The Middle Ground

A GUIDE TO DEAL TERMS IN PLAIN ENGLISH


+ Introduction

+ Purchase and Sale

+ Closing

+ Representations & Warranties - Seller

+ Representations & Warranties - Buyer

+ Covenants

+ Conditions to Closing

+ Indemnification

+ Termination

+ Miscellaneous

Access to Information


Classification: Moderately Material
Section: Covenants
Negotiation Time: Minimal
Transaction Costs: Insignificant
Major Impact: Risk Management and Transaction Completion


What is This? For many issues that the Buyer will investigate during due diligence, the best or only source of information is the Business itself (e.g. financial statements). So, in order to conduct its investigation, the Buyer needs access to the Business’s records, employees, and advisors. This section grants that access under certain agreed upon conditions.

The Middle Ground: In this covenant, the Seller promises: (1) to allow the Buyer full access to the books, assets, and properties of the Business; (2) to provide reasonably requested financial and operating data of the Business; and (3) that its Representatives will cooperate with the Buyer in its investigation of the Business. In return, the Buyer promises not to conduct its investigation in a way that unreasonably interferes with the Business (or other businesses of the Seller). The covenant also states that no investigation by the Buyer or other information received by the Buyer will act as a waiver or otherwise impact the representations, warranties, and other agreements made within the Agreement.

Purpose: By allowing the Buyer to take an inside look at certain aspects of the Business, this covenant significantly lowers the Buyer’s transaction risk without increasing the risk to the Seller. Buyers will invariably be more comfortable making an investment after conducting its own investigation rather than relying on the promises of the person that stands to benefit from the investment, and this provision gives buyers that opportunity without interfering with the Seller’s operations.

Buyer Preference: The Buyer wants to ensure that the language used here (and in any affiliated definitions) is broad enough to permit the desired level of access. For example, if there are environmental concerns relating to the Business and the Buyer plans to engage an environmental specialist to conduct an investigation, the Buyer can insert language into the covenant detailing the specialist’s rights of access. The Buyer may also want to include language regarding access to the customers and suppliers of the Business, so long as there are no confidentiality-related issues and the Seller does not object to providing such access.

Seller Preference: The Seller’s main concern here is preventing the Buyer’s investigation from interfering with the Business (or any of Seller’s other businesses), especially if the fact that the Business is being sold has not been disclosed to the employees. To prevent problems, the Seller may want to limit the covenant in one or more ways, including: restricting the hours of access, requiring advance notice of visits, requiring any visitors representing the Buyer to be supervised by personnel of the Seller, requiring all communications to be funneled through one or more designated employees, requiring the Buyer to obtain written consent before contacting customers or suppliers, limiting the Buyer’s right to physically inspect the Seller’s properties without advance notice, and prohibiting disclosure of information that is either privileged or could cause competitive harm if the deal does not close.

Differences in a Stock Sale Transaction Structure: None.


DISCUSSION

We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.