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Key Negotiating Points in Private Acquisition Agreements

Comparison Chart
Resource type: Checklist Status: Maintained Jurisdiction: USA

There are certain provisions that are negotiated in almost all private acquisition agreements. This chart
highlights those provisions and compares the key points that each of the parties should consider when
drafting and negotiating.

Howard T. Spilko, Kramer Levin Naftalis & Frankel LLP

This chart summarizes buyer and seller positions for commonly negotiated provisions in private acquisition
agreements. For more detailed drafting and negotiating guidance see Standard Documents, Stock Purchase
Agreement (Pro-Buyer Long Form) and Asset Purchase Agreement (Pro-Buyer Long Form).

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Representations and Warranties

Representations and warranties are statements of fact and assurances made by the parties. They are
usually the longest part of the acquisition agreement and often take a significant amount of time to negotiate.
The buyer and seller generally negotiate the scope of the representations and warranties. The buyer's goal
is to get comprehensive representations and warranties because they are a valuable source of information
about what the buyer is purchasing and form the basis for the buyer's right to indemnification for any
problems or unforeseen risks (see Indemnification) and constitute part of the closing conditions (see Closing
Conditions). Conversely, the seller wants to give as few representations and warranties as it can and limit
the scope of the representations and warranties it has to give.

The seller can limit the representations and warranties in the following ways:

• Materiality: Qualify a representation or warranty by what is material or what might cause a material
adverse effect (see Definitions).

• Knowledge: Qualify a representation or warranty by what a party knows or should know (see
Definitions).

• Scope: Limit a representation or warranty to certain material. For example, the representation or
warranty may be limited to the materials identified in the data room.

• Time: Make a representation or warranty as of a specified date or time or with respect to a particular
period.

• Disclosure schedules: Limit a representation or warranty by reference to the disclosure schedules

(see Practice Note, Disclosure Schedules: Mergers and Acquisitions).

The particular representations and warranties in the table below are frequently the subject of negotiation.

Name of Provision Buyer Favorable Seller Favorable

No Undisclosed Liabilities A buyer wants the seller to represent and A seller wants to narrow the scope of the
Representation warrant that there are no target company representation and warranty. In
This representation protects the liabilities (contingent or otherwise) other particular, the seller wants to limit the
buyer against unknown liabilities than those expressly identified on a nature and type of the liability required to
by shifting the risk of unknown disclosure schedule, reflected or be disclosed to the buyer to liabilities
liabilities to the seller. reserved against on the face of the which would be required to be disclosed
balance sheet or incurred in the ordinary as a liability on a balance sheet prepared
course of business since the date of the in accordance with GAAP. As a general
most recent balance sheet. rule, GAAP requires an accrual
associated with a contingent liability if it
is probable that an asset has been
impaired or a liability has been incurred
and the amount of the loss can be
reasonably estimated. Therefore, this
framework excludes from coverage
unknown contingent liabilities.

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Full Disclosure/(10b-5) A buyer wants to include a 10b-5 A seller wants to exclude any 10b-5 or
Representation representation and expand it to require full disclosure representation. However,
The full disclosure (10b-5) full disclosure, with no knowledge if the representation is included, the
representation is based on Rule qualifier, of any fact that would materially seller should seek to limit it to the
10b-5 promulgated under the adversely affect the assets, business or language of 10b-5 ("make any untrue
Securities Exchange Act of 1934. financial condition of the target company statement of a material fact or to omit to
Rule 10b-5 makes it unlawful, in or its business. state a material fact necessary in order
connection with the purchase or The buyer's right of recovery for a breach to make the statements made, in the
sale of any security, for a person of a 10b-5 contractual representation is light of the circumstances under which
to "make any untrue statement of broader than the buyer's right of recovery they were made, not misleading") and
a material fact or to omit to state a under SEC Rule 10b-5, because to resist any expansion of the scope.
material fact necessary in order to prevail in a Rule 10b-5 securities fraud If the representation is expanded to
make the statements made, in the action, a buyer must prove, among other cover any fact that could have a material
light of the circumstances under things, that the seller acted with scienter adverse effect on the target company or
which they were made, not and that the injured party reasonably its business, the seller should seek to
misleading". relied on the representation or non- insert a knowledge qualifier.
disclosure to its detriment. For more information on the use of
knowledge and other qualifiers in
representations and warranties, see
Practice Note, Stock Purchase
Agreement Commentary: Limitations of
Representations and Warranties and
Definitions.

