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During the initial negotiations on the terms of a proposed acquisition, the buyer and seller may draft non-binding heads of terms (US: term sheet) to record the results of their preliminary discussions and to provide a basis on which to proceed to the signing of the sale and purchase agreement (SPA). The buyer may also wish to enter into an exclusivity agreement that prevents the seller from actively seeking or negotiating with other prospective buyers for a specified period, thereby giving the buyer a period of exclusivity in which to negotiate the SPA. On an auction sale, where the seller seeks competing bids for the target, the seller will generally issue an information memorandum summarizing key investment considerations and an initial draft of the SPA to prospective buyers.

The buyer will also wish to conduct a due diligence investigation, which is the information-gathering process carried out by the buyer to find out as much as possible about the financial, legal and commercial status of the target company. The scope of the due diligence is often wider on a share sale than on a business sale, since the buyer of shares acquires a company with all its assets and liabilities. As part of the due diligence process on a share sale, particularly on an auction sale, the seller may put together a physical or virtual (on the Internet or CD Rom) data room where information about the target business is collected together for the prospective buyers and their professional advisors to review. The culmination of the due diligence process is often the production of a due diligence report by the law firm acting for the buyer containing the legal findings and an auditors’ report by the accountancy firm containing the financial and commercial findings.

During the due diligence process, the seller may require the buyer to enter into a confidentiality agreement in order to keep the proposed sale a secret from third parties and to limit the disclosure of sensitive information about the target to authorised persons such as certain employees and professional advisors of the buyer prior to the signing of the SPA.