CHAVALIT LAW GROUP Solicitors & Advocates

CONTRACTS & AGREEMENTS : STRUCTURING, NEGOTIATING, AND DOCUMENTING AGREEENTS
TO AVOID DISPUTES

I.  IDENTIFYING MAJOR LEGAL ISSUES IN STRUCTURING A DEAL

MAJOR LEGAL ISSUES

II.  DRAFTING KEY CLAUSES IN ALLIANCE, JOINT VENTURE AND M&A AGREEMENTS
KEY CLAUSES
JV AGREEMENT

M& A
SHARE SALE AND PURCHASE AGREEMENT

SALE AND PURCHASE OF SHARES
Sale and purchase of shares are subject to terms and conditions

REPRESENTATIONS AND WARRATIES

Shares fully registered and paid-up.
Share free and clear of all claims , options , pledges, charges, liens and encumbrances.
Transfer of shares not violate any provision of  laws and/or the Articles of Association.
Upon the transfer of shares, the transferee will have good and marketable title to the shares.
Land and buildings are free and clear of all restrictions , charges , pledges, mortgages, liens, encumbrances except for the purposes of security to secure repayment of the debts.
No direct liabilities other than those disclosed in the financial statements.
No material litigation or arbitration proceedings which may have a material adverse effect on the business or financial position of the joint venture company.

UNDERTAKINGS

CLOSING
Payment of money against delivery of the shares upon fulfillment of conditions precedent unless waived in writing.

MANAGEMENT
Positions of the senior management shall be clearly stated in the joint venture agreement, for examples :
The CEO shall be appointed from a person  nominated by Party A.
The Chief Operating Officer shall be appointed from a person  nominated by Party B.
The Chief Financial Officer shall be appointed from a person  nominated by Party B.

ACCOUNTING AND AUDITING
The accounting records of the joint venture company shall comply with the GAAP.
The accounts of the joint venture company shall be audited by a recognized auditor.
Parties to the joint venture agreement shall cause the joint venture company to prepare and provide them with  monthly unaudited management accounts.

FINANCING
Parties to the joint venture agreement shall subscribe for capital of the joint venture company.
The joint venture company shall acquire financing in a form of a loan from financial institutions or in the form of debt securities from investors.
The joint venture parties may guarantee the repayment of the loan or the debt securities, if required.
If appropriate, the joint venture parties may cause the joint venture company to increase its capital.
Each of the joint venture partner may lend money to the joint venture company in proportion to its shareholding.
Each of the joint venture parties may borrow money from banks at the lower interest rate and re-lend the money to the joint venture company at the higher interest rate.

MARKETING
The marketing of the products shall be limited in the territories set forth in the joint venture agreement.

DIVIDENDS
Joint venture parties shall cause a joint venture company to distribute at least a percentage of its net profits as dividends to shareholders of the joint venture company.

TERMINATION
The termination of the joint venture agreement upon occurrence of any of the following:
The joint venture company becomes insolvent or bankrupt, either of the parties may terminate the agreement by giving a written notice of termination.
In the event that either of the parties is in breach or violation of any of its obligations under the joint venture agreement, the other party shall be entitled to give a written notice to the other party to remedy the same within a specified period. Failure to do so will entitle the other party to give a written notice of termination with immediate effect. In this case, the non-defaulting party shall be entitled to purchase the existing shares from the default party at the net asset value to be determined from total assets minus total liabilities at book value as set forth in the financial statements of the joint venture company.

TRANSFER OF SHARES
Each of the parties may transfer any of its shares in the joint venture company to its affiliates.
If either of the parties wishes to sell all or any of its shares in the joint venture company to any third party other than existing shareholders, such party shall give a written notice to the other party of such intention and shall offer such shares to the other party on the same terms and conditions of the offer within a period of time. If such offer is not accepted within a specified time, the offeror may sell the offered shares to the designed third party on terms and conditions no more favourable than those offered to the other party.
The transferee shall have access to and becomes a party to the joint venture agreement by execution of the accession form to the joint venture agreement.

