What you need to know about DPAs
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A Definitive Purchase Agreement (DPA) is a legal document that records the terms and conditions between two companies that enter into an agreement for a merger, acquisition, divestiture, joint venture, or some form of strategic alliance. It is a mutually binding contract between the buyer and seller and includes terms and conditions such as asset purchased, purchase consideration, representations and warranties, closing conditions, etc.
The Definitive Purchase Agreement supersedes all prior agreements and understandings – both oral and written between the buyer and seller. A DPA is sometimes known as a “Stock Purchase Agreement” or “Definitive Merger Agreement.”
A Definitive Purchase Agreement is used as a document to transfer the ownership of a company. The agreement also contains schedules or annexures describing the inventory list, key employees, tangible assets, net working capital determination, etc.
There are two types of purchase agreements:
By way of a Share Purchase Agreement, the seller transfers the shares of the entity into the name of the buyer. Hence, the buyer owns the assets and liabilities that were previously owned by the selling entity. This type of transaction is also known as a “Stock Sale.”
In an Asset Purchase Agreement, the individual assets are transferred from the seller to the buyer, rather than the entire company. The seller remains the owner of the entity and the buyer merges the assets into his existing company or forms a new company with those assets.
The agreement will define the key terms and their meanings for the entire document. It will describe how the buyer and seller are referred to in the document, the meaning of the closing date, sufficient working capital, etc.
Purchase consideration describes the aggregate consideration the buyer is liable to pay to the seller. It also discusses any adjustments that are required to be made in the purchase price. It provides complete detail of the timelines of payment after the closing date and specifically contains the earnest money that is deposited in the escrow account, earn-outs, third-party financing, required working capital at the time of closing, etc.
In this section, both the buyer and seller need to state facts that are referred to as “representations” and then “warrant” that the statements are true. Also referred to as “Reps and Warranties,” this is one of the most important and longest parts of the agreement and is negotiated very extensively.
The goal of the buyer is to get comprehensive representations and warranties, as they provide a valuable source of information on what the buyer is paying money for. On the other hand, the seller’s objective is to limit the reps and warranties.
A typical warranty will be that the seller is in compliance with government regulations, the Worker’s Compensation Act, intellectual property laws, and has the legal authority to sign the agreement, etc.
The seller, however, can limit its reps and warranties by adopting the following:
Although the foundation of the definitive purchase agreement is captured in terms of representations and warranties, the indemnification clauses give it strength. With this clause in place, if the seller has failed to disclose a liability or has somehow covered it, the seller pays a huge fee. Below are the indemnification provisions that are frequently negotiated:
Generally, there is a time gap between the signing of the agreement and the closing of the deal, as certain regulatory approval is required. With such a time gap, there are certain conditions from both parties that must be met for a successful closing of the deal. If certain conditions are not met, then the other party is not required to close the transaction.
Some of the popular closing conditions in a Definitive Purchase Agreement are:
Apart from the abovementioned important provisions, below are some of the miscellaneous provisions that need to be considered:
The Definitive Purchase Agreement also includes annexures, which can include the Key Employee Agreement, Fixed Assets, Escrow Agreement, IP Agreement, Net Working Capital Determination Methodology, etc.
Here are a few things that are not included in the agreement:
Thank you for reading CFI’s guide to a definitive purchase agreement. To learn more about mergers and acquisitions, see the following CFI resources:
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