In this article, we will take a closer look at the three basic types of contracts most commonly used in M&A transactions. Specifically, these are the share purchase agreement, the business sale agreement, and the real estate purchase agreement. All of these agreements can be collectively referred to as so-called acquisition agreements.
Acquiring control over a company—that is, achieving the fundamental objective of M&A transactions—can be accomplished in several ways. Among the most typical forms of transactions are the transfer of equity interests in the target company, also known as a share deal, and the transfer of the business itself, which we refer to as an asset deal; the latter is typically carried out based on a business sale agreement, which is also regulated by Act No. 513/1991 Coll. Commercial Code (hereinafter the “CC”), or based on the sale of real and personal property, the assignment of receivables, and the like. The final typical method is the corporate transformation of a company through a merger, consolidation, or division of a business entity. [1]
In today’s essay, we will focus in more detail on the three basic types of contracts most frequently used in M&A transactions. Specifically, these are the share purchase agreement, the business sale agreement, and the real estate purchase agreement. All of these agreements can be collectively referred to as so-called acquisition agreements.
Share Purchase Agreement
Shares can undoubtedly be considered securities, which is expressly confirmed in Section 2(2)(a) of Act No. 566/2001 Coll. on Securities and Investment Services and on Amendments to Certain Acts (hereinafter the “Securities Act”). In accordance with the brief explanation above, a share purchase agreement can therefore be classified as a so-called “share deal.” The first question that must be properly answered is whether a share purchase agreement is a named contract or, conversely, whether we should consider it an innominate contract. The answer to this question can be found in Section 30 of the ZCP, which is titled “Agreement on the Purchase of Securities and Agreement on the Donation of Securities.” This provision consists of four paragraphs and establishes the basic legal framework for what a contract for the purchase of securities—including a contract for the purchase of shares—must contain. Paragraph 1 stipulates that this type of contract is governed by the provisions of the Commercial Code regarding purchase contracts. For the contract to be valid, it must properly specify the type of shares being transferred, their number, price, and the security’s designation according to the international numbering system for identifying securities, if such a designation has been assigned. [2] With regard to form, the Securities Act stipulates that in the case of registered securities, the contract for their transfer must be in writing. The contract for the purchase of a bearer security must also be in writing, provided that a special law so provides. The Securities Act also addresses the situation where a contract for the purchase of shares does not specify the purchase price for such securities. In such a case, the agreement would be valid only if the contracting parties have duly expressed their intention to conclude the agreement even without specifying this purchase price. In other matters, the Securities Act refers to the application of the Commercial Code, in which the purchase agreement is regulated in § 409 et seq.
At this point, I consider it appropriate to focus more closely on when a contract for the purchase of shares must be in writing, or whether there is any possibility at all for such a contract to be validly concluded in oral form. As we already know, and as follows from Section 156 of the Commercial Code, a share may be issued as a certificated share or as a book-entry share. In the case of a certificated share, it may only be issued in registered form, i.e., to a specific person. As for book-entry shares, they may be issued either in registered form or to the bearer. Section 30(3) of the Securities Act stipulates that only a contract for the purchase of securities, the subject of which are securities issued in registered form, must be in writing. In my legal opinion, therefore, in the case of a security—a share—issued to the bearer, a valid share purchase agreement for the purposes of an M&A transaction may be concluded even in oral form.
