11.5 Contents of the Sales Contract 40111.5 Contents of the Sales Contract.............................................................
The structure of the deal also influences the contents of the actual sales contract.
The parties often separate signing and closing. When the deal is completed, the
seller and the acquirer are expected to produce certain documents. The contract
typically contains representations and warranties as well as indemnities in the
event of breach of contract. The seller and the acquirer have differing approaches
to warranties, and warranties also depend on whether there are multiple sellers or
multiple buyers. The parties may agree on different forms of consideration, and
there can be different funding options. Key provisions will also regulate the effect
of the acquisition on employees, and tax issues.
Special remarks: venture capital. The contractual framework depends on the
nature of the acquisition. For example, the following contracts can be necessary in
a venture capital investment where an external investor becomes an active share-
holder in the target company and the target company is managed by an entrepre-
neur who has so far been the sole shareholder of the company:^15
Table 11.1 Contracts in a Venture Capital Transaction
Contract Parties Explanation
Non-disclosure
agreement.VC firm,
target company.The target company typically would not
disclose confidential information without
one.
Term sheet, letter of
intent, or a prelimi-
nary agreement.VC firm,
entrepreneur,
target company.The VC firm’s serious interest in making
the contract makes it easier for the target
to disclose more information and confi-
dential information.
Master agreement. VC firm,
entrepreneur,
target company.Contains the big picture and basic terms
of the whole transaction, complemented
by detailed contract documents.
Contract for the pur-
chase of shares by
the VC firm.VC firm,
entrepreneur.Enables the entrepreneur to cash out.Contract for the sub-
scription of shares
by the VC firm.VC firm,
target company.Enables the target to raise funding.Credit agreement,
agreement on con-
vertible bonds or
subordinated debt.VC firm,
target company.Enable the VC firm to mitigate risk and
manage agency relationships.Credit agreement. VC firm,
entrepreneur.The entrepreneur has a further incentive
to act efficiently if the entrepreneur has
borrowed money to subscribe for new
shares in the company.(^15) For an introduction to the contractual framework, see Groner R, Private Equity – Recht.
Stämpfli Verlag AG, Bern (2007) pp 24–35 and 120.