This is Part Two in a series discussing steps in a business transaction. In Part One, I discussed term sheets, also sometimes referred to as letters of intent or deal memoranda. In this part, I’ll discuss preparation of the definitive agreement for your transaction.
The definitive agreement – or long-form agreement - means the primary contract for the transaction. Actually, you tend to use the terms “definitive agreement” and “long-form agreement” only if the parties negotiated a term sheet, deal memorandum, or short-form agreement at an earlier step in the transaction. Otherwise, you tend to refer to your definitive agreement simply as the contract or the agreement.
The exact form and name of your definitive agreement depend on the transaction. If the transaction is the sale of a company, the definitive agreement might be an Asset Purchase Agreement. If the transaction is a venture capital financing, the definitive agreement might be a Series A Preferred Stock Purchase Agreement. If two companies merge, the definitive agreement is a Merger Agreement. For a company providing technology or services to another company, the definitive agreement might take the form of a License Agreement or Services Agreement.
A long-form agreement may run 20, 30, 40 or more pages. Here are some of the most significant sections
you might find in such an agreement:
- Definitions of terms used in the agreement
- Description of the transaction
- The money to exchange hands stated as a purchase price, license fee, etc.
- Representations and warranties of the parties
- Conditions that must occur prior to closing
- Section with miscellaneous provisions including governing law, notice requirements, and the right to terminate the agreement
Theoretically, the more thought and detail put into your term sheet, the smoother will be the negotiation of the definitive agreement. Once the definitive agreement is executed, it supersedes or replaces the term sheet. At that point, the term sheet is void and no longer relevant. So make sure that all the points important to you from the term sheet make their way into the definitive agreement. When I work on a definitive agreement, I have the term sheet in front of me and to the extent possible lift language from the term sheet and place it directly into the definitive agreement.