By Cristina Hernández Lería, Partner, Lener Asesores Legales y Económicos
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The acquisition process of a company typically commences with the potential buyer, in this case a Search Fund, signing a non-disclosure agreement and progresses to a non-binding Letter of Intent (LOI).
This document serves as the foundation for negotiations between the buyer and seller, outlining the basic terms of the proposed transaction. Common clauses found in an LOI include:
• Introduction and Purpose: This section identifies the prospective acquirer and outlines the purpose of the LOI, emphasizing the intention to explore the acquisition of the target company and clearly identifying it.
• Valuation and Purchase Price: The LOI establishes a preliminary valuation, subject to financial and legal due diligence, based on the target company’s most recent financial statements. It also sets a preliminary purchase price, typically calculated by deducting the target company’s net debt from the valuation at the transaction’s closing date.
• Adjustments and Determination of Purchase Price: The preliminary purchase price is often subject to adjustments based on the buyer’s due diligence findings. These adjustments account for any discrepancies between the reference accounts (usually the audited annual accounts of the last financial year preceding the LOI) and the actual net debt reflected in the target company’s balance sheet.
• Payment of Purchase Price: It’s common for the purchase price not to be paid in full at the closing date. A portion may be retained in escrow or paid in installments, serving as security for the buyer against potential damages to the target company.
• Due Diligence by the Buyer: After signing the LOI, the seller grants the buyer and their designated advisors full access to the target company’s documentation and facilities for a specified period, allowing for a thorough review of various areas, including accounting, finance, legal, tax, labor, administration, environmental, and business operations.
• Conditions: The completion of the transaction is often contingent upon specific conditions, such as obtaining necessary authorizations and permits, the target company continuing its activities as usual, and the buyer being satisfied with the results of due diligence.
• Commitment of Key Personnel: If key employees are present in the target company, it’s advisable to secure their continued employment through formal contracts for a specified period.
• Non-Compete Agreement: Sellers commonly agree not to engage in competition with the buyer for a specified period. It’s also typical to regulate the prohibition of soliciting the target company’s employees for a certain minimum duration.
• Management of the Target Company: The seller is typically required to ensure that the target company continues its operations as usual until the closing date, refraining from undertaking extraordinary transactions.
• Confidentiality: In case the parties have previously entered into a confidentiality agreement, reference is usually made to it, stating that it will remain in force on its own terms. If this LOI is the first formal document executed by the parties, both the buyer and the seller, along with their respective advisors, commit to maintaining the confidentiality of the LOI and not disclosing its contents or any negotiations without the prior written consent of the other party, except as required by law or in compliance with a court order. It is essential to maintain the confidentiality of information exchanged during the acquisition process to protect proprietary and sensitive data.
• Exclusivity: Both parties agree to exclusively negotiate with each other for a specified period to facilitate productive discussions and minimize distractions from other offers. Sometimes, a penalty and reimbursement of expenses incurred by the buyer may be stipulated in the event of the seller’s breach of the exclusivity obligation or if, shortly after the seller terminates negotiations, he initiates discussions with third parties that result in a deal.
• No Obligation to Negotiate: The LOI emphasizes that it does not obligate either party to proceed with the transaction, preserving their autonomy.
• Costs: The allocation of costs associated with due diligence and negotiation activities is clarified to manage financial expectations and minimize disputes. Typically, both the buyer and the seller bear their respective expenses incurred during the negotiation, preparation, or consummation of the transaction, including the fees of advisors and intermediaries hired by them. It also regulates how expenses and taxes resulting from the transaction will be paid if the planned operation is completed, for example, according to the law.
• Non-Binding Nature and Duration: The LOI emphasizes its non-binding nature, serving as a preliminary agreement for negotiation purposes only. Once signed, the LOI becomes a non-binding agreement of intentions for the parties, without them being legally obligated to each other under the letter, or any conversations and/or negotiations that have taken place. Additionally, a validity period for the LOI is established, which should cover a reasonable time for conducting the audit and negotiating the transaction documents.
• Binding Provisions: Notwithstanding the clause above, certain clauses, such as confidentiality obligations and exclusivity arrangements, may be intended to have legal effect and will bind and benefit both the buyer and the seller.
• Termination: Circumstances under which either party may terminate the LOI are outlined, bringing clarity to the negotiation process.
• No Representation or Warranty: It’s clarified that the LOI does not constitute a representation or warranty regarding the accuracy or completeness of provided information.
• Governing Law and dispute Resolution: The process for resolving disputes during negotiations is defined to enhance efficiency. In this regard, it is usually specified which law governs the rights and obligations arising from the LOI and to which jurisdiction any disputes, claims, or disputes arising between the parties regarding the interpretation or performance of this letter will be subject, which may be to the jurisdiction of the courts of a certain location or to arbitration, in which case, the seat of the arbitral tribunal and certain minimum content that the arbitration submission clause must have are regulated.
By incorporating these clauses into the LOI, tailored to the specific situation, the search fund can effectively navigate the acquisition process while protecting its interests.