But what does a share purchase agreement actually contain in practice? Of course, the basic requirement is the identification of the contracting parties—that is, the buyer and the seller—regardless of whether they are natural persons or legal entities. The subject matter of the agreement is always the seller’s obligation to transfer securities (shares) to the buyer, along with all rights associated with them, and the buyer’s obligation to purchase the shares and pay the purchase price to the seller. From the above, we can identify another essential element, namely the purchase price, its amount, and the payment terms under which the purchase price will be paid. The contract should also specify the detailed terms of the share transfer, which is typically finalized by its registration with the Central Securities Depository. However, one must not overlook “classic” contractual clauses and provisions such as the preamble, which defines the basic purpose of the contract, the article defining the meaning of key terms used in the contract, articles addressing the possibilities for terminating the contract, non-competition clauses, methods of service, as well as introductory and concluding provisions. [3]
Business Purchase Agreement
Another type of contract we will address in this essay is the business purchase agreement. A business purchase agreement constitutes a specific type of purchase contract, as can be inferred from its systematic classification within the Commercial Code. The business purchase agreement is regulated as a type of contract in the Commercial Code, but with the difference that the Code refers to it in § 476 et seq. as a business sale agreement. According to § 476(1) of the Commercial Code, the following applies: “By a contract for the sale of a business, the seller undertakes to transfer to the buyer the ownership of the assets, other rights, and other property values serving the operation of the business, and the buyer undertakes to assume the seller’s obligations related to the business and to pay the purchase price.” The Commercial Code further stipulates that the agreement must be in writing and the signatures of the parties must be notarized. The fundamental difference from a share purchase agreement is that while the latter could, under certain circumstances, be concluded orally, the law strictly requires the written form for a business purchase agreement. Since this provision is mandatory, the contracting parties cannot exclude its application by mutual agreement. The fundamental characteristic of this type of contract is that all rights and obligations to which the sale relates are transferred to the buyer. [4]Although all three types of contracts discussed in this essay share several common features, it is worth highlighting the specific differences between them. The fundamental difference applicable to a business purchase agreement is that, upon the purchase/ sale of a business, the seller and his legal personality do not cease to exist, even though the sale results in the loss of all assets and liabilities previously held by the seller, as these are transferred to the buyer, with the purchase price that the buyer is obligated to pay serving as a certain equivalent for their acquisition. [5]
The central concept of this type of contract, as is evident from its name, is the concept of a business. The Commercial Code defines a business in Section 5, which states: “For the purposes of this Act, a business is understood to mean a set of tangible, as well as personal and intangible, components of business operations. An enterprise includes items, rights, and other assets that belong to the entrepreneur and are used to operate the enterprise or, by their nature, are intended to serve this purpose.”
A review of Section 263(1) of the Commercial Code reveals that a contract for the sale of an enterprise consists of a significantly greater number of mandatory provisions than is the case with other types of contracts. It is therefore necessary to note here that the sale/purchase of a business takes place without the prior consent of creditors; consequently, the legislature has ensured a certain level of creditor protection within this type of contract by designating most of these provisions as mandatory, i.e., provisions that cannot be altered by agreement between the contracting parties and must be applied under all circumstances.
As Ďurica also notes, in practice, clearly and precisely defining the subject matter of the sale can pose a significant challenge, particularly in the case of active businesses where there are constant changes in the assets and liabilities of the business. To avoid these problems, an expert appraisal is often prepared, through which the expert assesses the value of the business, and the purchase price is subsequently determined based on this appraisal.[6]
The contract must also clearly specify the subject matter of the purchase/sale. This means that the contract must properly define the inventory being transferred, or real estate, provided that such assets are also included in the sale, as well as, for example, intellectual and industrial property rights, and so on.
Based on our knowledge of commercial law, we know that the subject matter of a purchase contract concluded under the Commercial Code can only be movable property. However, I mentioned above that real estate can also be the subject matter of a business purchase agreement. What type of contract is involved in this case, and is it a contract concluded under the Civil Code or the Commercial Code? The answer to this question was provided, among others, by the Supreme Court in its decision, file no.: 5 Cdo 45/2007, according to which, quote: “If a purchase contract concerns real estate, it is governed by the Commercial Code only in cases where the real estate is the subject of a contract for the sale of a business (Section 476 of the Commercial Code), or is the subject of a contract for the purchase of a leased item (Section 489 of the Commercial Code). In other cases, the Commercial Code refers to the provisions of the Civil Code. The application of the Commercial Code to a contract for the sale of real property is out of the question even in cases where it is concluded between entrepreneurs.”
In accordance with the cited decision of the Supreme Court, it can therefore be concluded that a contract for the purchase of a business constitutes one of the two types of contracts regulated by the Commercial Code, the subject matter of which may be the transfer of ownership of real property.
