clauses?
·      Can the counterparties terminate the contract unilaterally or upon certain events triggered by the M&A transactions, such as change of control or shareholding provisions?
·      How long is the notice period to terminate?

5.    Are there any liquidated damages, penalties, uncapped liability or indemnity, or service level clauses which may lead to loss-making contract.

6.    Are there any restrictive covenants and exclusivity provisions in the contract which will restrict how the target company conduct its business such as non-competition or ‎non-solicitation provisions? ‎

7.    Do the counterparties have the right to assign the contract to third parties without consent from the target company?

8.    For intellectual property related contract, who owns the intellectual property right which is the subject matter of that contract?

9.    Whether there are other onerous provisions which may affect the business or financial position of the target company

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This post was first posted on Linkedin on 23 December 2022.