Friday, 17 January 2014

SPA Series Part 4: How To Negotiate M&A Deals In Finland?

So now (someone might say finally) it is time to return to our SPA blog series. It has been a bit busy start of the year and it seems that at least the number of divestments is not decreasing any time soon (see more on out practise from TRUST's website by clicking here or here). Well, I thought that I would do this blog before I start my Christmas vacation but I was too busy, my apologies! So let’s go straight to the topic and outline some of the first clauses of the agreement. But, before that, some risk allocation issues and core terms from that perspective.

If we start with the definition of the parties, the previously noted point on differences between the business transfer and share transaction should be noted. In the former, the seller is the company while, in the latter, the seller is the owner of the shares. Typically these SPA agreements start with the following wording or something similar:

“THIS SHARE PURCHASE AGREEMENT is entered into by and between

[Name of Purchaser], [(Business Identity Code [])], [address of Purchaser] (Purchaser), and [Name of Seller], [(Business Identity Code [])], [address of Seller] (Seller).


WHEREAS, the Seller owns [all of the][or:___] issued and outstanding shares (Shares) of [] (Business Identity Code []), [address] (Company); and

WHEREAS, the Purchaser is willing to acquire from the Seller and the Seller is willing to sell to the Purchaser the Shares subject to the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth in this Agreement, the parties hereto agree as follows:”

As said earlier, a share purchase agreement is, like any other transaction agreement, an agreement on the allocation of risks and liabilities concerning the object of the deal. In other words, the agreement tries to find a proper balance between the purchase price paid on the one hand and the risks and liabilities assumed by the purchaser on the other hand. Of course, there is a correlation: if the purchase price is higher, fewer risks and liabilities are assumed by the purchaser and the other way around.

The allocation of risk and the negotiating tactics of the parties are influenced by several factors and it is always a point that needs experience—how to create a proper strategy to exit your deal especially with a view on optimising your business targets, e.g., deal value. Typically, the points one should consider include:

(i) negotiating position;

(ii) aims of the parties;

(iii) time constraints;

(iv) risk tolerance; and

(iv) understanding of the core business.

During the transaction process, information concerning the object of the transaction and the risks pertaining thereto and liabilities becomes available to the purchaser, most frequently through the due diligence review or through a separate disclosure by the seller.

The purchaser cannot usually refer to a defect that he was aware of before entering into the transaction. Therefore, if the purchaser is, through due diligence or otherwise, aware of a particular problem, but chooses not to share it with the seller, the purchaser will run the risk of being unable to claim damages suffered as a result of a breach by the seller.

In order to achieve a proper balance between the purchase price and the risk and liabilities assumed by the purchaser, findings based on the due diligence review (read more on this due diligence from here) or disclosure by the seller can be addressed in several ways, depending on the severity and content of the finding. As a starting point, the alternatives for addressing the findings include:

(i) restructuring and redefining the target;

(iii) adjusting the purchase price or the related price mechanism;

(iv) conditions precedent;

(v) representations and warranties;

(vi) specific indemnities; and

(vii) execution of transitional and other related agreements.

If a finding cannot be readily addressed through any of the above measures, or if the necessary measures are not feasible, e.g., for tax reasons, the finding may be a deal breaker, resulting in the transaction becoming too unattractive to pursue. Typically there are several ways to deal with these findings and very often issues and even significant findings can be handled in different ways to reduce or eliminate the risks. One example is an online gaming company established by two engineers at the late 90s. They started coding an engine for an online game and later on went to establish a company. We were performing a due diligence investigation in connection with a financing round where we represented a foreign venture capital fund. Although everything else was pretty much in order, the company was at the time of financing round already quite large with dozens of employees, these founders had never actually assigned the intellectual property rights of the engine to the company. Naturally, it was defined as a condition precedent for the deal and eventually these persons obviously agreed to assign these rights. However, should the situation be different, if, for example, we could not have received this signing for the assignment documentation, we would have been faced with a deal breaker. This was the case in connection with a biotech firm and its gene bank, but that is another story.

The most difficult findings to deal with are the first two above. This is because they go to the very heart of the target and might change the whole contemplated deal structure. As an example, a share deal’s due diligence review might reveal very high litigation risk or potential environmental liabilities related to a certain property. This might mean that the purchaser is only interested if the structure is changed to an asset deal which makes it possible for the purchaser to exclude from the scope of the transaction any liabilities relating to the litigation or the contaminated property.

An important point to note is that a seller often wants to make extensive disclosures in order to limit or avoid any liabilities under the agreement, in particular under the representations and warranties or disclosure letter. This is a point to which we will return in later postings. A purchaser should normally approach such disclosures with caution and should not accept them without considering their full implications, particularly in light of the findings in the due diligence review. These are issues one must always go through with people who have the best visibility to the field of business and target.

As a rule of thumb, a purchaser should only accept disclosures that are fairly made and sufficiently exact in their scope for the purchaser to be able to fully appreciate all their implications and decide on appropriate action. Also in some cases, the purchaser may want to disclose to the seller certain intentions relating to the special use of the object of the transaction. The purpose of such disclosure is to broaden the seller’s liability.

Some points on the above recitals and object of the transaction clauses are probably needed as well. The recitals convey background information to the transaction. Even though the recitals describe the intentions of the parties, the recitals should be straightforward and simple. In particular, a recital should not state a purpose that is broader than what the agreement seeks to accomplish. Begin each recital with “WHEREAS,”. The recitals constitute a list; end each recital with a semicolon and the second to last recital with “; and”. This is the “linguistically correct” way to do these, or at least so I was thought. Recitals may also have an important role to play if there is a complex transaction,  because then it should give an overview of the whole deal and all related agreements so that a third party who has not been involved in the deal would easily get an understanding of the overall picture. This also affects competition law analysis, especially as IP-intensive deals, for example, are typically connected with several IPLAs (intellectual property assignment agreements) or IPAAs (intellectual proper assignment agreements) going from the purchaser to the seller and the other way around. If you are interested in IP issues, a good starting point might be IP handbook which also contains some reference agreement models (available from

The object section identifies the object of the transaction. The object of the transaction should be clearly and unambiguously defined so nothing specific about that. Typically, template recitals assume that all issued and outstanding shares of the target company are the object of the transaction. If not, the recital and definition of “Shares” should be amended accordingly.

So next we continue with definitions, but before that I want to wish to you a splendid year 2014!