The Role of Default Positions in M&A

Default positions in terms play an important role in the overall dynamics of a deal.

What's a default position? Anything that happens automatically absent affirmative action to change it.

What are some examples in M&A?

EXCLUSIVITY. Does the no-shop provision in the LOI automatically extend absent termination or does it automatically terminate unless the seller takes action (for example, by agreeing to extend it upon the buyer's request)?

DILIGENCE PERIODS. If the purchase agreement has a diligence-related closing condition tied to an associated time period, does the satisfaction of that condition require the buyer's notice that it's satisfied with diligence or simply that the buyer doesn't object by the end of the time period?

OFFSET RIGHTS. If there are indemnification offset rights for seller notes, rollover equity, or other items, can the buyer simply make the offset, leaving the seller to challenge it, or does the buyer first have to prove that the offset is warranted?

WHERE'S THE CASH? In an earnout, the buyer goes into its pocketbook to write a check, so by default, the funds are with the buyer. In a reverse earnout, a note or other future benefit is offset if the agreed-upon targets aren't hit. In that case, by default, the funds are with the buyer but are owed unless shown otherwise. If the earnout amount is escrowed (rare), the funds are with a neutral third party.

POST-CLOSING ROLE. Does the seller's consulting / employment agreement automatically terminate on a set date or does it automatically renew absent notice by a party?

The list is close to infinite, and these are just some examples.

*Default positions are important not only because they can have real legal and economic impact, but also because they can influence the trajectory of a transaction based on social / relationship factors.