Contract for the Purchase of Real Property
The final type of contract that will be the subject of my essay is the contract for the purchase of real property. It should be noted right at the outset that while the first two cases involved named contracts—where the contract for the purchase of shares is based on Section 30 of the Commercial Code and the contract for the purchase of a business on Section 476 of the Commercial Code— the contract for the purchase of real property is not a named contract in the strict sense of the word.
In the case of a contract for the purchase of real property, we will primarily rely on Act No. 40/1964 Coll., the Civil Code (hereinafter the “Civil Code”). Section 42(1) of the CC stipulates that contracts for the transfer of real estate, as well as other contracts for which the law or an agreement between the parties so requires, must be in writing. It is therefore clear from the above that the basic formal requirement for this type of contract is that it be concluded in writing.
It is typical for contracts whose subject matter is the transfer of ownership of real estate that they acquire legal effects only upon approval of the registration of ownership in the real estate cadastre by the competent district office. In this context, the question arises as to whether it is necessary to notarize the signatures on these contracts, as was the case with the business purchase agreement. The literature notes that in the context of M&A transactions, these transactions are often carried out across borders. Consequently, so-called “major acquisition agreements” are frequently concluded, covering assets in multiple countries, with so-called “minor acquisition agreements” subsequently being concluded in individual countries. The question therefore remains as to when the signatures on these agreements must be officially certified. Gyárfáš, Matulníková, and Vavrák state that, in their legal opinion, such certification is generally required only for the small, transfer agreement, whereas it is not required for the large agreement. At the same time, however, they add in the same breath that this interpretation will likely not be universally applicable.[7]
For the purposes of M&A transactions, we will consider a real estate purchase agreement to be an asset deal. The legal basis for this type of contract is Section 588 et seq. of the Civil Code, which governs purchase agreements.
The negotiation process in M&A transactions is undoubtedly lengthy and demanding. This applies not only to the conclusion of real estate purchase agreements but to all contracts concluded as part of this process.
Undoubtedly, the above list of acquisition contracts does not appear to be exhaustive or definitive. One might also mention, for example, the agreement on the transfer of a business share, which is also regulated in the Commercial Code and therefore constitutes a specific type of contract. The process of negotiating and concluding acquisition agreements forms the cornerstone for the successful execution of an individual M&A transaction. However, this area is so specific that it is currently still handled by a relatively small circle of lawyers and attorneys. In practice, acquisition agreements typically run to dozens of pages, which is justified, among other things, by the breadth and complexity of the issues that must be addressed in the agreement.[8]
We consider entrusting the drafting of an acquisition agreement to an expert to be crucial. As early as in Roman law, the principle “clara pacta – boni amici” applied—that is, good agreements make good friends. The same applies to acquisition agreements. Proper and professional drafting of this agreement can significantly minimize the risk of potential disputes that might arise from it in the future.
- [1]Gyárfáš, J., Matulníková, K., Vavrák, T. M&A in Slovakia. A Legal and Tax Guide. Bratislava: C. H. Beck, 2019, 1st edition, pp. 4–5
- [2] Section 30(1) of the Commercial Code
- [3] Gyárfáš, J., Matulníková, K., Vavrák, T. M&A in Slovakia. Legal and Tax Guide. Bratislava: C. H. Beck, 2019, 1st edition, pp. 41–60
- [4] Section 477(1) of the Commercial Code
- [5] Patakyová, M. et al. Commercial Code. Commentary. 5th edition. Bratislava: C. H. Beck, 2016, pp. 1362–1366
- [6] Patakyová, M. et al. Commercial Code. Commentary. 5th edition. Bratislava: C. H. Beck, 2016, pp. 1362–1366
- [7] Gyárfáš, J., Matulníková, K., Vavrák, T. M&A in Slovakia. Legal and Tax Guide. Bratislava: C. H. Beck, 2019, 1st edition, pp. 39–39
- [8] Gyárfáš, J., Matulníková, K., Vavrák, T. M&A in Slovakia. Legal and Tax Guide. Bratislava: C. H. Beck, 2019, 1st edition, pp. 34–35
