Authors: Alex Gorka and Brett Anderson
Preliminary documentation
Regardless of the structure chosen, the following documents are typically entered into early in the negotiations:
Term sheet
The term sheet may also be formulated as, or attached to, a letter of intent or a memorandum of understanding.
Signed by both the seller and purchaser, the term sheet sets out the general framework of the transaction and usually includes
- the structure and type of transaction being contemplated
- the type and amount of consideration to be paid
- a summary of key terms and conditions
- a list of any significant outstanding legal, financial and operational due diligence
- details concerning the purchaser’s sources of financing for the transaction
- often, in the context of a competitive auction process, a description of the purchaser’s rationale for the transaction and intentions for the corporation’s management team, employees and other stakeholders
- a timeline for completion of the transaction
The term sheet will typically provide that it is not legally binding on the parties, except that the following terms will generally be binding:
- confidentiality
- transaction expenses
- exclusivity
Non-disclosure (confidentiality) agreement
A confidentiality agreement prevents the purchaser from disclosing the existence of the negotiations as well as from disclosing or using the information provided by the seller for any purpose other than evaluating the transaction. It is a prerequisite to entering into substantive negotiations or sharing information as part of the due diligence process. The seller and the target corporation will want to ensure that their confidential and commercially sensitive information is protected in the event the transaction is not completed.
In some instances, including where the consideration includes securities of the purchaser’s own issue, the confidentiality agreement will be mutual. This allows the purchaser to share information about itself with the seller on a confidential basis, allowing the seller to conduct “reverse due diligence” on the purchaser to assess the value of the securities forming part of the consideration.
Purchasers will want to secure exclusivity as early as possible in a transaction process; however, sellers will typically try to resist until principal deal terms have been agreed upon.
The confidentiality agreement should independently consider the protection of any personal information disclosed to a prospective purchaser for the purposes of evaluating the transaction. Canadian privacy laws generally require that personal information not be disclosed as part of diligence unless the parties have contractually agreed to meet prescriptive obligations to protect that personal information and to not make use of it except to evaluate the transaction.
Confidentiality agreements may often include additional terms, including restrictions on soliciting employees as well as access to customers and suppliers.
Exclusivity agreement
Purchasers may require an exclusivity agreement prior to expending significant resources to conduct due diligence investigations and negotiate definitive documentation in order to ensure that they are not competing with other prospective purchasers. Purchasers will want to secure exclusivity as early as possible in a transaction process; however, sellers will typically try to resist until principal deal terms have been agreed upon. In the context of an auction process, the winning bidder will often be awarded a time-limited exclusive right of negotiation to settle definitive agreements.
Exclusivity can be memorialized in a standalone agreement or, alternatively, as a provision in the term sheet or confidentiality agreement. In either case, the terms will require that the seller not solicit, initiate, enter into or continue discussions with any other potential purchaser of the shares or assets of the target for a period of time.
