The current adverse scenario of the global economy is testing the cash and runway of startups to consolidated companies, creating M&A opportunities in Brazil for investment funds and organizations to acquire assets with attractive valuation.
In M&As, the stock purchase agreement (SPA) is a key instrument for seller and buyer, constituting a complex agreement that involves negotiation of sensitive and relevant clauses, which will impact the business by several years from the date of signature.
See below 5 key clauses in stock purchase agreement (SPA) for transaction related to Brazil:
1. Price Clause: It is fundamental to clearly and objectively define the price and its conditions. Establishing the price for the shares to be acquired, or the metric to arrive at the same (eg. EBITDA multiple), seems basic, but there are countless cases where, after the documents has being executed, buyer and seller have different views on how to calculate the price.
In addition, price adjustment clauses must be adhered to, which change, up or down, the final price for the acquisition, based on financial performance, contingencies, risks and other relevant factors.
2. Dilution Clause in Case of Partial Sale of the Target Company’s Equity: In partial acquisitions (generally related to investments in early stage startups and series A, B, C+), seller and investor must foresee how eventual dilutions of the position of both will occur if new rounds of capitalization are necessary.
Dilution significantly affects shareholder’s voting rights. Thus, a Shareholders’ Agreement must be entered into to establish the form of dilution, and the voting rights of the diluted shareholders.
3. Representation and Warranties Clauses: Commonly considered unimportant by the unwary, the Representations and Warranties section in SPAs is, in fact, one of the most relevant, especially for the buyer.
In it, the target company and its controlling shareholders declare (i) that the company is regularly constituted and operated, (ii) that there are no civil, environmental, tax, labor liabilities, among others, other than those informed by the company and sellers, and (iii) that there are no other assets, indebtedness, commercial contracts, third party rights, among others, other than those informed by the company and sellers.
If any of these, and many other, representations are incorrect, the buyer may be entitled to terminate the contract and seek damages.
4. Non-Compete Clause: Important provision for buyers and investors, the non-compete clause prohibits the seller from competing with the sold company for a certain period of time (generally between 2 to 5 years) after the transaction closing date.
The term and scope of the non compete restriction are negotiated between seller and buyer and may include geographic or product/service limitations.
5. Indemnification Clause: Mainly connected with the contractual “Representations and Warranties” section, this clause establishes the obligation of the seller to indemnify the buyer for any damages or losses resulting from any breach of the main contract and accessories of the M&A.
If there is a false, incorrect or incomplete representation and warranty, the buyer may seek damages from the seller.
Because they are complex, the preparation and negotiation of an M&A contract requires care, as it involves sensitive and relevant clauses, which will impact the business for several years from its closing.
