In addition to representations and warranties, an Acquisition Agreement will provide for covenants, rights and conditions.

Covenants are another kind of risk allocation mechanism. They are important because they create a duty and obligation to perform. They establish a standard of liability. That standard can change by changing the degree of obligation.

• As of Closing, the Seller’s equipment shall be in good condition; 
• From the date of this Agreement until the Closing, the Seller shall maintain the equipment in good condition, ordinary wear and tear excepted; or
• From the date of this Agreement until the Closing, the Seller shall maintain the equipment in accordance with industry standards.

A contract right flows from another party's duty to perform. The person to whom the performance is owed has a "right" to that performance. Therefore, when a duty exists, so too does a right. Although there are often business and legal reasons to express a provision as a duty, the provision alternatively can be expressed as a right. For example:

• At the Closing, Seller shall deliver the Assets, free and clear of liens or encumbrances; or
• At the Closing, Buyer shall receive good and valid title to the Assets free and clear of liens and encumbrances.

The classic definition of a condition is a state of facts that must exist before a party has an obligation to perform; for example, a condition to the closing of an acquisition agreement.
There are three types of conditions:

• A condition to an obligation. (e.g., “Subject to Buyer’s delivery of the Purchase Price at the closing, Seller shall convey good and valid title to the Assets.”)
• A condition to discretionary authority. (e.g. “In the event the Seller is unable to deliver good and valid title to all of the Assets, Buyer may reduce the Purchase Price…”)
• A condition to a declaration.

As you can see, there are many important details when it comes to drafting an acquisition agreement. Specific wording can significantly alter the intended allocation of deal risks, so it is important that you work with an attorney experienced in mergers and acquisition.

This is the ninth in a series of eleven blogs on the selling process. For more information on S&K Transitional Services please contact info@stark-knoll.com.