Corporate acquisitions: from the letter of intent (LOI) to closing

How does a corporate acquisition work?

The process is essentially the same across all sectors. It can be broken down into six phases, each building on the previous one and yielding a tangible result.

During the exploratory phase, initial contact is established and matters such as a rough valuation and confidentiality are clarified. The key document is usually the confidentiality agreement. This is followed by the letter of intent: a Letter of Intent or Term Sheet sets out the structure, key financial terms, timetable and exclusivity.

Subsequently, due diligence examines the company from legal, tax, financial and commercial perspectives. Its findings form the basis for the purchase price, warranties, indemnities and conditions precedent. In parallel with or following this, contract negotiations begin, during which these points are incorporated into the draft company purchase agreement and ancillary agreements.

The purchase agreement is concluded at the signing and, in the case of GmbH shares, is notarised. Closing takes place as soon as the conditions precedent have been met. The purchase price, transfer of shares or assets, and other closing formalities are then finalised on the basis of a closing memorandum or closing protocol.

Whether you pursue this process solely with the seller or against other interested parties depends on the sale process. If a shareholder is selling privately, you negotiate on an exclusive basis. If a structured bidding process is underway, the seller sets the pace, works to deadlines and utilises a prepared data room, and the scope for negotiation shifts in their favour. For the buyer, this means that the sooner their own structure is in place, the less they will be under time pressure from the seller.

What does the Letter of Intent cover?

The LOI or term sheet sets out the financial and procedural parameters before either party incurs significant advisory costs.

From a financial perspective, the LOI first describes the subject matter of the sale and the provisional structure, as well as the indicative valuation and the rationale behind the purchase price. This includes assumptions regarding net debt, working capital and whether a locked-box or closing accounts arrangement should be used. A management rollover, earn-out or seller’s loan should also be addressed at the appropriate conceptual level.

In terms of process, the document sets out the scope and timetable for due diligence, financing assumptions and regulatory approvals. Exclusivity, confidentiality and public communication determine how both parties may conduct themselves up to the signing.

Finally, the framework should cover costs, applicable law, dispute resolution and target dates for signing and closing. The provisions should also make it clear which parts are binding and which will only become legally binding in the final purchase agreement.

The commercial key points are usually expressly non-binding. By contrast, confidentiality, exclusivity, the allocation of costs, choice of law and, in some cases, non-solicitation clauses are regularly made binding.

A breakdown in negotiations does not automatically give rise to a claim for damages. Pre-contractual liability requires a specific breach of duty and a legitimate expectation of protection. In the case of transactions requiring specific formalities, the threshold is particularly high, as the parties are generally aware that the agreement only becomes binding upon notarisation. The main issues of concern are deception, the withholding of information in breach of a duty, the misuse of confidential information, or the continuation of negotiations without a serious intention to conclude the agreement.

If the LOI is to contain a binding obligation to acquire or dispose of GmbH shares, the notarial form required under section 15(4) of the German Limited Liability Companies Act (GmbHG) must be observed. Indirect commitments or economic pressure may also create a risk relating to form. The distinction between binding and non-binding provisions should therefore be made explicit and expressed in unambiguous language.

What does the buyer examine during due diligence?

Due diligence is not intended to examine every conceivable legal issue in full. Its purpose is to identify and assess the risks that are material to the investment decision and the contract.

The review follows typical workstreams.

The legal review typically begins with company law and share ownership. This is followed by key customer, supplier, financing and cooperation agreements, as well as licences and regulatory requirements. Employment law, management and occupational pension schemes form a further focus.

Depending on the business model, IP, IT, cybersecurity and data protection, property and the environment, as well as compliance, sanctions and export controls, are examined in greater depth. Legal disputes and insurance must be linked to the tax, financial and commercial reviews. The value of the due diligence process is determined by a clear classification of which findings influence the purchase price, contract drafting, completion or integration.

Materiality, sampling and focus should be tailored to the purchase price, sector and risk profile. Ideally, the outcome should be an actionable list of issues: deal breakers, price or structural issues, conditions precedent, waivers, warranties, covenants or post-closing measures.

Disclosure in the data room does not automatically have the same effect for every contractual claim. Section 442 of the German Civil Code (BGB) concerns statutory rights in respect of defects. Whether knowledge or disclosure precludes claims arising from independent warranties depends on the SPA and its disclosure and knowledge regime. Buyers and sellers must therefore expressly specify which information is deemed to have been duly disclosed and what legal consequences are attached to such disclosure.

Asset deal or share deal: What is the buyer purchasing?

There are two ways to acquire a company, and the choice between them shapes the entire contract. In a share deal, the purchaser buys the shares in the legal entity, i.e. the shares in a limited liability company (GmbH) or the shares in a public limited company. They take over the company as it stands, with all its assets and liabilities. The company’s existing contracts remain unaffected, as the contracting party does not change from a legal perspective. The transfer itself is straightforward, but in the case of a GmbH it requires notarisation, both for the assignment of the shares and for the contractual obligation to do so (Section 15(3) and (4) of the German Limited Liability Companies Act (GmbHG)).

