Businesses usually enter into different kinds of agreements. The agreements can be signed between the business and other organizations, customers, suppliers, or government agencies. In every agreement, it is essential to set out the duties of each other parties to the contract (Levin , 2016 ). In addition, the contract should contain vital elements such as the cost of the contract, timelines, termination, and the repercussions of failing to meet the contractual agreements. Presently, I am the CTO and co-founder of a company engaged in investing, consulting, and data analysis through artificial intelligence, big data, and math algorithms. Our company strives to use technology to maximize returns for investors and interested stakeholders. At the moment, we have offices in Australia, Thailand, and the United Kingdom. Soon, we intend to venture into the US market. Throughout our operations, we usually enter into separate agreements with diverse stakeholders. These pacts may determine the direction that we take as a team. As one of the company's co-founders, I need to understand the crucial details behind a business contract. In this project, I will reflect on a business agreement that we will likely sign soon as we seek to expand into new markets.
Part Two: Introduction to Transactional Agreements
The business agreement under consideration in this project will involve our company and strategic partner in the United States. In the current business world, businesses are always looking out for opportunities that they can use to achieve their full potential. In addition, enterprises strive to look for new markets that they can use to maximize their sales and achieve long-term business objectives. Failure to take such measures is likely to make the organization lose its competitiveness in the market. In addition, the organization may struggle to meet the needs of its customers well. Against this background, we are constantly working to find opportunities that we can exploit to succeed in the market. Furthermore, the co-founders of the company have agreed on the need to go to other markets. Our business is currently targeting United States customers. The United States provides important opportunities that enterprises can exploit to succeed. In addition, there is a growing market for companies such as ours. Therefore, we are planning to venture into this competitive market as we seek to expand our enterprise and make it among the successful companies in the world. However, getting into such an area will not be easy. The organization must select the right approach on how to venture into the market. In our case, we have decided that acquiring an already existing startup in the US may be the right avenue to get into the market. This implies that we will be getting into a business agreement to buy an existing consulting or investment company. Once we have acquired the organization, we intend to restructure it to make it similar to the mother company. The primary goal is to successfully get into the American market and give quality services to our new clients.
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Getting into an acquisition business contract will not be an easy process. First, it is imperative to state that an acquisition revolves around buying a company that is already operational and making it part of the mother company. The previous owners of the enterprises give up their rights and stakes in the company to the new owners in exchange for the agreed amount of money or other related resources. In the present case, our company will be the buyer while the company owners that we have already identified in the United States will be the sellers. As the buyers, we are looking forward to entering into a business sale agreement that will allow us to control the new US venture. In addition, we expect that we will get value for the money that will be paid for the startup venture. At the same time, we expect that the sellers will also be interested in maximizing their earnings from the sale. Since starting and running a company is not easy, the owners of the organizations that we are targeting are likely to demand money or compensation that reflects the actual value of the enterprise. Each of the parties to the contract will therefore strive to get the best out of the transactions. The business deal will be done based on a legally binding business agreement. The agreement will set out the product being sold, the amount to be paid, and the responsibilities of each of the parties to the contract. In our case, we plan to work closely with the company lawyer to ensure that the deal sails through. As the top executives, we also intend to use our skills and knowledge to develop a business agreement that will be beneficial to our organization.
Representations and Warranties, and Disclaimer of Warranty
When getting into a business agreement, it is crucial to understand how it relates to the elements of representations, warranties, and the disclaimers of warranty. In a business agreement, representations refer to the statements of facts made by the parties to the contract. On the other hand, a warranty refers to the grantee that makes regarding the condition of an item, product, or service (Rocap, 2016). It may also be considered the situations and terms in which exchanges will be made if the products fail to function in the way stipulated in the agreement. It is also worth stating that a warranty can be viewed as the promise of the accuracy of the facts that one makes during an agreement. In most instances, the representations and warranties made will help a party in a business deal to bridge any information gap. In addition, they allow the parties to the agreement to make an informed decision regarding the deal in question. Once the parties to the contract understand the warranties and representations, they can allocate the risks and determine the agreement's value. In some cases, business agreements contain disclaimers of warranty (Rocap, 2016). These statements inform the other party regarding the lack of guarantee or promise that the product will operate or function in a specific way. The disclaimers are meant to release the producer or seller from any legal liability in the event of product or service failure.
