Agreements
and Contracts

INTRODUCTION

Agreements and contracts are the foundational instruments of mergers and acquisitions. Without them, dealmaking would not exist.

They take on a variety of forms, including: (i) oral commitments to do something, (ii) email or text message exchanges setting expectations, (iii) short written documents like LOIs prepared at the outset of potential deals, and (iv) hundred-plus page merger agreements written and negotiated by lawyers.

At their core, agreements and contracts are communication tools that memorialize economic arrangements, establish responsibilities, coordinate action, and mitigate risk.

TWO TYPES

In commercial practice, deal instruments fall into two categories, separated by the critical factor of enforceability:

• non-binding agreements, which are arrangements that a court cannot enforce; and

• binding agreements, which a court can enforce.

HOW AND WHEN TO CHOOSE

Some commercial relationships, like with landlords and customers, start out as binding from the outset. Others, like M&A transactions, usually begin as non-binding and then become binding later.

Non-binding arrangements grant parties the freedom to explore options without incurring costs, expenses, and liabilities typically associated with binding commitments.

For example, non-binding arrangements like LOIs give (i) buyers the ability to indicate initial interest in a target business without having to complete full diligence or negotiate full legal documents and (ii) sellers a sense of potential suitors in the early stages of a sales process. (Note LOIs and IOIs, though generally non-binding, may contain binding exclusivity or other provisions.)

It may be reasonable to rely on a non-binding agreement for a time. But if any of the below factors are present in a business or other commercial relationship, a binding agreement is likely appropriate instead:

• NONPUBLIC INFORMATION TO BE EXCHANGED

If confidential information or materials are or are expected to be shared by one party or exchanged by all parties, a binding agreement should precede any transmissions.

• RESOURCES TO BE SPENT

If any party is or is planning on expending money, time (including employee time), property, or other resources, a contract is advisable.

Most business partners are comfortable spending immaterial or allocated resources in pursuit of opportunities without binding agreements. Yet what counts as immaterial or is available under budgets changes in real time. If resources are being spent in connection with a non-binding agreement, it is worthwhile to regularly reconsider the arrangement and consider whether a binding commitment is more appropriate.

• PROMISES WERE MADE

If a party has committed to do, or not do, something and the consequences of that party breaking the promise would be unacceptable, the commitment should be a written contract.

• GUT CHECK FAILS

As a general rule, if a party would be unhappy discovering after-the-fact that its business or other commercial relationships with another party were unenforceable—i.e., that the other party would suffer no legal consequences for breaching—a written contract should be sought.

CONCLUSION

Determining whether a transaction or other business arrangement should be enforceable at any given time is a strategic decision worth re-visiting on a routine basis, preferably with input from legal and financial advisors.