In an asset deal, by contrast, the purchaser acquires individual assets: machinery, stock, trademarks, individual contracts and land. Each item must be described in the contract in sufficiently specific terms; otherwise, it is not transferred. Contracts can only be transferred with the consent of the respective contracting party, which can be time-consuming in the case of many customer or supplier contracts. If a plot of land is included, the contract must be notarised (Section 311b(1) of the German Civil Code (BGB)). The same applies if the entire current assets are transferred (Section 311b(3) BGB).

One point deserves particular attention in an asset deal. If the purchaser takes over a business or part of a business, the employment relationships are transferred to them by operation of law (Section 613a(1) of the German Civil Code (BGB)). The employees concerned must be notified in writing in advance (Section 613a(5) of the German Civil Code (BGB)) and may object to the transfer within one month of receiving this notification (paragraph 6). Anyone who regards the workforce as part of the purchase value must factor this mechanism into their planning at an early stage.

The structure is usually determined by tax and liability considerations: buyers often prefer the asset deal because it excludes historical liabilities and creates a basis for depreciation, whilst sellers prefer the share deal because it provides a clean separation and is often more favourable from a tax perspective.

What does the share purchase agreement (SPA) contain?

The share purchase agreement, or asset purchase agreement as it is known internationally, is the central document of the transaction. It translates the findings of the due diligence process into binding terms. Its structure is broadly similar across most deals:

Subject matter of the sale and purchase price. The agreement describes precisely which shares or assets are being transferred and how the price is determined. In the case of a ‘locked box’, the price is fixed as at a reference date. ‘Closing accounts’, on the other hand, adjust it on the basis of the actual figures at the time of completion.

Warranties and indemnities. As statutory warranty law provides only limited protection regarding the company’s condition, the seller provides separate warranties concerning, for example, title, financial statements, material contracts, legal disputes and taxes. Specific risks identified during due diligence are addressed through targeted indemnities or other special mechanisms.

Completion and liability. Conditions precedent determine when the deal may be completed. For warranty and indemnity claims, the SPA sets out the legal consequences, maximum liability amounts, de minimis and basket thresholds, and limitation periods. Ancillary agreements and covenants supplement the framework for the period before and after closing.

How these clauses are structured in detail is the true art of contract negotiation. The warranty and indemnity framework, the purchase price clauses and special instruments such as W&I insurance, the earn-out and the MAC clause are covered in separate, in-depth articles. Only one thing is crucial here: the purchase agreement definitively sets out the allocation of risk between buyer and seller, and every line of it is informed by the preceding due diligence.

What is the difference between signing and closing?

At the signing, the purchase agreement is concluded. At the closing, shares or assets are transferred, the purchase price is paid and further steps to complete the transaction are taken. Both steps may take place at the same time if no conditions precedent are required.

There is often a completion phase in between. Typical conditions precedent include:

Regulatory approvals, in particular merger control and investment scrutiny, often form the critical path. In addition, approvals from banks, landlords or key contractual partners, as well as resolutions under company law, may be required.

Other conditions relate to acquisition financing, carve-out measures or internal restructuring. Management contracts, transitional services agreements or licence agreements may also need to be concluded before or at closing. The agreement should clearly set out responsibilities, deadlines, evidence requirements and the consequences of any condition ultimately failing to be met.

The agreement sets out which party is to request a release, what efforts they are required to make, which remedies must be accepted, and when the long-stop date is reached.

Between signing and closing, the seller generally continues to run the business. The buyer may contractually control measures requiring approval, but must not exercise any unauthorised control prior to competition law clearance. Information rights and interim covenants must therefore be structured in such a way as to protect the enterprise value without triggering ‘gun jumping’.

The closing itself is prepared using a checklist and a funds flow schedule. The fulfilment, waiver or continued validity of each condition should be documented. Post-closing tasks such as register notifications, purchase price adjustments and integration are handed over separately.

What does legal transaction management involve?

Legal transaction management combines specialist review, contract drafting and project management. 

Initially, the legal team compares share deals, asset deals and possible pre-structuring options. It drafts and negotiates NDAs, LOIs and exclusivity agreements, and defines the scope, priorities and reporting format of the due diligence.

The findings of the due diligence are then incorporated into the purchase price, warranties, indemnities, covenants and ancillary agreements. This includes drafting and negotiating the SPA, as well as coordinating merger control, investment reviews and other approvals.

In cross-border transactions, the lead counsel manages the local law firms and consolidates the findings into a unified risk assessment. Prior to signing and closing, notarial and company law procedures, conditions precedent and closing documents are coordinated. Thereafter, the remaining obligations are handed over smoothly to those responsible for post-closing matters.

The sensible point of entry is usually prior to the LOI. This is where the structure, pricing logic, exclusivity and regulatory assumptions are first defined. Subsequent changes are possible, but often cost time or negotiating leverage.

Remuneration can also be managed on a project-by-project basis: through phase-based budgets, caps, a clear scope of due diligence and regular forecasts. It is crucial to focus the available advisory services on issues relevant to value and liability.