Closing Conditions

If there is a time gap between signing and closing, each party requires the other to fulfill certain conditions
before the transaction closes. Usually there are conditions that both parties must satisfy and conditions that
only bind one of the parties. If a condition of a party is not satisfied, that party is typically not required to
close the transaction until the condition is satisfied. A party can always waive its own closing condition. The
particular closing conditions set out in the table below are frequently the subject of negotiation.

Name of Provision Buyer Favorable Seller Favorable

Bring-down of representations A buyer should ask that the A seller prefers to only measure the
and warranties (issue of when) representations and warranties be accuracy of the representations and
The bring-down of representations accurate as of the signing and as of the warranties as of the closing date to
and warranties provides the buyer closing. This is important because a enhance the certainty of closing. A seller
with the right to walk away from buyer values the target based on certain is well-advised to include an updating
the deal if any of the seller's assumptions, including the accuracy of mechanism for the disclosure schedules
representations are inaccurate. the representations and warranties as of (for example, see Standard Document,
The buyer and the seller often the signing. Stock Purchase Agreement (Auction
negotiate on what date the Form): Drafting Note, Supplement to
representations and warranties Disclosure Schedules).
must be accurate.

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Bring-down of representations Ideally, a buyer wants the A seller wants to subject any bring-down
and warranties (issue of how representations and warranties to be of representations and warranties to a
accurate) "accurate in all respects." However, a materiality or material adverse effect
The buyer and the seller also often buyer typically cannot obtain this qualification. Otherwise the seller risks
negotiate how accurate the standard for all representations and uncertainty of closing over immaterial
representations and warranties warranties. Typically, certain breaches.
must be when they are brought fundamental representations and However, the seller typically agrees to
down. warranties (such as organization and subject certain fundamental
authority, capitalization, taxes, employee representations and warranties that are
benefits and environmental matters) within its control to an "accurate in all
must be accurate in all respects. The respects" standard (such as organization
remainder of the representations and and authority, capitalization, taxes,
warranties must be accurate in all employee benefits and environmental
material respects or accurate except matters).
where the inaccuracy would not
constitute a material adverse effect.
The buyer should ensure that it is not
subject to a double materiality standard
for representations that are already
qualified by materiality. This is why
representations that are subject to a
materiality qualifier should be accurate in
all respects, rather than accurate in all
material respects. Another approach that
can be taken is to disregard (read out)
materiality and material adverse effect
qualifiers for all representations and
require the representations to be
accurate, in all material respects or
accurate except where the inaccuracy
would not constitute a material adverse
effect.
The buyer should also seek a provision
eliminating double materiality in the
indemnification section (see
Indemnification).

Stand-alone material adverse A buyer often includes this as a separate A seller wants to exclude any separate
effect (MAE) condition condition because it provides an MAE condition to closing and can argue
The stand-alone MAE condition additional right not to close the that the buyer should be protected by the
gives the buyer the right to walk transaction. However, as evidenced in bring-down of the representations and
away from the transaction if there Hexion Specialty Chemicals v. warranties.
has been a target company MAE Huntsman Corporation, 965 A.2d 715 Because buyers rarely succeed when
between the date of signing and (Del. Ch. Sept. 2008), when litigated, the parties litigate the issue of whether
the date of closing. courts rarely find that an MAE has an MAE has occurred, the seller wants to
occurred. The standard of proof for an keep the standard MAE formulation. If

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MAE is high, and the burden of proof the seller agrees to include objective
falls on the buyer. Although the buyer criteria or metrics (such as financial or
can try to shift the burden to the seller operational targets) in the definition of an
(by explicitly stating so in the MAE, it can provide that multiple triggers
agreement), it is better for the buyer to must be met before the buyer can refuse
identify objective criteria or metrics (such to close the transaction. For example,
as financial or operational targets) and that there has been a 20% decline in the
include them in the agreement, rather target's EBITDA and following that
than relying on the standard formulation decline, the target has lost any one of
of an MAE condition to terminate a deal. the customers listed on a schedule to the
For more information see Practice Note, agreement.
Material Adverse Change Provisions:
Mergers and Acquisitions and Standard
Document, Stock Purchase Agreement:
Drafting Note, MAE Condition.

