The Joint Task Force on Model Short Form M&A Documents of the American Bar Association Business Law Section announces the publication of a model short stock purchase agreement with separate optional provisions. The model agreement and optional provisions are drafting aids for experienced mergers and acquisitions attorneys and are available for download in Word format to members of the ABA Business Law Section via the Tools section of BLS publication Business Law Today. The task force is a joint task force of the Mergers and Acquisitions Committee (the “M&A Committee”) and the Middle Market and Small Business Committee. The task force is also developing a model short asset purchase agreement as well as several related products, including a seller’s mark-up of the model short stock purchase agreement, a version of the agreement with rollover provisions, and an optional EBITDA earnout provision.
The Model Short Stock Purchase Agreement (the “Model Short SPA”) is designed for use in the acquisition of a private corporation, structured as a stock purchase, with a purchase price in the $500,000 to $10 million range (the “Sub Lower Middle-Market”). The Model Short SPA attempts to provide the basic framework (at least from the buyer’s perspective, as noted below) of a stock purchase agreement typically used in lower middle-market transactions ($10 million to $250 million) but with a length under 25 pages. The shorter document is designed to be a more appropriate starting point for a Sub Lower Middle-Market transaction and to address some of the common complaints related to Sub Lower Middle-Market transactions, including length of agreement, complexity, and cost.
Joint Task Force
The Model Short SPA was prepared by a Joint Task Force of the ABA Business Law Section comprised of members of both the Middle Market and Small Business Committee and the M&A Committee. The Joint Task Force was comprised of a wide cross-section of practitioners, from solo practitioners to lawyers practicing at international law firms, as well as lawyers practicing at law firms of every size in between. The Joint Task Force included practitioners with regular experience representing clients in Sub Lower Middle-Market transactions, some of which primarily represent buyers, some of which primarily represent sellers, and some of which regularly represent both buyers and sellers.
Disclaimer
The Joint Task Force does not hold out the Model Short SPA as “safe.” Practitioners commonly use documents that are 60 to 90 pages—or longer—for lower middle-market deals. The verbiage in longer documents is often there for good reason. Transaction documents have evolved over time, and provisions became lengthier and more complex to address ever-evolving case law or more detailed circumstances, often because someone got “burned” in a specific way (or saw a way they could get “burned”) and added language as protection. That being said, it has been the general experience of the Joint Task Force that clients buying or selling a business in the Sub Lower Middle-Market, particularly sellers, tend to think that a 60- to 90-page stock purchase agreement is simply too long, is not appropriate for the deal size, and will result in too much legal expense. The Model Short SPA seeks to respond to this complaint that Sub Lower Middle-Market transactions break down due to perceived “over-lawyering” and inappropriately long purchase documents.
However, the Model Short SPA is not intended to be a “do-it-yourself” product for nonlawyers or for lawyers with little or no experience in mergers and acquisitions (“M&A”). All deals are generally unique enough that these tools should only be used by practitioners with appropriate experience in M&A. Lawyers are reminded of the requirement of Rule 1.1 of the Model Rules of Professional Conduct (Competence), requiring lawyers to have the requisite training or to associate qualified co-counsel.
Draft Perspective and Considerations
It is the experience of the Joint Task Force that Sub Lower Middle-Market transactions are largely dominated by private equity (“PE”) buyers. PE buyers often engage in Sub Lower Middle-Market transactions as an “add-on” or “tuck-in” for a current “platform” investment. Since buyer’s counsel typically prepares the first draft of the purchase agreement (at least unless seller is conducting an auction with multiple potential buyers) the Model Short SPA has been prepared from the perspective of buyer’s counsel representing a PE platform in an “add-on” or “tuck-in” transaction. As a result, the Model Short SPA is a solidly pro-buyer agreement, probably ranking about an 8 on a scale of 1 to 10, with 1 being the most pro-seller and 10 being the most pro-buyer.
The Model Short SPA is merely a suggested starting point for buyer’s counsel and not a finished product. Effective documentation must be tailored to the client, industry, and transaction by experienced counsel. Buyer’s counsel who utilize the Model Short SPA will need to tailor the Model Short SPA to address the circumstances of the particular transaction and client, such as additional representations reflecting the business of the target company and other terms to reflect the business deal. Buyer’s counsel also may want to consider a more “friendly” approach for the target, such as dialing back the solidly pro-buyer approach of the Model Short SPA. Similarly, seller’s counsel, in responding to a draft such as the Model Short SPA, may wish to modify or add provisions to reflect the seller’s position.
The Model Short SPA is not intended to suggest what a seller should accept, or what a buyer should require or propose, in a Sub Lower Middle-Market transaction. Transaction documents are intended to be negotiated by experienced practitioners, and the Model Short SPA is no different. As a result, the Joint Task Force intends to prepare a sample mark-up reflecting possible seller’s comments to the Model Short SPA.
Base Model and Optional Provisions
The Model Short SPA includes a “base model” agreement (the “Base Model”) and a selection of optional provisions (the “Optional Provisions”) that can be added to or used in place of Base Model provisions to help the practitioner appropriately tailor the document to a particular transaction. Included with the Optional Provisions is a set of replacement provisions that converts the Base Model from an agreement with a sign and simultaneous closing structure to one with a sign and subsequent closing structure. The Optional Provisions also include a selection of provisions providing commonly negotiated limitations of liability of the selling stockholders not included in the Base Model. The Optional Provisions also include some potential tax elections, though when making tax elections, other related provisions (such as for allocation of purchase price) may also be appropriate, and both buyers and sellers should obtain tax advice before making (or deciding not to make) such elections.
Long Form Model Stock Purchase Agreement
The M&A Committee has published a model stock purchase agreement, with commentary and forms (the “Long Form SPA”), intended for transactions beyond the intended scope and size of the Model Short SPA. The Joint Task Force recognizes that the circumstances of a particular transaction may merit the inclusion of more extensive language than provided in the Model Short SPA, such as key representations and warranties. The Long Form SPA also includes extensive commentary. The Joint Task Force recommends the Long Form SPA as a complementary and invaluable resource for users of the Model Short SPA needing a “deeper dive” to address more complicated issues in a transaction.
Deal Points Studies
The Market Trends Subcommittee of the M&A Committee regularly publishes deal term studies that compile and report data from hundreds of deals within the past several years (the “Deal Points Studies”). Users of the Model Short SPA may choose to consult the Deal Points Studies when negotiating the Model Short SPA. Note, however, that the Deal Points Studies are based on deals publicly filed by public company buyers with the SEC, which are typically much larger than those targeted by the Model Short SPA. Therefore, the Deal Points Studies may be useful when identifying market trends, but users must be careful if relying on the Deal Points Studies to determine what is considered “market” for a Sub Lower Middle-Market transaction.