The concepts of representation, warranties, and disclaimer of warranties apply to the business agreement that we are likely to sign when acquiring a new startup in the US market. Regarding the representations, the sellers of the new venture must accurately state the facts related to the company. Some of the issues that need to be addressed are the enterprise's financial performance, existing liabilities, and ownership (Levin , 2016; Rocap, 2016). Furthermore, the seller must indicate that the information they have provided is accurate and reflects the enterprise's actual condition. When it comes to the disclaimer of warranty, there is a high probability that the sellers will release themselves from any legal liability if the venture performs poorly in the future. The sellers expect the new buyers to operate the company independently and make decisions that are in line with their interests. Therefore, they may include a disclaimer warranty that protects them from any events that affect the organization's future, including issues related to financial performance and tax liabilities.
Covenants (Affirmative and/or Negative)
Another critical component of a business contract is covenants. It is common to find a party to a contract stating without qualification that an issue I true. In such cases, the lawyers making the contract will say that an issue is true based on the person’s knowledge. These are statements and issues that relate to the concept of covenants in a business agreement. An affirmative covenant gives protection to the investor by including a provision for remediation if there is a problem with the company (Rocap, 2016). The negative covenants, on the other hand, are restrictive. Therefore, they require a given party to avoid or cease doing something if there is a problem in the deal. The subject of covenants is likely to apply in the present case since it also includes issues around intellectual property, structures, and assets. In case a problem arises before the deal is sealed, then we may be required to go back to start the remediation process. The primary goal is to protect the interest of our company and avoid losses. On the other hand, the negative covenant may also be included to stop us from doing anything that may harm the startup before we take complete control of the venture. The unfavorable contract may be of great importance to the seller as they also seek to protect their interest and reputation before the business deal is sealed and all the dues paid.
Conditions to Closing
In most business deals, the way parties act or fail to act may affect the successful completion of a contract. In some cases, the parties are expected to provide specific information and details on their future activities before the deal is done (Fennell & Keys, 2016). In addition, the parties may be expected to disclose ways through which they intend to make the payments or fulfill their contractual obligation before proceeding with the deals. These are issues that relate to the subject of conditions of closing. Furthermore, the concept is likely to apply in the contract that we may sign in the future. In our case, we will disclose the details regarding our enterprise, the need for the new acquisition, and the plans that we have for the new venture. The seller will also give details regarding the activities of their enterprise. The provision of such details helps in bridging the information gap that may arise before the business deal is sealed. In addition, it helps the parties to the contract to determine the risks that they may face before and after the contract are signed and the deal sealed.
Post-Closing Price Adjustments
Business enterprises get into agreements to get some benefits. In addition, the contracts usually involve some form of payment or consideration. Therefore, the set-closing price adjustments are among the critical issues that need to be considered (Fennell & Keys, 2016). The contract that is being reviewed in this case involves an acquisition of a new business venture. Therefore, payment for the company is a critical factor that must be taken into account. The payment can be made in different forms, such as securities of the buyer, cash, and other non-cash forms of the transaction (Fennell & Keys, 2016). Furthermore, the parties will be interested in the portion of the purchase price, which includes the payment made after the deal is closed. This amount is commonly referred to as the earnout, and it entitles the seller to further payments if the target company meets the prescribed benchmarks after the deal is closed. While signing the business agreement, our company will be interested in a wide range of provisions related to earnouts. They include the milestones, measurement ad accounting methods, earnout period, taxation, control over the earnout transaction, and staff rights. Throughout the process, we will seek information related to the above significant elements of post-closing price adjustments to sign a good deal that will benefit the organization.
Disclosure Schedules
In any contract, parties require various types of information before, during, or after the agreement. The details allow the parties to decide on the best approach to deal with the engagements and issues that they may face. In addition, it is imperative to set a disclosure schedule that will be used to determine the rate and time at which information is provided to the parties to the contract. The concept of disclosure schedules will apply to the contract that our company may sign when acquiring the new venture. As a group, we are looking to work with a startup that will enable us to move into the US market. Since the US market is vital to our organization, we cannot sign the business deal without getting details about the organization that we will buy. Our organization expects that the business agreement will set out how the seller will be providing information. Before the agreement, our company will need to have information regarding the ownership of the targeted venture, its performance, prospects, and other fiscal obligations. Once the deal is signed, we expect access to other critical information regarding trade secrets and intellectual property rights. On our side, we will also provide the details that the seller may require to ensure that the deal is sealed smoothly.
