Case Study (International Acquisition Agreement)

2. Case Study (International Acquisition Agreement)

5. The parties have agreed that the Buyer shall buy 50% of the shares of the Company and that the Company shall be run as a joint venture among the Buyer and the Sellers.

6. Financially, the Sellers are looking for: (a) maximum cash for their shares, (b) an injection of at least $1.5 million cash in the Company for operating capital during a one-year start-up period; and (c) the possibility of additional payments for their shares if the Company succeeds.

7. The Sellers need some kind of control over the management of the Company to help ensure that the Company will succeed so as to permit them to receive their “earn-out” (additional payments for their shares).

8. Mrs. A wants to act as the Company’s President or General Manager, but wants to do so through an American company she owns.

9. Mr. B wants to provide his services as inventor as an independent contractor through a consulting agreement, but wants the consulting agreement to be with a British Virgin Islands company controlled by him.

10. Buyer wants to be able to sell future products of the Company pursuant to license and distribution agreements. A and B want the Company to be able to sell directly as well.

11. There are some potential problems with the chain of title to the IP. The inventions were created by B and several assistants while working for a predecessor company to the Company in France. The chain of title described in 2 above has not been filed with the various patent offices where the IP was filed originally.

12. All parties agree that at a certain point the Buyer should be entitled to purchase the remaining 50% shares of the Company.

13. The initial transaction – purchase of 50% of the shares of the Company by the Buyer - is based upon a detailed Business Plan prepared by the Sellers, forecasting $1 million in operating revenues during the first year after the closing of the transaction.

The parties are now ready to negotiate and sign a letter of intent. First, they should make check lists (as detailed as possible) of the major items of concern that each wants to cover in the letter of intent.

1. 
   Intellectual property: Patents, patent applications, technology and know-how; trademarks; tradenames
   

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  Value, availability elsewhere, possibility of developing in-house
  

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  How to acquire: purchase, joint venture of independent companies, acquisition of shares of the (French) Company owning the IP
  

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  Ownership: verification of perfect chain of title from the inventor (B) and his associates to a French company, then to a Canadian company, then in bankruptcy, then to Mr. A’s company, then to Mr. A then to the Company; registration of the chain of title with patent offices
  

2. 
   Form of Company in which 50% investment to be made (currently a French SARL)). Possibilities:
   

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  SARL (problem is that gérant has full powers and is difficult to control)
  

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  SA (with board of directors and president and general manager or with two boards – supervisory and directoire); which party names officers
  

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  SAS (great flexibility, does not have board of directors, can describe management arrangements in the statuts)
  

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  Foreign company for operational and tax reasons (especially if the company is not going to manufacture and will be essentially a licensing company)
  

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  Escape clauses (new bankruptcy) Normally shareholders will be liable only up to the amount of capital contributed to the Company; however, if a shareholder becomes actively involved in the business and keeps the company artificially alive and lets it continue to incur debts, there is a possible action en comblement de passif; need to beware of a future action ABS (abus de biens sociaux)
  

3. 
   Percentage of shares to be acquired
   

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  50% (how to deal with stalemate votes)
  

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  51% (can control ordinary shareholder decisions)
  

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  Absolute majority (requires 2/3rd plus in SA, 3/4^th in SARL)
  

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  How to deal with any minority shareholders
  

4. 
   Price
   

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  Valuation (DCF x coefficient; gross revenues or net profits x coefficient)
  

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  Manner and time of payment (at closing? earn-out? mixture? if earn-out, the sellers are going to want to have an active participation, if not control of, management)
  

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  Reserve fund (escrow of part of cash portion of purchase price to back up representations and warranties under the guaranty agreement)
  

5. Business plan

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  Need to set forth all the essential considerations upon which the Sellers agree to sell and the Buyer agrees to purchase
  

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  Importance of forecast of earnings during start-up period
  

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  Initial financing of the business (increases in capital, bank loans (with shareholder guarantees), shareholder advances)
  

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  Key targets (revenues, cash on hand, profits – note as to the latter, there may be a difference of opinion as to whether surplus cash should be reinvested in the business or distributed as dividends)
  

6. 
   Management of the Company
   

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  President
  

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  General manager
  

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  Board (if SA)- double board?
  

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  Financial, marketing, manufacturing managers
  

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  Director of Research and Development
  

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  Bank accounts and signatories
  

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  Lawyers, accountants
  

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  Commissaires aux comptes
  

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  Fiscal year; first accounting year, if not calendar year
  

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  Agreement as to matters requiring joint approval or unanimous or qualified majority vote by shareholders
  

6. 
   Products
   

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  Direct manufacture (cost and financing of plant, equipment and operations)
  

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  Sub-contracts (outsourcing?)
  

