With over a decade of experience drafting and negotiating M&A agreements, I’ve found that the cryptocurrency context demands special attention to certain clauses—particularly around representations, warranties, and indemnifications. Here’s a closer look at the provisions you can’t afford to overlook.
Introduction
A well-crafted M&A agreement is the backbone of any transaction. In the crypto space, legal documents must address unique factors like token classification, cybersecurity risks, and global regulatory frameworks. Overlooking these issues can lead to disputes, enforcement actions, or failed deals.
This article highlights the critical clauses that protect both buyers and sellers when crypto assets and blockchain technology are part of the M&A equation. While each deal is unique, understanding these typical contract provisions will help you negotiate from a position of strength.
1. Representations and Warranties
Representations and warranties set out the facts each party declares to be true. In crypto deals, pay close attention to statements regarding:
- Regulatory Compliance: The target’s compliance with securities laws, AML/KYC regulations, and relevant licensing requirements.
- Token Issuances: Whether any tokens issued were done in accordance with applicable laws, including disclosures and exemptions.
- IP Ownership: Confirmation that the company owns or properly licenses all blockchain protocols and software.
2. Indemnification Provisions
In crypto M&A, indemnification clauses are particularly important for covering unforeseen liabilities such as regulatory fines or claims of unregistered securities offerings. Buyers will often seek broad indemnification if the target misrepresented its token compliance or had security lapses leading to hacks.
3. Purchase Price Adjustments
Volatility in crypto can lead to fluctuating valuations. Clauses that allow for purchase price adjustments—such as working capital adjustments or price collars tied to specific token values—can reduce the likelihood of renegotiation if market conditions shift dramatically before closing.
4. Earn-Outs and Milestone Payments
Earn-outs tie a portion of the purchase price to post-closing performance metrics—especially relevant when the target’s success depends on future token values, network growth, or user adoption. Carefully define benchmarks to avoid future disputes.
5. Closing Conditions
In addition to standard closing conditions (like regulatory approvals), crypto M&A agreements may include conditions related to:
- Security Audits: Confirmation that the target’s smart contracts or custody solutions have passed third-party audits.
- Token Lock-Up Periods: Ensuring founders or key stakeholders can’t immediately liquidate large token holdings post-closing.
6. Confidentiality and Non-Disclosure
Crypto businesses often handle sensitive data, including user information and proprietary algorithms. Strong confidentiality clauses protect these assets during and after the transaction. For deals involving decentralized systems, consider how code repositories and developer communications will be handled under these clauses.
7. Governing Law and Dispute Resolution
Given the global nature of crypto, parties might be in different jurisdictions with varying legal systems. Decide upfront which law governs and how disputes will be resolved—arbitration is often favored for speed and flexibility, but enforceability must be considered.
Conclusion
In the rapidly evolving crypto sector, M&A agreements must be meticulously drafted to address everything from token valuation to cybersecurity. By focusing on robust representations and warranties, carefully crafted indemnification provisions, and well-defined closing conditions, you can reduce the risk of unpleasant surprises.
Whether you’re on the buy side or the sell side, these key clauses serve as guardrails, ensuring that the transaction’s strategic objectives remain intact while minimizing legal and regulatory pitfalls. Properly executed, a comprehensive crypto M&A agreement can pave the way for growth and innovation in this fast-paced market.