Termination Provisions
Termination provisions set out the procedures that may be used in ending a business agreement. The agreement may be halted for several reasons, such as the failure of one of the parties to fulfill the set financial obligations or the decision by one party to engage in activities that hinder the successful completion of the deal (Levin, 2016). Information gaps may also provide a basis for terminating a business contract. Therefore, there is a need to include the termination provisions in the contract that we may sign with the new venture in the future. This component of the contract should set out the procedures used to end the contract, issues that may lead to the termination of the contract, and the liabilities of each of the parties if the contract is stopped.
Interrelation of the Components
The successful completion of a business deal depends on how each of the parties fulfills their obligations. In addition, the parties need to ensure that the agreement contains all the components that help reduce the information gap. From the preceding discussion, it is evident that several elements of the contract will determine how it is implemented. While these elements are different, they are usually interlinked as the contract is being drawn and implemented. For instance, the representations and warranties may influence how the covenants in the contract are defined. In this case, it is imperative to base the contract on factual data and set out responsibilities that each team will accomplish. In the same way, the failure of the parties to give accurate representations may form the basis for the creation of the conditions to closing. When it comes to post-closing price adjustments, a company may also look at the warranties and representations before agreeing with the provisions. At the same time, the disclosure schedules may affect both the termination procedures and the extent to which the parties agree with the indemnification or earnout requirements. In this regard, it is evident that the elements of the contract are interrelated and meant to ensure that the business deal is done in the right way.
Part Three: Working with Representations and Warranties
Information Gaps
When parties get into an agreement, they expect each of them to act in a way that will ensure that the deal is successful. In addition, the parties expect that the contractual obligations are clear to each of them. However, this is not always the case, as there are instances where inaction on the side of each of the parties leads to significant conflicts. Such inactions can also lead to the termination of the contract. Therefore, there is a need to identify the information gaps that may arise and find ways of dealing with them.
The first information gap in the contract that our company is likely to sign with the new partner relates to the warranties and representations. When the other party provides non-factual representations, it is not easy for the other party to make an informed decision. The representations may relate to the company's background, potential, financial obligations, and liabilities. If there is such a gap, our organization may not be able to make a valid and appropriate deal.
Another significant information gap may occur as a result of the unwillingness of the seller to disclose information as provided for under the disclosure schedules. Our company intends to venture into one of the most competitive markets in the world. Therefore, the organization requires information that it can use to make an informed decision before buying another venture. If the disclosure schedule is not followed, our company risks losing out on details that will allow it to move the new venture in the right direction. In addition, the organization may incur losses by buying a company that it cannot fully control due to the lack of details regarding intellectual property and trade secrets.
Finally, the seller's failure to include warranty provisions or rely on inaccurate warranty disclaimers can affect the successful completion of the deal. The warranty is meant to protect our company from an event or defect that can lead to a loss. The warranty disclaimer, on the other hand, protects the seller from legal liability. These provisions should be set accurately and clearly to prevent any information gap before and after the deal is sealed.
Representations and Warranties
Once the contract has been signed, the parties must work towards meeting their obligations. Any changes to the agreement should be discussed between the parties involved to avoid costly litigations. Those involved in creating the contracts need to understand the relevant provisions and their implications on the operations of a business. Moreover, the executives involved should also understand the legal elements of the contract so that they can know what to expect when the contracts have been signed. The lack of such understanding makes it difficult for the companies to make the right move when getting into binding agreements. In my work, I have realized that understanding the legal aspects of a contract and any other elements is critical for business executives. Warranties and representations may help deal with the information gaps in a business agreement ( Lopez, 2015 ). Each of the parties to the business deal will rely on one another to offer accurate details about the transactions. The seller is also expected to give the assurance that the business is worth the investment. As the buyers, we intend to provide sufficient information supporting the asking price set by the seller. The process will entail giving financial statements, ownership, a list of current contracts, and customer listings. During the negotiations, we will strive to demand information from the seller to assess the risk of the transactions. Once the information is provided, it will be possible to create the representation and warrant clauses to protect our rights and ensure that the business agreement is successful.
