Identify Issues In Merger Agreement

---
name: ecvc-identify-issues-merger-agreement
task_id: emerging-companies-venture-capital/identify-issues-in-merger-agreement
description: A sell-side issues memo for a draft merger agreement should assess indemnification economics as percentages of transaction value against market conventions, identify whether a materiality scrape is present and explain the analytical consequence if it is not, compare any reverse termination fee to market norms, and evaluate interim operating covenants for carve-outs that preserve ordinary-course or committed business operations.
activates_for: [planner, solver, checker]
---

# Skill: Identify Issues in Merger Agreement

## 1. Subject-matter triage

- Treat the draft merger agreement as the primary source, but read it against the supporting deal documents and partner instructions before issuing any seller-side conclusions.
- Identify whether there is more than one relevant transaction scale or operating constraint; if so, enumerate the distinct items before analyzing them.
- If the task is a pure issue memo, preserve the deal mechanics, but do not drift into full-form drafting unless a requested fix is necessary to explain the issue.

## 2. Failure modes the skill is correcting

- Economic terms are described in isolation instead of being normalized to transaction value and tested against market practice.
- The memo flags restrictive covenants without checking whether the carve-outs preserve committed, ordinary-course, or business-critical operations.
- The analysis stops at “problem identified” without tying the issue to the governing clause, the interacting documents, and the practical consequence for the seller.
- Issues are ranked implicitly, making it hard to tell which provisions are deal-critical versus negotiable.
- The memo notes a deficiency but does not propose a targeted drafting or negotiation fix.
- Legal conclusions are stated as intuition rather than anchored to the controlling agreement language or recognized market convention.

## 3. Legal frameworks / domain conventions that apply

- Indemnification economics: analyze escrow, holdback, basket, and cap as percentages of transaction value and compare each to market conventions for comparable private-company M&A transactions.
- Basket structure: identify whether the basket is deductible or first-dollar and explain the recovery consequence of that structure.
- Materiality scrape: determine whether the indemnity framework removes materiality qualifiers for breach and damage analysis; if absent, explain how that affects recovery for non-material breaches and damages measurement.
- Reverse termination fee: assess whether any fee is calibrated to the transaction and the seller-side bargain, using market convention as the benchmark.
- Interim operating covenants: evaluate restrictions on expenditures, hiring, financing, capex, development, contracting, or other business operations for carve-outs that preserve ordinary-course performance and committed obligations.
- MAE / closing condition issues: check whether the adverse-change definition includes customary carve-outs, disproportionate-impact language, and treatment of customer, regulatory, supply, or market-specific shocks where relevant.
- Source-document hierarchy: use the merger agreement, disclosure schedules, ancillary documents, and partner instructions together; if they conflict, note the interaction and the practical drafting consequence.
- When the memo relies on a legal or market proposition, name the governing authority, doctrine, statute, rule, or standard that supports it rather than stating the conclusion nakedly.

## 4. Analytical scaffolds

- For each issue, move in this order: provision → what the language does → relevant market or legal benchmark → why it matters for the seller → recommended fix.
- Quantify every economic term against transaction value or another source-document threshold, and tie the issue to the clause or schedule that changes its effect.
- For indemnity provisions, test escrow, basket, and cap together rather than as isolated provisions, because one term can reframe the risk of the others.
- For materiality scrapes, analyze whether the scrape applies to representation breaches, damages, or both, and whether it is limited by knowledge qualifiers or disclosure-schedule mechanics.
- For reverse termination fee provisions, compare the fee to transaction economics and to the buyer’s termination rights, financing-outs, and specific performance regime.
- For operating covenants, identify the business activities most likely to be impeded, then ask whether the carve-outs preserve the company’s ordinary-course and pre-close commitments.
- For each issue, state the downstream consequence in one line: economic leakage, operational constraint, closing risk, litigation leverage, or negotiation asymmetry.
- For each critical or high-priority issue, include a concrete drafting or negotiation approach, not just a critique.
- If the sources identify multiple parties, periods, thresholds, or alternatives, address each separately; do not collapse distinct items into a single representative analysis.

## 5. Vertical / structural / temporal relationships

- Track which provisions override or qualify others, especially where definitions, indemnity mechanics, disclosure schedules, and conditions to closing interact.
- Note whether a covenant, condition, or remedy is time-sensitive and whether it is tied to signing, interim operation, closing, or post-closing claim periods.
- If one document supplies a carve-out or qualifier that another document appears to omit, flag the mismatch and explain which version controls the practical outcome.
- Where a provision affects later recovery or enforcement, explain the vertical relationship from drafting choice to post-closing consequence.
- If timing affects compliance or economics, state the relevant milestone and how the provision operates before or after that point.

## 6. Output structure conventions

- Write a sell-side issues memorandum organized by severity using an explicit ordinal scale: Critical, High, Medium, Low.
- Define the severity scale once at the top, then apply it consistently to every issue.
- For each issue, include: subject provision, short issue statement, severity, benchmark or controlling standard, source-document interaction, seller-side consequence, and recommended fix.
- End every issue with a concise close-out that covers scale/quantification, document interaction, and downstream consequence.
- Include an economic terms table covering escrow, basket, cap, and any reverse termination fee, stated as percentages of transaction value where applicable and compared to market convention.
- Separate issues by topic rather than by document order when that improves readability, but preserve enough detail to show where each issue comes from.
- End with a Recommended Actions block that assigns each next step to a responsible role and ties it to the relevant deal milestone or deadline if one appears in the sources.
- Keep the memo fit for a Word deliverable and avoid reproducing internal document text verbatim except where a short quotation is necessary to surface the operative language.