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  Quality control
  

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  Research and development: improvements and new products
  

6. 
   Marketing
   

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  Direct
  

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  Distribution agreements (exclusive or non-exclusive, territories, right of company to sell directly)
  

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  License agreements
  

6. 
   Need for the negotiation and conclusion of a standard acquisition agreement containing standard representations, warranties and guarantees (contrat de guaranties – declaration d’actif et du passif
   

6. 
   Closing: (simultaneously with or subsequent to the signing of the acquisition agreement)
   

6. 
   Conditions precedent to closing of acquisition agreement (should be met and be true and accurate at the date of the closing)
   

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  Change of the company form, if required
  

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  Successful completion of due diligence (see due diligence outline)
  

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  Confirmation of ownership of intellectual property and other assets and the appropriate registrations with patent offices
  

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  Management agreement for Mrs. A or her company (For how long? Under what conditions can it be terminated? Tax problems?)
  

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  Consulting agreement with Mr. B or his company (For how long? Under what conditions can it be terminated? Tax problems?)
  

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  Employment agreements with key employees
  

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  Approval of transaction by shareholders and/or board of directors of the buyer
  

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  License agreement? Essential terms?
  

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  Distribution agreement? Essential terms?
  

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  Shareholders’ agreement in letter of intent, acquisition agreement, statuts and/or separate agreement re management, disposition of shares – option to purchase remaining 50%, right of first refusal, etc.
  

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  Completeness and accuracy of the sellers’ representations and warranties as of the date of the closing
  

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  Operation in the ordinary course of business prior to closing
  

6. 
   Non-competition agreement: Area of business, territory, period
   

6. 
   Finders: How to pay Mr. X. Who pays?
   

6. 
   Payment of expenses: Cost of due diligence; cost of transformation of the Company; cost of IP due diligance and registration of the chain of title
   

6. 
   Investigation (due diligence by the buyer subsequent to the signing of the letter of intent; principle of full disclosure; Sellers to cooperate)
   

6. 
   Exclusivity: Exclusivity of dealing during the pre-contractual stage
   

6. 
   Confidentiality: During the negotiations and thereafter
   

6. 
   Acquisition agreement (parties to proceed with the negotiation and conclusion in good faith of acquisition agreement and guaranty agreement)
   

6. 
   Purpose and effect of the letter of intent (specify if pre-contractual liability is to be excluded)
   

6. 
   Applicable law: Contract? National law? Lex mercatoria?
   

6. 
   Resolution of disputes: National courts? Arbitration ad hoc or institutional?
   

6. 
   Tax matters
   

6. 
   Outs (for one or both parties, for example if closing does not take place within a certain period of time, if results of due diligence not satisfactory)
   

6. 
   Representations, warranties of both parties (capacity, good standing, authorization to enter agreement, non-default under other agreements, etc.)
   

25. Sellers’ representations, warranties: with respect to   the following matters:

1. 
   Legal status of the company (good standing)
   

2. 
   Shares
   

3. 
   Increase in capital
   

4. 
   Transfer of shares
   

5. 
   Financial statements
   

6. 
   Assets
   

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  Real estate
  

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  Fixed assets
  

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  Material, equipment and furnishings
  

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  Inventory
  

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  State of assets
  

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  Intellectual property
  

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  Title to properties
  

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  Receivables, prepaid expenses, loans
  

7. 
   Liabilities - no indebtedness or other undertakings or liabilities other than as disclosed in the financial statements and in schedules to the guaranty agreement
   

8. 
   Taxes and charges
   

9. 
   Authorizations and compliance with laws (especially concerning the environment)
   

10. 
    Litigation
    

11. 
    Insurance
    

12. 
    Employees
    

13. 
    Shareholdings
    

14. 
    Contracts
    

15. 
    Suppliers, clients and partners
    

16. 
    Directors and officers, bank accounts and financial agreements
    

17. 
    Absence of materially adverse changes (between the signing of the letter of intent and the closing; obligation of the Sellers to run the Company in the ordinary course of business)
    

25. Outline of due diligence: See Questionnaire.

(Letterhead of Purchaser)

, 2002
The Shareholders of the Company
Re.: Purchase of 50% of the shares of The Company
Dear ,
Based on various meetings and discussions and further to our correspondence of___________, Purchaser hereby confirms its desire to acquire a 50% interest in the patents, intellectual property, trade marks and other inventions as well as equipment and inventory, other physical assets and property rights listed in Exhibit A hereto (the «Assets») by purchasing 50% of the shares of the Company, a French société à responsabilite limitée, which shall be transformed into a French société anonyme (the «Company») and into which all such Assets shall have been contributed.

1. 
   Purchase of 50% of the shares of the Company
   

Although the structure of the acquisition of 50% of the shares of the Company and the provisions for the closing of such acquisition (the «Closing») would be set forth in a binding acquisition agreement, we would expect that Purchaser or a subsidiary or affiliated corporation would acquire 50% of the shares of the Company as follows:

B 321 shares 42.80%

C 34 shares 4.54%

D 20 shares 2.66%

E 20 shares 2.66%

F 9 shares 1.20%

G 6 shares .80%

H 6 shares .80%