Definitions

Defined terms are used in acquisition agreements for structure and clarity. The particular defined terms set
out in the table below are often heavily negotiated because they serve to allocate risk between the parties.

Name of Provision Buyer Favorable Seller Favorable

Material Adverse Effect (MAE) As mentioned above, the burden of proof A seller can try to narrow the MAE
How the parties define a "material standard for an MAE is high and a court definition by:
adverse effect" is significant for is unlikely to find that an MAE has • Deleting any reference to "prospects."
purposes of determining whether a occurred using the standard formulation.
• Including carve-outs for changes in
condition to closing has been However, the buyer can try to negotiate
law and general economic changes or
satisfied and for interpreting the the following:
conditions, industry wide changes or
application of qualifiers to the • Include "prospects" in the definition so
conditions, war, terrorism and
representations. that an MAE means "any change,
otherwise generally applicable risks.
event, occurrence or condition that has
Additionally, the seller can also try to
a material adverse effect on the
include carve-outs for an MAE
business, assets, liabilities, financial
resulting from:
condition, results of operations or
prospects of the Company." • the announcement of the
transactions contemplated in the
• Eliminate or scale back any seller
acquisition agreement;
carve-outs to the definition of MAE for
general economic changes or • changes that the buyer knew about;
conditions, industry wide changes or
• changes in GAAP;
conditions, war, terrorism or otherwise
generally applicable or deal-related • changes to the credit markets in
risks. general, including changes in
interest rates or the availability of
financing;

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• If pro-seller carve-outs are accepted • the target company's failure to meet

(as described in the above bullet), internal or published projections,
exclude any circumstances that forecasts or revenue or earning
"disproportionately affect" the target predictions for any period; or
from those carve-outs.
• changes in political conditions.
In addition, buyers may try to further shift
the risk to the seller by: For more information on MAE/MAC
• Affirmatively allocating the burden of provisions see Practice Note, Material
proof to the seller. Adverse Change Provisions: Mergers
and Acquisitions and Standard
• Expressly providing that any change,
Document, Stock Purchase Agreement
event, occurrence or condition
(Pro-Buyer Long Form): Drafting Note,
whether known or unknown at the
Material Adverse Effect: Definition.
time of execution of the agreement will
be considered in the determination of
whether an MAE has occurred.

• Applying the MAE definition to what

"could have" or "is reasonably likely to
have" an MAE, as opposed to "has" or
"would have" an MAE.

• Specifying the time period (for

example, since the balance sheet date)
in which the effect should be
measured. Otherwise the courts look
for proof that an MAE is "durationally
significant."

• Specifying that a failure to meet

objective criteria such as a particular
milestone or financial metric would
constitute an MAE.

For more information on MAE/MAC

provisions see Practice Note, Material
Adverse Change Provisions: Mergers
and Acquisitions and Standard
Document, Stock Purchase Agreement
(Pro-Buyer Long Form): Drafting Note,
Material Adverse Effect: Definition.

Knowledge A buyer wants knowledge to be defined A seller wants knowledge to be defined

One important function of as constructive knowledge so that the as actual knowledge so that there is no
representations and warranties is seller will be deemed to know what it investigation requirement and no
to allocate risk between a buyer would have known with a reasonable uncertainty as to the application of the
and a seller. In connection with investigation. standard (for example, what is actually
allocating risk, a seller will look to known by an individual as compared to

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mitigate its exposure by limiting If the seller limits knowledge to a what the individual should have known
the scope of its representations particular subset of people (one or two after an investigation).
and warranties (see specific individuals, all senior executive If the buyer succeeds in a constructive
Representations and Warranties). officers, all employees and so on), the knowledge definition, the seller should
One of the principal ways a seller buyer should ensure this group is not too limit this investigation obligation to a
can limit its exposure is by limited and that it includes people who discrete group of senior management.
qualifying representations and are knowledgeable about the target's
warranties by knowledge. operations.

Indemnification

While the representations and warranties provided by a seller in an acquisition agreement create the basic
structure for allocating risk between a buyer and a seller, the foundation of that structure is the strength of
the indemnification standing behind those representations and warranties. The indemnification provisions
set out in the table below are frequently negotiated.

