Material Contracts
What are Material Contracts? In this section, the Seller provides information regarding the Business’s contracts. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: The Material Contracts provision defines the term “Material Contracts” and requires the Seller to list all the Material Contracts affecting its Business in the Disclosure Schedules. It also includes a Seller representation that those contracts are valid, binding, and in full force and effect and that the Seller is not in breach or default under them. The representation also states that there are no material disputes, pending or threatened, related to the Material Contracts.
Purpose: This representation plays a major role in allocating the risk that stems from the Business’s Material Contracts. For many companies the Material Contracts will make up the bulk of its business, so the representation that those contracts are valid, have not been breached, and are not the subject of any material disputes is a valuable one. In addition to the representation, having access to the contracts themselves gives the Buyer extensive insight into the Seller’s operations and standards – information that is tremendously important during the transition phase.
Buyer Preference: The Buyer wants to carefully consider what constitutes a Material Contract in the target’s industry and Business and include those attributes in the definition of Material Contracts. In addition to the list of attributes, the Buyer wants to include a catchall category that uses a materiality standard to encourage disclosure in borderline situations. Because non-Assigned Contracts may affect the value of Assigned Contracts, it is best for the Buyer if Material Contracts are not limited to Assigned Contracts. A Buyer may also want a representation that no party is in breach or default of any Material Contract.
Seller Preference: The Seller wants to limit this disclosure to Assigned Contracts since those are the contracts with which the Buyer will be involved. It also wants to limit its representation regarding breach or default under the Material Contracts to its own breach or default rather than speaking for all contract parties. As a compromise, it may allow the representation to be included for all parties if a knowledge qualifier is added.
Differences in a Stock Sale Transaction Structure: None.
