agreement

“Business acquisitions and sales typically involve a complex and lengthy negotiation process for the parties to reach an agreement. The multitude and variety of elements that make up a company makes it necessary to review and negotiate the physical, legal and accounting status of the company before signing the purchase agreement. To do this, it is customary and recommended that the parties make prior agreements to regulate the rights and obligations of the parties during the negotiation,” emphasizes Gustavo García Calbó, lawyer specializing in M&A. AGM lawyers.

“In the Spanish legal system there is no regulation for these prior agreements. Its use and content are characterized by commercial exploitation. The most common agreements pre-sales of businesses are confidentiality agreements, letters of intent, and letters of intent. Choosing one or the other depends on the circumstances of each operation and what the parties intend to regulate,” he adds. And then explains what each is made of.

non-disclosure agreements (Non-Disclosure Agreements – NDA)

A non-disclosure agreement is the contract by which subscribers undertake to exchange documents or information that are necessary for the negotiation process and may be sensitive (accounting documents, industrial property rights, etc.). This agreement requires that the information will not be shared with third parties or used for purposes other than the subject matter of the negotiations that could give the parties a competitive advantage.

A penalty clause can be added to the contractual obligations, providing for a pre-determined sanction for non-compliance.

Letters of Intent (Letters of Intent (MoU)

A memorandum of understanding, in turn, is a document in which two or more parties in negotiations summarize the key aspects of the operation. Although their content is not binding on the parties, the declarations contain a strong ethical commitment linked to good faith, necessary at the pre-contractual stage. It is usually used as an open document during the negotiation to record the progress of the negotiations.

Letters of Intent (Letter of Intent (LOI)

A letter of intent consists of the document that expresses the purpose of conducting a negotiation to conclude a sales contract, the main conditions of which are mentioned in an approximate way. It therefore represents the agreement to reach an agreement.

It can be unilateral or bilateral. It usually takes the form of a letter, although the sender may require the recipient’s signature and consent. In the event that the letter requires acceptance by the addressee, any binding representations it may contain will not be binding on the issuer until accepted by the addressee. This acceptance may be express or implied.

Usual content of letters of intent. The content of the declarations of intent can be non-binding declarations for the parties and/or legally binding agreements. The former serves to define the subject of the negotiation, while the latter is responsible for regulating the obligations of the negotiating parties.

In the case of non-binding declarations, the delimitation of the subject of the negotiation is usual, even if only relatively. This statement is not trivial. The delineation can be very simple when the intention is to acquire all or part of the shares in a company, but it can be complex when the object of the acquisition is specific assets. Therefore, the lack of specification of the subject of the negotiation can lead to the failure of the operation.

It may also include the price or the method of determining the price, responsibilities assumed by the buyer in relation to the assets and third parties, guarantees and indemnities to the seller, etc.

The existence of non-binding declarations does not prevent the parties from making binding agreements.

The first of the clauses of a memorandum of understanding that must necessarily produce legal effects is the “non-binding” clause. Its main task is to qualify which declarations are not binding on the parties. It is therefore not a pact in itself, but a rule of interpretation of the declarations to which it refers.

To mitigate the risks that negotiation frustration can cause, a “risk and cost-sharing clause” is usually included, with each party assuming its own risks and costs, thereby limiting the ability to pass them on to the other in the future • Assumption that the negotiations fail. In any case, the contractual regulation of cost sharing does not limit or exclude liability for good faith.

Other binding agreements that are commonly included in the MOU are the confidentiality agreement, granting a period of exclusivity to reach an agreement, or setting out the terms that must direct the negotiation process and the completion of the transaction.

Effects of declarations of intent. The main function of the letter of intent is to limit the risks that may arise from a complex and lengthy negotiation without the parties being bound by convention.

As a result, the buying company gains legal certainty before investing resources in an uncertain negotiation, and the selling company gains certainty before passing on sensitive information and documents. The declaration of intent primarily has two effects: the reinforcement of feelings of guilt in return and the non-mandatory agreement.

Regardless of the signing of a prior agreement that regulates the negotiation process, Art. 7 of the Civil Code obliges the parties to negotiate in good faith. The scope of liability in the event of non-compliance with this obligation in the pre-contractual phase has been developed by case law as fault in return.

The letter of intent reinforces this obligation in two senses: on the one hand, insofar as it makes the existence of the negotiation explicit, it can regulate and extend the duty of care in those aspects that require it (e.g. the information that the buyer needs to know to form a decision before the purchase) and on the other hand, with regard to the way of expression as proof of the obligation (in the sense of a possible legal claim from this obligation).

In a different order, the parties involved in a negotiation process run the risk that their behavior can be classified as tacit agreements. This risk cannot be fully mitigated by one’s own behavior as it is always subject to interpretation. In addition, the declaration of intent contains the agreement that the negotiation process does not require the final signing of the contract. This is the most important function of the MoU: the behavior and declarations of the parties in the negotiation process are not considered a real contract until the final agreement is signed.

Therefore, we can confirm that the lack of legal regulation of the pre-contractual phase makes it particularly necessary to sign an agreement before the sale, both to coordinate the perspectives of the parties before the start of the negotiations and to mitigate possible contingencies to be derived in the event of operational failure.

Agreements, buying a business, buying and selling, confidentiality