CONDIDENTIALITY
Information to be treated as confidential information including trade secret, technical, commercial or marketing information.
Period of confidentiality such as 5 years from the date of termination of the agreement.
Confidentiality clause shall survive the termination of the joint venture agreement.

CONFLICT BETWEEN JOINT VENTURE AGREEMENT AND ARTICLES OF ASSOCIATIONS
In the case of inconsistency between the Joint Venture Agreement and the Articles of Association of the Joint Venture Company, provisions of the Joint Ventures Agreement shall prevail between the Parties.

DISPUTE RESOLUTION
Arbitration vs. litigation.

OUESTIONS
Should an agreement between a government authority and a private company be referred to arbitration ?
How is a direct or indirect conflict of interest of arbitrator determined ?     
Should a dispute between a company in a first country and a company in a second country be decided by arbitrators in a third country ?

GOVERNING LAW
Should the governing law be the law of either of the parties ?
Can the law of a third country be the governing law ?
What aspects are governed by the governing law ?

III.  TRACKING LEGAL RISKS IN AGREEMENTS

LEGAL RISKS

• shares in the target company are pledged to secure repayment of any loan and/or bonds and/or any other types of securities
• foreign shareholding limit under laws including Land Code, Commercial Banking Act, Securities and Exchange Act, life insurance law, casualty insurance law and telecommunication law
• restrictions or prohibitions on transfer , pledge or encumbrances over shares in the  Articles of Association, Joint Venture Agreement and/or Shareholders Agreement in  compliance with conditions in licenses, permits or approvals
• review BOI certificate including tax privileges and compliance with conditions therein
• obligations of the parties in major agreements, undertakings of the agreements, any events of default in the major agreements and damages to be payable
• major covenants in loan agreements, terms and conditions of securities, and the share sale and purchase agreement
• legal issues on land , buildings ,  machinery and/or equipment of the plant
• risks covered by and exceptions and limitation of compensation in insurance policies
• any breach or violation of any of the intellectual property rights
• any legal dispute out of any major agreements, material litigations or arbitrations
• compliance with legal requirements  under laws and regulations

TYPES OF DUE DILIGENCE

• financial due diligence
• accounting due diligence
• legal due diligence
• business due diligence
• technical due diligence
• asset appraisal

DUE DILIGENCE EXERCISE

• focus on material information and details of information on material points
• due diligence information should be material, reliable , true and correct

TRACKING LEGAL RISKS

• fulfillment of conditions precedent
• extensive representations and warranties
• tough undertakings
• Indemnities
• Termination
• share buy-out

SEC REGULATIONS
Notification on offering of new shares, bonds, warrants
Notification on reporting requirement
Notification on tender offer requirement

SET REGULATIONS
Notification on disclosure of information
Notification on connected transaction
Notification on acquisition or disposition of assets
Regulation on securities trading including big lots


IV.  TECHNIQUES FOR NEGOTIATION AND CONCLUSION OF AGREEMENT

TECHNIQUES

• appoint advisors including financial advisor, auditor, legal advisor and/or technical advisor and/or asset appraiser, if necessary
• sign a MOU on tentative terms subject to execution of an agreement
• kick-off meeting to discuss legal issues  
• interview the management of the target company
• prepare checklist of due diligence documents
• conduct due diligence
• prepare representations and warranties and/or letter of disclosure
• prepare undertakings
• discuss representations, warranties and undertakings
• take a give and take approach
• negotiate advantages and disadvantages between parties (allocation of risks)
• exhibits or schedules essential
• have business mind
• pinpoint strengths and weaknesses
• soft and hard techniques
• focusing on advantages
• avoiding disadvantages
• know the other party
• emphasis on important points
• use extensive questionnaire

 

Author: Partner Picharn Sukparangsee