Mergers and acquisitions (M&A) transactions involve a complex contractual structure whose success depends directly on the negotiation and drafting of specific clauses designed to protect the parties involved and ensure the legal certainty of the deal. Below are some examples of these clauses:
Representations and Warranties (Reps & Warranties)
These are statements made by the seller regarding the target company, such as its financial condition, liabilities, litigation, regulatory compliance, among others. They serve as the foundation of the due diligence process: any incompleteness, omission, or inaccuracy may result in indemnification claims.
Material Adverse Change (MAC)
The so-called “MAC clause” allows the transaction not to proceed if an event occurs that materially and adversely affects the target company or the basis of the deal between signing and closing, such as certain legislative changes. Its wording requires precision, as it determines which events are covered — or excluded — by its application.
Price Adjustment
A mechanism that allows the purchase price to be reviewed based on variations in the target company’s working capital, cash position, net debt, or EBITDA. The most common methodologies are locked box, in which the price is fixed based on a reference balance sheet and the economic risk of the target company transfers to the buyer as of the locked box date (not the closing date), and completion accounts, where the adjustment is made after closing based on audited financial statements.
Interim Covenants
Between signing and closing, the seller undertakes to operate the target company in the ordinary course of business and may not make significant decisions without the buyer’s consent (for example, incurring debt, disposing of assets, distributing extraordinary dividends, or implementing corporate changes). This clause aims to preserve the value of the target company until the effective transfer of control.
Price Retention (Escrow and Holdback)
Part of the purchase price may be retained in an escrow account or simply deferred (holdback) for a specified period. This amount serves as security for potential indemnification claims arising from breaches of representations and warranties or liabilities identified after closing. These mechanisms reduce the buyer’s risk and may coexist with other guarantees (whether real or personal) provided by the seller.
Earn-out
Part of the purchase price may also be paid on a deferred basis, conditional upon the achievement of future performance targets (such as revenue or EBITDA). This structure reduces the buyer’s risk but requires clear provisions regarding calculation methodologies and the buyer’s control over the metrics that determine payment (e.g., restrictions on accounting changes, operational conduct obligations, and access to information), otherwise disputes may arise.
Non-compete and Non-solicitation
These clauses prohibit the seller from competing in the same market segment as the target company and from soliciting its employees or clients for a certain period. They are essential to preserve the value of the acquired asset but must respect limits regarding duration and scope; otherwise, they may be deemed null or have their enforceability reduced by the courts.
Conditions Precedent
These provisions establish the conditions that must be fulfilled for the closing to occur, such as antitrust approval, regulatory or third-party consents, or the securing of financing. Failure to satisfy these conditions may suspend or terminate the transaction.
Indemnification and Limitations of Liability
These clauses define the scope of indemnification obligations in the event of breaches of representations and warranties or liabilities arising from events prior to closing. Common limitation mechanisms include the cap (maximum indemnification amount), basket — either tipping basket (once the threshold is exceeded, the entire amount of losses may be claimed, including those below the threshold) or deductible basket (only the amount exceeding the threshold is indemnifiable) — de minimis thresholds (a minimum value for individual losses to be considered), and contractual or statutory limitation periods.
Dispute Resolution Clause
This clause defines the mechanism for resolving disputes arising from the agreement: arbitration or court litigation, with or without prior mediation. In M&A transactions, arbitration is widely preferred due to the specialization of arbitrators, the confidentiality of proceedings, and the greater efficiency compared to traditional courts. The clause should specify the arbitral institution, the number of arbitrators, the language, and the seat of arbitration.
Post-closing Governance
These provisions regulate the management structure of the target company after the completion of the transaction, particularly in partial acquisitions. They may include, for example, rules on board composition, minority veto rights, dividend policies, lock-up periods (restrictions on transferring equity interests for a certain period), budget approvals, and deadlock mechanisms for situations in which shareholders cannot reach consensus on key matters.
Negotiating these clauses requires an integrated legal, financial, and strategic perspective. In M&A transactions, contractual details are not mere formalities; they represent the primary line of defense for the parties’ interests in an environment of high complexity and risk.
These are just some of the clauses that can determine the success of an M&A transaction.
Want to learn more? Contact our team.