The definitive purchase agreement is the legally binding contract that sets out the terms of an acquisition. Its exact name depends on the structure: a share/stock purchase agreement (SPA) for an equity deal, an asset purchase agreement (APA) for an asset deal, or a merger agreement for a statutory merger. It is negotiated after due diligence and supersedes the non-binding letter of intent.
Principal provisions
- Purchase price and adjustments — the headline price plus mechanisms such as a working-capital adjustment and any earnout (contingent payments).
- Representations and warranties — statements of fact by each party (about the business, financials, contracts, litigation, compliance). If untrue, they can trigger indemnity claims.
- Covenants — promises about conduct, especially how the target is run between signing and closing (operating in the ordinary course; not taking major actions without consent).
- Conditions to closing — what must be true to complete: regulatory approvals, shareholder votes, accuracy of representations, no material adverse change.
- Indemnification — who compensates whom, and how much, for breaches; often supported by an escrow holdback or representations-and-warranties insurance.
- Termination rights — when either party may walk away, and any break fee payable.
Material adverse change (MAC/MAE)
A material adverse change (or material adverse effect) clause lets a buyer refuse to close if the target suffers a serious deterioration between signing and closing. MAC clauses are heavily negotiated and, in litigation, courts have set a high bar for invoking them, generally requiring a durationally significant, company-specific impact rather than a short-term or industry-wide downturn.
Signing and closing
In many deals signing and closing are separated by weeks or months while conditions (especially antitrust clearance) are satisfied. The agreement governs both moments and the gap between them.
See also
- Letter of intent — A preliminary document outlining the main terms of a proposed deal, mostly non-binding.
- Due diligence — The investigation of a target company carried out before a deal is signed or closed.
- Deal structure — How an acquisition is assembled — chiefly the choice between buying stock or assets.
- Earnout — Deferred, contingent payments tied to the target’s performance after closing.
- Antitrust and merger control — Government review of mergers to prevent harm to competition.
External resources
Practitioner guides from Main Street Wealth, an M&A advisory firm:
- Complete M&A Process Timeline — Stage-by-stage walkthrough of a transaction from preparation to closing.