Are you planning to take over a company abroad – or will your company be taken over? Then you are faced with one of the most complex legal documents there is: the acquisition contract.
A takeover is more than a handshake and a purchase price. The acquisition contract – in practice often called a Share Purchase Agreement (SPA) or an Asset Purchase Agreement (APA) – specifies who buys what, for what price and who bears the risk if something goes wrong. International takeovers add additional challenges: different legal systems, language and cultural differences and greater distances. As an SME entrepreneur, you want to understand what you are signing. In this blog, we list seven topics that deserve attention in almost every international acquisition contract.
1. The purchase price: how is it determined?
The purchase price sounds simple, but rarely is. There are two commonly used mechanisms. In completion accounts, the final purchase price is determined after the transfer. The calculation is based on the actual financial position of the company on the transfer day, for example the available working capital, the net debt and the balance in the bank account. This gives the buyer protection if the company turns out to be less strong than expected during the transfer. For the seller, it does mean that the price can still change after closing.
With a locked box, the purchase price is already fixed before signing. In principle, no financial adjustment will follow after that. The economic value of the business is charged to the buyer, as it were, from an agreed date, while the legal transfer takes place later. This provides price certainty and can speed up the process. On the other hand, the buyer must be able to rely on the financial information on which the locked box is based. That is why anti-leakage provisions are important: they prevent the seller from withdrawing value from the company before the transfer, for example through an extra dividend or an unusual payment.
2. Warranties and indemnities: who bears the risk?
Warranties are statements by the seller about the condition of the company. For example: there are no major lawsuits, the tax returns have been filed on time and the company has the necessary permits. If a warranty turns out to be incorrect, the buyer can claim compensation under certain conditions. In international contracts, it is extra important to agree on what exactly is meant by a warranty and how a claim should be reported.
An indemnity goes a step further. In doing so, the seller takes financial responsibility for a specific, already known risk. Think of an ongoing tax procedure, an environmental issue or a dispute with an employee that came up during the due diligence investigation. Preferably do not only cover known risks under a general warranty. A warranty may be limited if the buyer already knew the problem; A well-formulated indemnification makes it clear who bears the concrete risk.
3. Warranty & indemnidication
Warranty & Indemnity insurance, or W&I insurance for short, is increasingly being used in international acquisitions. This insurance can protect the buyer if a warranty from the seller turns out to be incorrect afterwards. The insurer then takes over part of the financial risk – within the agreed limits.
- The seller can exit relatively cleanly, without having to keep a large liability on the balance sheet for years.
- The buyer gets extra security, even if the seller is less accessible or financially less strong after the acquisition.
- The insurance can facilitate the negotiation process, because the parties can divide the risk in a different way.
Please note that W&I insurance usually does not cover problems that were already known, no ordinary purchase price adjustments and no fraud by the seller. The policy conditions, exclusions and the deductible therefore deserve at least as much attention as the contract itself.
4. Earn-out: pay based on future performance
In an earn-out, the buyer only pays part of the purchase price if the acquired company achieves certain goals after the transfer, for example a turnover or profit target. This can help if the buyer and seller look differently at the future value of the company. It lowers the risk for the buyer and gives the seller the opportunity to benefit from growth.
An earn-out does require very clear agreements. How is the turnover calculated? What accounting rules apply? What happens if the buyer relocates operations, incurs additional costs, or changes strategy? Also establish measurement moments, information rights and an independent dispute procedure. In this way, you prevent a settlement that was intended as a bridge from becoming a source of conflict.
5. Non-competition clause and confidentiality
After the acquisition, the buyer usually wants to prevent the seller from immediately starting a competing business or taking important relationships with them. A good acquisition contract therefore contains clear agreements about:
- A non-compete clause: the seller does not start a competitive activity for a reasonable period of time and within a clearly defined area.
- A non-solicitation clause: the seller does not actively recruit employees, customers or other important relations of the company.
- Confidentiality: confidential information remains protected, both during negotiations and after transfer.
The duration, geographical scope and content must be proportionate. Agreements that are too broad can be legally vulnerable and in some countries are assessed differently than in the Netherlands.
6. Conditions precedent and certainty about the deal
In cross-border acquisitions, the transfer is often subject to conditions precedent. The deal will then only go through if certain conditions are met. Examples include approval from competition authorities, shareholder approval, obtaining financing or the absence of a materially adverse change in the company. Such a final agreement is often referred to as a MAC clause.
Look not only at the conditions themselves, but also at the question of who should take what action, before what date and with what effort. As a buyer, you need to know when you can still get rid of the deal. As a seller, you want sufficient certainty that the buyer will not leave without good reason.
7. Governing law and dispute resolution
In the case of an international transaction, it is important to determine in advance which law applies to the contract and where a dispute will be handled. For example, parties opt for Dutch or English law, because both legal systems offer a lot of room for customization. International arbitration, for example through a specialised arbitration institution, may also be an option. Arbitration often offers more privacy and can be practical if parties are based in different countries.
Pay attention to the relationship between the law chosen, the language of the contract, the competent authority and the possibility of enforcing a judgment in the other country. A nice clause on paper is only valuable if it is also practically enforceable.
Conclusion: make your contract match your deal
An international acquisition contract is tailor-made. The text should not only cover the legal risks, but also be in line with your commercial goals, financing and plans after the acquisition. Bol International helps you navigate through every step of an international acquisition – from due diligence to signing.