Name of Provision Buyer Favorable Seller Favorable

Sandbagging A buyer wants the agreement to A seller wants to expressly limit the
In connection with an acquisition explicitly state that there is no limit on its buyer's remedies based on preexisting
agreement, a buyer typically remedies based on preexisting knowledge of an inaccuracy or breach.
conducts a substantial amount of knowledge of an inaccuracy or breach. As a compromise, the seller may agree
due diligence on the target and its As a compromise, the buyer may agree to remain silent on the issue of
business. However, despite this to remain silent on the issue of sandbagging. Although many courts will
investigation, a seller is required to sandbagging. However, courts in interpret this silence in favor of the seller
make representations and different jurisdictions interpret this (including New York) in certain
warranties concerning the target silence differently. Many jurisdictions circumstances, it is important for counsel
and its business and is permitted to (including New York) interpret this to confirm how the applicable state is
set out certain exceptions to its silence in favor of the seller in certain likely to rule on this issue and in what
representations and warranties on circumstances and the buyer should circumstances will silence benefit the
the disclosure schedules. agree to remain silent on the issue only seller's position.
However, there may be facts, with an understanding of the implications
events or circumstances that, in doing so.
although known to a buyer, are not
set out on the disclosure schedules
and for which a buyer would be
permitted to bring a claim for
indemnification after the closing
(because a representation and
warranty of the seller would be
inaccurate as a result of the
existence of these facts, events or
circumstances). This right of a
buyer to bring an indemnity claim
based on breaches known before

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closing is referred to as
sandbagging.

Survival A buyer wants to expand the survival A seller seeks to limit the duration of
This provision provides an period. Buyers should negotiate for survival of the representations and
expiration time for indemnification certain representations and warranties, warranties, or if a seller has substantial
claims made under the such as tax, employee benefits and leverage, provide that the
representations and warranties environmental matters, to have a longer representations and warranties do not
section. Survival periods usually or unlimited survival period. Sometimes survive the closing for any period.
range from six months to three these representations have a survival
years (12 to 24 months is most period of the applicable statute of
common). limitations for the claim plus a
reasonable period (often 60 days).
A buyer also wants to provide that the
survival period is unlimited for
fundamental representations and
warranties (such as organization and
authority and capitalization).

Type of damages A buyer wants the definition of damages A seller wants to expressly exclude
The parties often negotiate what or losses to be as broad as possible and punitive, consequential and similar
type of damages can be recovered tries to include consequential and similar damages and may seek to exclude
in the definition of "Damages" or damages and diminution in value. diminution in value damages.
"Losses." If a buyer has substantial leverage, it Because a buyer resists this express
can try to expressly include punitive limitation, a seller sometimes
damages, but this is not common. compromises by remaining silent on the
Because a seller resists this inclusion, a issue or including a qualitative limitation
buyer sometimes compromises by that only applies to direct claims (and not
remaining silent on the issue or including to third party claims).
a qualitative limitation that only applies
to direct claims (and not to third party
claims).

Baskets and deductibles Ideally a buyer prefers no basket or A seller wants to include a basket or
Baskets and deductibles are deductible because it is a limitation on its deductible. Of the two, sellers prefer a
designed to provide a seller with right to indemnification. However, deductible so that when the buyer's
assurance that, even in the event because this type of limitation is losses exceed the agreed-on deductible
of breach of a representation or common, the buyer will likely accept the amount, the seller is liable only for the
warranty, the seller will not be concept and instead negotiates the size amount of the losses that exceed the
bothered for immaterial claims. and exceptions to the basket or deductible.
In the case of a basket, when the deductible. A seller wants the basket or deductible
buyer's losses exceed the agreed- A buyer prefers a basket over a amount to be as high as possible. The
on basket amount, the seller is deductible so that once the threshold is seller may also try to negotiate a mini
liable for the total amount of the hit, the seller is liable for the total basket.
losses. amount. A seller also wants to limit any carve-
outs to the basket or deductible.

