Negotiating the Deal - Drafting Key M&A Transaction Documents

Introduction

In M&A contract negotiation, the legal documents in mergers and acquisitions don’t merely record the deal - they actively shape its commercial, legal, and operational outcomes. These documents allocate risk, clarify expectations, and govern how both parties behave before and after completion.

Whether you’re a buyer, seller, legal advisor, or stakeholder, navigating this stage demands careful legal precision. At Devonshires, we specialise in providing trusted legal guidance through each layer of the process - from preliminary heads of terms to the final closing steps - helping clients manage risk in a company acquisition with clarity and confidence.

What Are the Core Documents in an M&A Deal?

Letter of Intent (LOI)

The LOI marks the start of formal discussions. Though non-binding in most areas, it often includes binding clauses on confidentiality, exclusivity, and timelines. It outlines deal fundamentals - such as price, structure, and closing conditions - and sets the tone for future negotiations. 

Term Sheet

Similar to an LOI but more concise, a Term Sheet summarises key commercial terms in bullet-point format. This is a common approach in venture capital and private equity deals, it fosters alignment early, helping parties avoid protracted disagreements when drafting the definitive agreement. Spending time during this stage can help with a smoother process overall.

Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA)

The SPA or APA - often referred to as the definitive agreement - formalises the final, binding terms. It includes critical provisions such as:

• Consideration structure
• Representations and warranties
• Covenants
• Conditions precedent

(Refer to Part 2 of this series for a full SPA vs APA breakdown).

Disclosure Letter

This key document limits the seller’s liability by outlining exceptions to the representations and warranties. It comprises:

• General disclosures: e.g. data room contents or public filings
• Specific disclosures: tied to individual warranties

Buyers must review this carefully, as it directly impacts risk allocation, and the buyer can to a degree amend specific disclosures set out in the letter.

Ancillary Documents

Supporting agreements - such as board resolutions, IP assignments, escrow arrangements, and regulatory filings - play a vital but often overlooked role. Though less negotiated than the SPA or APA, they’re essential for a smooth execution. It is important to have these ancillaries considered with sufficient time so agreement of them does not delay the timeline. 

Key Documents by Stage of the Deal

Pre-Transaction:

• Letter of Intent (LOI)
• Term Sheet

Execution Phase:

• SPA or APA
• Disclosure Letter
• Ancillary Documents

Post-Signing:

• Earn-out tracking documentation
• Completion deliverables
• Regulatory filings and notices

Legal Terms That Shape the Deal

Representations and Warranties

These are factual assurances about the business being sold. They allow buyers to claim remedies if material misstatements later emerge. Key negotiation points include:

• Knowledge qualifiers
• Materiality thresholds
• Limitation caps on claim amounts
• Survival periods

What are reps and warranties? 

They protect buyers from hidden liabilities and are a core component of any M&A contract.

Covenants

Covenants are obligations to act (or refrain from acting) in a particular way, both pre- and post-completion. For example: operating “in the ordinary course”; or restrictions on hiring or financing or going after prospective customers/clients.

Indemnities

While warranties cover misstatements, indemnities offer compensation for known risks (e.g. ongoing tax disputes). Their scope, duration, and cap are often hotly negotiated and tend to be for specific items that have been flagged during the due diligence process. (Refer to Part 1 of this series for a full breakdown on the due diligence process).

Material Adverse Change (MAC) Clauses

MAC clauses allow buyers to walk away if a significant negative event occurs pre-closing. Though rarely invoked, they’re crucial in uncertain economic environments and need clear drafting.

Sandbagging Clauses

Pro-sandbagging allows buyers to claim for breaches they knew about before signing. Anti-sandbagging clauses prevent this. These are often negotiated in more complex or high-value deals.

Earn-out protection Clauses

This allows a seller to protect against the buyer artificially driving down the targets business to avoid paying the full earn-out. The buyer may need to negotiate this carefully to strike a balance allowing the seller to gain comfort and the buyer not be in handcuffs during the period between completion and paying the earnout.

Allocating Risk: Negotiation Tactics & Tools

Warranty and Indemnity (W&I) Insurance

W&I insurance M&A coverage has become mainstream - particularly in private equity and cross-border deals. It covers breaches of warranties and indemnities, often replacing escrow or seller liability.

Benefits:

• Clean exits for sellers
• Faster negotiations
• Added buyer protection

Limitations:

• Exclusions apply
• Premiums and underwriting timelines vary

Locked Box vs Completion Accounts

Additional Pricing and Risk-Shifting Mechanisms

• Escrow accounts: Funds held back to cover potential liabilities
• Holdbacks: Deferred payment mechanisms tied to warranty breaches
• Earn-outs: Additional payments based on future performance
• Deferred consideration: Payment spread over time

Conclusion

Whether you’re reviewing legal documents in a company acquisition or preparing to negotiate your M&A contract terms, understanding the structure and risk points is critical. Each document plays a vital role in shaping the final outcome - and negotiating them effectively is where deals are made or broken.

Devonshires' aims to deliver clarity, certainty, and confidence and we do that by guiding our client through each deal phase with strategic, pragmatic advice. Get in touch with Prasan Modasia or Helen Curtis to discuss your transaction today. 

FAQs

What is the difference between an LOI and a Term Sheet?

An LOI is usually more formal, with potential binding clauses. A Term Sheet is more of a commercial checklist. Both serve to align the parties ahead of a definitive agreement.

Which warranties are most commonly negotiated?

• Financial accuracy
• Title to assets
• Knowledge qualifiers
• Legal compliance
• Tax position
• Material contracts

Sellers often limit scope via qualifiers; buyers seek broad, unqualified coverage.

When should I consider W&I insurance?

• When sellers want a clean exit
• In cross-border or private equity deals
• When liability caps are contentious
• Negotiations over warranties are stalling the deal
• It shifts risk to insurers and accelerates the deal.

What is typically disclosed in a Disclosure Letter?

• General disclosures (e.g. data room contents, information on the public domain, accounts for a particular period)
• Specific disclosures tied to warranties

It limits seller liability and ensures transparency.

How can I limit post-completion liability as a seller?

• Use knowledge and materiality qualifiers
• Set liability caps and timeframes
• Make thorough disclosures
• Consider W&I insurance

A well-drafted SPA or APA, backed by experienced legal advice, is essential to achieving this.

This article is part of our Legally FM article series, to read more from this series please click here.