The Memorandum of Understanding

What is a Memorandum of Understanding?

A contract or definitive agreement (memorandum of understanding) is a legal document that records the terms and conditions between two companies that enter into an agreement for a merger, acquisition, divestiture, joint venture or some form of strategic alliance.

It is a mutually binding contract between the project owner and the target and includes terms such as the shared, purchased or merged assets, consideration for the combination, representations and warranties, closing conditions, etc.

The final contract or agreement supersedes all prior agreements and understandings – both verbal and written between the buyer and seller.

A definitive purchase agreement is used as a document to transfer ownership of a business. The agreement also contains schedules describing the inventory list, key employees, fixed assets, determination of net working capital, etc.

Clauses of a Memorandum of Understanding

Definition of key termsThe
agreement will define key terms and their meaning for the entire document. It will describe how stakeholders are referred to in the document, the meaning of closing date, sufficient working capital, etc.

The agreement defines the financial and operational terms of the combination at the level of each of the parties involved. It also addresses any adjustments that need to be made to the financial terms. It provides full details of the operational terms of the combination, guarantees and financial commitments.

Representations and WarrantiesIn
this section, the stakeholders must state facts called “representations” and then “warrant” that the representations are true. Also called “representations and warranties,” this is one of the most important and time-consuming parts of the agreement and is negotiated very thoroughly.

The goal of stakeholders is to obtain full representations and warranties, as they provide a valuable source of information about what the parties are committing to.

A typical guarantee will be that the stakeholders comply with government regulations, workers’ compensation law, intellectual property laws and have the legal authority to sign the agreement, etc.