M&A: What should and shouldn’t survive termination?

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Sale and purchase agreements for M&A transactions usually provide for certain clauses of the agreements to survive termination. In other words, if the agreements are terminated. some clauses continue to be effective.

Termination of agreements only terminates the parties’ duties to carry out contractual obligations which have not been performed prior to termination. Any contractual rights which have accrued prior to termination remain enforceable.

Therefore, clauses which are necessary for the interpretation of agreements should survive termination. Same goes for clauses which by nature, are required to survive termination in order to protect certain rights of the parties’ post-termination.

These include clauses relating to:
• definition
• interpretation
• obligation to keep confidential
• obligation to pay stamp duty on the agreements
• notice
• governing law
• jurisdiction/forum
• certain boilerplate clauses which continue to be relevant in order to construe the agreements post-termination such as counterparts, severability, and entire agreement clauses.

𝘞𝘩𝘢𝘵 𝘤𝘭𝘢𝘶𝘴𝘦𝘴 𝘴𝘩𝘰𝘶𝘭𝘥 𝘯𝘰𝘵 𝘴𝘶𝘳𝘷𝘪𝘷𝘦 𝘵𝘦𝘳𝘮𝘪𝘯𝘢𝘵𝘪𝘰𝘯?

To answer this question, consider when the right to terminate arises and whether the clauses are required post-termination.

For most sale and purchase agreements for M&A transactions, termination rights typically arise before the transfer of shares and before the purchaser becomes a shareholder of the company. In this instance, clauses which become relevant only after the purchaser becomes a shareholder of the company, should not survive termination.

In the example above, the following clauses should not survive termination:

1. Indemnity clause which indemnifies the purchaser against events which reduce the value of the company such as claims by third parties against the company or fines imposed on the company by regulators.

As termination happens before the purchaser becomes a shareholder of the company, the purchaser would not suffer loss due to the said events. There is no reason to indemnify the purchaser.

2. Non-compete clauses and non-solicitation clauses which restrict the manner in which the seller carries out business after the disposal of shares to the purchaser.

The rationale of these clauses is to protect the purchaser’s investment in the company in exchange of the purchase price paid by the purchaser. As termination happens before the purchaser pays the purchase price and becomes a shareholder of the company, the sellers should not be required to comply with non-compete clauses and non-solicitation clauses.


This post was first posted on Linkedin on 13 June 2022.

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