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In the case of a deductible, when A buyer can try to lower the dollar
the buyer's losses exceed the amount of any basket (at or below 1% of
agreed-on deductible amount, the deal value is common). A buyer also
seller is liable only for the excess wants to avoid any additional smaller
amount of the losses above the baskets for de minimis claims (known as
deductible. A combination of a mini baskets). A mini basket prohibits
basket and deductible is any claim below a certain amount.
sometimes used. Normally, these claims do not count
After the parties have concluded toward baskets or deductibles.
that a basket or deductible is A buyer should try to carve out
appropriate, the parties are then covenants and fundamental
left to determine the amount to set representations and warranties (such as
for the basket or deductible (which organization and authority, capitalization,
may be based on a percentage of taxes, employee benefits and
the transaction value). environmental matters) from the basket.
If there is an agreement that the seller
will take full responsibility for a particular
liability (such as a particular litigation),
the buyer should ensure that the liability
is not included in the basket.
The buyer should ensure that it is not
subject to a double materiality standard
for representations that are already
qualified by materiality. The buyer
should insert a provision that contains a
read out of materiality and material
adverse effect qualifiers for the purpose
of the basket or deductible.

Cap Ideally a buyer prefers no cap because it A seller wants to include a cap and
A cap limits the seller's is a limitation on its right to wants the cap amount to be as low as
indemnification obligation. It may indemnification. However, because this possible (around 10% of deal value is
be a set dollar amount, but is type of limitation is common, the buyer common).
typically based on a percentage of will likely accept the concept and instead A seller also wants to limit any carve-
the transaction value. negotiate the size and exceptions to the outs to the cap.
cap.
A buyer can try to increase the size of
the cap (around 10% is common). A
buyer should try to carve out covenants
and fundamental representations and
warranties (such as organization and
authority, capitalization, taxes, employee
benefits and environmental matters)
from the cap.
If there is an agreement that the seller
will take full responsibility for a particular

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liability (such as a particular litigation),

the buyer should ensure that the liability
is not included in the cap. If there are
certain liabilities that have potential to be
high (such as environmental liabilities or
products liability), the buyer may also try
to negotiate those as cap exclusions or
separate caps.

Exclusive Remedy A buyer would rather provide that A seller wants to provide that
Agreements can provide that indemnification is the non-exclusive indemnification is the exclusive remedy
indemnification is: remedy or remain silent. However, this with limited exceptions. Otherwise the
• The exclusive remedy. point is typically difficult to win. Most seller could risk rendering negotiated
buyers agree to an exclusive remedy limits to indemnifications less meaningful
• The exclusive remedy except for
provision, but negotiate certain (such as caps and baskets). A seller
certain situations.
exclusions for equitable remedies, fraud, typically agrees to certain exclusions
• A non-exclusive remedy willful breach and intentional (such as for equitable remedies, fraud,
(meaning that other remedies in misrepresentation. willful breach and intentional
equity and for contractual breach misrepresentation). In particular, it is
are available). difficult for a seller to argue that fraud
must be subject to any indemnification
Alternatively, the parties can
limitations.
remain silent as to whether or not it
is the exclusive remedy.

Escrow/Holdbacks A buyer wants an escrow or a holdback A seller objects to escrows or holdbacks

The parties sometimes agree to because either assures the buyer that because it wants to extract as much deal
hold a portion of the purchase there will be readily accessible funds to value as possible at closing.
price in escrow for a certain period pay indemnification claims. A seller prefers escrows to holdbacks
of time to satisfy future Although not as common as escrows, a because the money is held by an
indemnification claims. buyer prefers holdbacks over escrows independent escrow agent and is easier
As an alternative to an escrow, the because the buyer retains control over to recapture upon expiration of the
buyer can holdback a portion of the the funds. escrow period.
purchase price to cover future Once a buyer can negotiate an escrow If a seller does agree to an escrow or
claims. or a holdback, the buyer should ensure holdback, it wants either to be for as
that the dollar amount is large enough to small a percentage of the purchase price
cover any material issues. The buyer as it can negotiate and to ensure that the
should also ensure that the funds are funds are released in a reasonable
held in escrow (or held back) for a period of time.
sufficient period of time (usually If the seller agrees to an escrow, it can
matching the survival period associated propose that the escrow serve as the
with non-fundamental representations). exclusive source for recovery of
indemnification claims. In this case, the
escrow amount serves as a cap on the
total amount of recovery available for
indemnification claims.

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Related content

Topics
Private M&A

Standard Documents
Asset Purchase Agreement (Pro-Buyer Long Form)

Stock Purchase Agreement (Auction Form)

Stock Purchase Agreement (Pro-Buyer Long Form)

Checklist
Negotiating M&A Escrow Agreements Checklist

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