Thorts: Back to basics: Preliminary aspects to consider when drafting a sale agreement

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Thorts: Back to basics: Preliminary aspects to consider when drafting a sale agreement

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Published Date: 2021-04-01 | Source: DealMakers | Author: Nikhil Sham

Thorts: Back to basics: Preliminary aspects to consider when drafting a sale agreement

As one of the cornerstones of Corporate SA is efficiency, we thought it prudent to develop a 'cheat sheet' on various key agreements in the Mergers and Acquisitions sphere. In this article, we have decided to include our list of high-level items to consider when drafting a sale agreement.

At the outset, we stress that this is not an exhaustive list of issues, as each transaction has its own unique set of facts which require a matter-by-matter evaluation. We further caution that there may be nuances and exceptions which may apply. Our intention is to cover only the simple aspects encountered in the ordinary course of a sale transaction between juristic persons.

The parties

While correctly identifying the parties to a sale agreement may seem simple (a buyer and a seller), it is not uncommon for parties to be added to an agreement (in addition to the buyer and seller). As a general rule of thumb, if a person has rights and obligations under an agreement, they should be added as a party to the agreement.

The object of the sale and the price

As a sale agreement is a specific type of contract, in addition to the usual requirements for a valid contract, the essentialia for a sale of contract must also be present. The two essentialia for contract of sale are a specified (or ascertainable) merx (object) and price. Accordingly, the first substantive aspects to settle are what is being sold (object) and for how much it is being sold (price)?

In the M&A space, the primary merx in question is either shares in a company or a business (assets and liabilities) forming part of a company. This article applies equally to both.

Discharging of the purchase price

There are a multitude of ways in which a purchase price can be discharged. The most common three methods of discharging the purchase price are (i) in cash; (ii) in kind (other property); or (iii) by way of off-set (where the purchaser has an existing obligation against the seller and such obligation is off-set against the obligation of the purchaser to pay the purchase price to the seller). A mixture of these can also be used to discharge the purchase price.

Once a method(s) of discharging the purchase price has been agreed on, the parties may also choose to vary the terms of such payment (which also can be varied in an almost endless number of ways) by deciding on, among other things, (i) the timing of the payment, (ii) if payment will be made in full or in tranches; and (iii) if there are any instances where the purchase price may be varied.

Conditions to the sale agreement

Often, if not always, some various procedures and approvals need to be in place before a sale becomes effective - even when the terms of the sale have been agreed and the parties are ready to implement the transaction. Accordingly, to ensure that the requisite procedures are followed and approvals received, the parties will add such procedures or the obtaining of such approvals as conditions to the sale becoming effective.

Practically, a clause will be included in the sale agreement which sets out the conditions to be fulfilled before a sale can become effective, which has the effect of 'suspending' the effectiveness of certain provisions of the agreement (related to the sale and the implementation thereof) until such conditions have been met.

The most common conditions to a sale agreement are:

  • corporate approvals (e.g. resolutions or consents);
  • any related agreements being entered into and/or becoming unconditional;
  • proof that the purchase price can be discharged being provided (e.g. a bank guarantee or a proof of funds certificate);
  • approval by the Competition Authorities; and
  • any industry-specific requirements (e.g. ministerial approval for the change of control of a company or the transfer of a licence).

Incidental clauses

While there is no defined group of incidental clauses, these clauses are usually included to regulate aspects of the transaction that flow from the main sale. Such clauses may perform the function of offering protection to either the purchaser or the seller, or they may even regulate the next steps of the transaction.

The most common incidental clauses are:

  • warranties (a statement of fact in respect of the merx and/or related items which, if breached, offers a remedy to the party to which the warranty was given); and
  • limitation of liability (a clause which regulates the extent to which each party is liable under the agreement); and
  • closing clause (this clause regulates the practical procedures that the parties must follow once the agreement becomes unconditional for the sale to be implemented, which includes the execution and/or exchange of certain documents, as well as the delivery of the merx).

Boiler plate clauses

Boiler-plate clauses is the colloquial term given to the standard clauses which appear in most written agreements, irrespective of whether it is a contract of sale or not. These clauses regulate the baseline obligations between the parties and aim to promote the clarity of the agreement between parties by spelling out, among other things (i) how the contract can be executed and varied; (ii) how disputes between the parties are to be handled; (iii) how and under what circumstances the contract can be terminated; (iv) the legally chosen address to which documents can be delivered to each party and the permitted methods of delivery; and (v) the jurisdiction and legal system which will apply to the contract.

Conclusion

While this article attempts to give a general outline of what should be included in a sale agreement, it is worth remembering that once the essentialia for a sale agreement have been agreed, the principle of freedom of contract still applies. In short, parties should always be aware that they can regulate and agree on any terms they wish (provided such terms are within the confines of the law) - so there is wide scope when attempting to reflect the intention of the parties or, better still, for manoeuvring when searching for ways and means to overcome an impasse between parties.

Nikhil Sham is an Associate | Corporate Commercial at ENSafrica. Reviewed by Ian Hayes, an Executive in ENSafrica's corporate commercial department.


This article first appeared in DealMakers, SA's quarterly M&A publication


DealMakers is SA's M&A publication.
www.dealmakerssouthafrica.com



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