Part Four: Working with Covenants
Promises in the Agreement
While signing a contract, there are some promises that parties make and are expected to fulfill. At the same time, the parties may promise to refrain from specific actions which are likely to affect how the contract is implemented. In the present case, there are various promises that our company will make to the buyer ( Lopez, 2015 ). The first promise will be to give detailed accounts regarding our business enterprise and how we plan to pay for the new venture. During the negotiation process, the team will promise to avail all the documents that the seller may require to understand our company and determine our ability to pay for the startup. The second promise will be to give sufficient consideration for the contract to be legally binding. The consideration refers to the bargained value for the new enterprise that we seek to buy. The value will be exchanged for the organization. Our team will promise to pay the agreed amount in the prescribed form in exchange for the new company. The third significant promise is to keep the details of the deal secret until the agreement is completed. The primary objective is to protect the parties to the contract from any external action that may lead to adverse effects. The fourth major promise is to provide accurate information regarding the intention of our company and the post-agreement operations. The information will help the seller to determine the earnout to expect from the seller at the end of the deal.
Addressing Information Gap through Affirmative or Negative Covenants
In the context of business dealings, covenants can be described as the legally enforceable rules that parties agree on. The covenant aims to protect the bondholders through the creation of some form of assurance on what the bond issuer will do or will avoid doing during the period of the deal. In most instances, the covenants take the affirmative or negative forms. The affirmative covenants require a party to engage in a specific nature when administering an estate to ensure no additional costs to the agreement. As a result, affirmative contracts do not limit the issuer's freedom when it comes to the day-to-day running of the business. In the selected agreement, our company will be expected to abide by the affirmative bond. In this case, our organization will agree to operate the new venture professionally until the agreement is fully implemented. In addition, we will strive to maintain an adequate insurance level and provide audited financial statements up to the time the deal is finalized. The second form is the negative covenants that highlight what an issuer is not allowed to undertake. Some of the negative covenants that may apply to the contract that we will sign include not taking additional debt, avoiding asset distribution or disposal, and not undertaking any form of mergers and acquisitions. Since the deal is completed, our company will be free from both the negative and positive covenants set in the contract.
Part Five: Working with Price Adjustments
In mergers and acquisitions, questions are always asked regarding the party which should bear the burden of unexpected liabilities after the money has been paid for the deal (Lopez, 2015). For the seller, it is usually good to walk away from the transactions with the fully negotiated payment. For the buyer, a good deal will be one where the liabilities and risks are minimized. These include the liabilities that arose under the watch of the seller or the inaccuracies in the description of the business assets during the negotiation process.
There is a need to set contractual provisions that address the concerns. For the two pares to have some degree of certainty on who bears the liabilities, it is imperative to include the indemnification provisions and earnout clauses (Lopez, 2015). Under the indemnification clause, the parties agree on a contractual mechanism for allocating the risks during the transactions. The parties will strive to strike a deal in which they are protected from post-closing problems and losses. On the other hand, the earnout clause refers to the amounts paid to the seller once the business meets a particular milestone after the deal was closed. In the deal being considered in this paper, the parties must agree on various issues related to indemnities and earnouts. Some of the common concerns that may arise are the duration that should be considered, tax obligations, methods of measuring performance, accounting procedures, and assessing the company's financial position.
The subject of post-closing price adjustment is critical in some business transactions. In addition, parties need to agree on how the transactions should be done in the post-deal period. While focusing on such issues, it is also imperative to examine how specific issues may affect the post-closing price adjustments. One such concern is the subject of fraud. Companies strive to negotiate for fraud exceptions to indemnification limitation clauses. Therefore, the seller will not get any benefit if they engage in fraud. The issue becomes complex when dealing with fraud done by previous employees who left the organization before the deal. In such cases, the teams may struggle with the process of dealing with the subject of indemnification. Another issue relates to the subject of tax obligations. The teams need to agree on how the issue will be addressed before signing the deal. Therefore, the following two questions need to be considered when creating the post-closing price adjustment provisions.
How should be the issue of fraud be handled when developing the post-closing price adjustment provisions?
How do taxation and tax law changes affect post-closing price adjustment provisions?
References
Fennell, L., & Keys, B. (2016). Evidence and innovation in housing law and policy . Cambridge University Press.
Levin, G. (2016). Structuring venture capital. Wolters Kluwer.
Lopez, E. (2015). Introduction to M&A earmouts. Jasso Lopez PLLC .
Rocap, G. (2016). Mergers, acquisitions, and buyouts . Wolters Kluwer.
