The Pitfalls of Deferring the Agreement

It all started well in the first case. Both the seller and the purchaser of the subject company in the first case agreed that the sale and purchase of the company would be on friendly terms and that the transaction should be completed as soon as possible. The sale and purchase agreement provided that the key personnel of the company shall enter into a service agreement with the company at the completion of the transaction which shall set out the terms on which the key personnel would continue to provide his services to the company after the completion. In order to expedite the completion, the purchaser agreed to defer the execution of the service agreement until after the completion. The seller and the purchaser discussed the terms of the service agreement after the completion of the transaction and there were various terms which they could not reach a consensus. As the transaction had completed, the purchaser had less bargaining power and had to accept the terms proposed by the seller in order to retain the key personnel, who was also the seller in this case.

Similar to the first case, the agreement for the sale and purchase of the target company in the second case contained a provision for execution of a service agreement by the key personnel of the target company at the completion of the transaction. The service agreement would bind the key personnel of the company for a period of time post completion. In this case, the key personnel of the target company, who was also a director and major shareholder of the seller, could not agree on the terms of the service agreement until the eleventh hour on the day of completion of the transaction.

Takeaway

In an acquisition of a company, the purchaser may want to retain the key personnel of the company to ensure continuity of business after completion of the acquisition. This may be because the key personnel possess the expertise to run the operation of the target company which makes it an attractive acquisition target in the first place. This is also to avoid the key personnel from leaving and taking the key customers and suppliers of the target company.

It is common for an agreement in respect of the sale and purchase of a company to contain a provision which requires the execution of an agreement which binds the key personnel to continue to be employed or engaged by the target company as a condition to completion of the sale and purchase agreement. As illustrated in the examples above, notwithstanding the parties are on friendly terms or the acquisition is subject to time constraint, the parties should beware of the pitfalls of deferring the execution of the relevant agreement to bind the key personnel of the target company to after completion. The parties should consider including an agreed form of the service agreement or employment agreement, which shall be executed prior to the completion of the sale and purchase of the company, as part of the sale and purchase agreement. The benefit of this approach is that there would be no delay to the completion of the overall transaction due to the parties unable to agree on the terms of retention of key personnel of the company.

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