M&A contracts are complex contracts. This complexity does not only derive from the composition and content of the contract, but also from the formation of the contract itself, which requires a longer negotiation procedure, mainly due to the difficulty, or impossibility of determining the contractual elements (such as price and method of payment) instantly.
Negotiations are lengthy, and, often, the definitive conclusion of the contract itself, when there is legal binding, may not be easy to identify. Questions arise, which will be analysed here: (i) When is the M&A contract “formed”? (ii) When can the parties be said to be bound? (iii) Before this moment of contractual conclusion, are there already legal duties between the traders?
Answering the first two questions: the general rule is that the contract arises from the acceptance of the proposal, provided that its essential elements are present. At this point, at first, each party will be able to demand the promised performance from the other. In the case of an M&A contract, without deferred execution, at the time of acceptance of the proposal, the buyer may demand the transfer of equity interests, and the seller may demand payment of the price, if the essential elements of this contract are present. Determining whether the essential elements of the contract are present will depend on market usage and practices.
This moment, however, is not always completely clear, as during the negotiations there are several documents in which the negotiators express their intention to negotiate and stipulate the guidelines of the future contract. These are documents called letters of intent, or memorandum of understanding, which function mainly in formalizing and confirming the seriousness of a given fact in the negotiation.
Our legal system does not expressly regulate these documents, but there is no doubt that they can be celebrated due to the principle of atypicality, contained in art. 425 of the Civil Code.
The general rule is that these documents have no binding effect. But this does not mean that certain clauses (rights and obligations) contained in these documents are not binding. An example is the duty of confidentiality, which is already demanded as of the signing of the letter of intent, and, if violated, infer legal consequences.
For the correct legal qualification of these documents, it is necessary to observe whether the document, despite being titled “memorandum of understanding”, has the essential elements of a contract – that is, the real content of the document. In these cases, regardless of the title, it may be qualified as a contract, having full binding effects1.
Answering the third question. In the negotiation phases, before the formation of the contract through acceptance of the proposal, there are duties to be observed by potential contractors. Because not only is the contract a source of duties, but there are also general duties to harm no one, which derive from social contact2. This approach between market players gives rise to duties, especially protective duties: they do not concern a provision – as it does not exist at this stage, for example, the obligation to pay the price or transfer the shares – but refer to the protection of the legal sphere of the other trader.
There may be, for example, a duty of secrecy, when one of the traders has access to the other’s sensitive information and cannot disclose it. Furthermore, there is a duty not to abruptly break off negotiations, when the negotiator creates a legitimate expectation in the other party that the contract will be concluded and, contradictorily, abruptly breaks off negotiations.
These duties of the negotiation phase, if violated, culpably, imply legal consequences: the duty to compensate the negative interest, corresponding to pecuniary compensation aimed at reconstructing the situation in which the injured trader would be if he had not initiated negotiations. For instance, the reimbursement of expenses incurred with lawyers, appraisers and auditors, in the event of an abrupt break in negotiations.
Summarizing, the M&A contract has binding effects upon acceptance of the proposal. It is not always clear this moment in the contractual itinerary, as negotiations are made up of several documents, which may or may not, even titled “memorandum of understanding” or “letters of intent”, constitute true binding contracts. Or they may also be partially binding, such as, for example, the duty of confidentiality.
In any case, even before the M&A contract is signed, the parties must observe certain duties, duties of protection and not duties of provision. Those duties, if culpably violated, imply compensation for the negative interest.
Fernanda Mynarski Martins-Costa,
Postgraduate Professor at FGV/SP and PhD in Law from USP
partner at Judith Martins-Costa Advogados.
[1] MARTINS-COSTA, Judith. As Cartas de Intenção no Processo Formativo da Contratação Internacional: os graus de eficácia dos contratos. Revista da Faculdade de Direito da Universidade Federal do Rio Grande do Sul, Porto Alegre, n. 17, 1990.
[2] COUTO E SILVA, Clóvis. A obrigação como processo. Rio de Janeiro: FGV Editora, 2006.
