Our corporate attorneys have represented countless companies, buyers, and sellers in M&A transactions, and one of the most common questions we get is “what are M&A closing conditions?”
An M&A closing condition is a thing that a party says must happen for the transaction to close. All deals with closings have at least a few conditions, and some have of tons of them. Buyers usually require a lot more conditions to close than sellers, who typically focus most on getting closed and paid.
The number of merger and acquisitions has increased to record highs across the globe in many if not all sectors. With more M&A deals, there will be more transactions that ultimately stall out or blow up. This can happen before any documents are signed, if the parties can’t see eye to eye on key deal terms (including closing conditions). But our M&A attorneys have seen numerous deals that were heavily negotiated fail during the “pre-closing period” between signing and closing. And these deals fail generally because one or more closing conditions were not met.
This post focuses on the M&A closing conditions our corporate attorneys typically see. We’ll look at the common mutual closing conditions, the conditions that sellers want, and the condition that buyers usually insist on, as opposed to some of the rarer or very deal-specific terms that a seasoned corporate lawyer will have come across.
1. Typical Mutual Closing Conditions
First, let’s look at some of the more general closing conditions that are often mutual or at least that both parties will have in one form or another in their separate closing conditions:
- No Restraints on Closing: The parties will usually make closing mutually conditioned on not being restrained by any governing body or court order. This can happen sometimes for regulated businesses or if someone sues to stop a transaction.
- Securing Third-Party Approvals: Some closings require third-party approval. Regulated businesses may need to secure regulatory approvals. Lessors of properties owned by the target business also often need to consent. There may even be consents on the buyer side in certain deals. So we usually see these closing conditions on both sides of M&A transactions.
- Executing Closing Contracts: Any time there’s a closing, there will be additional contracts to be signed at closing. For example, a promissory note, bill of sale, or assignment agreement. If something needs to be signed, the parties will condition closing on getting those signings done.
- Compliance with Purchase Agreement Terms: This one almost goes without saying. If a party violates the purchase agreement before closing, the other side won’t want to close – or at least won’t want to be obligated to close.
- Accuracy of Representations and Warranties: M&A contracts always contain some representations and warranties. Since there’s a lag between signing and closing, it can be tricky to determine when the promises should be effective. For example, if the company represented it only had 5 employees, does that mean at signing or closing? If the reps and warranties are going to be accurate at closing, the parties will need to make that accuracy a closing condition.
2. What Sellers Want in Order to Close
Now, let’s look at some of the more common M&A closing conditions sellers require:
- Delivery of Purchase Price: Sellers want to get paid and will usually condition closing on this.
- Delivery of Post-Closing Escrow Sums: If the transaction includes an escrow fund that will be used to satisfy post-closing payments (like an indemnification escrow fund), one or both parties usually will condition closing on this.
This isn’t a long list. Yes, sellers can insist on additional M&A closing conditions. But, in addition to the mutual conditions noted above, these are generally the main ones sellers want.
3. A Buyer’s Closing Requirements
The below are the M&A closing conditions typically most important for buyers:
- No Material Adverse Changes or Material Adverse Events: A lag between signing and closing means a possibility for changes in a target business. Big changes may make a buyer want to back out. Material adverse change or material adverse effect conditions are often highly negotiated. Sellers usually want to clarify that general economic changes don’t qualify, while buyers usually want anything under the sun to qualify.
- No Indebtedness: In most M&A transactions, the target company has some outstanding third-party debt that buyers often will insist gets paid before closing.
- No Back Taxes: Many target companies have some tax debt that the buyer wants cleared before closing.
- Target Metrics: Buyers want to know that their sellers will hand them the keys to a business that has some level of inventory and working capital. Nobody wants to buy a business and show up to an empty room with nothing in the bank. The specific inventory and working capital levels are highly negotiated commercial terms.
- Legal Opinions: In complicated transactions, buyers often ask for legal or tax opinions concerning the target business or some form of the transaction. The goal of the opinion is to give the buyer some assurance that the business or deal does not pose a huge risk. And obviously, they need to get these pre-closing.
- Financing Condition: Buyers may not have all the money they need to close just sitting around. They may need a bank loan to close, but won’t want to go through the hoops of seeking out that loan until the contract to do the deal is signed. Such a buyer will always want the deal to be contingent on it being able to secure financing during the pre-closing period.
- Diligence Satisfaction: Buyers in M&A deals do LOTS of due diligence. Sometimes, the diligence window goes right through the closing date. If a buyer discovers a bad fact, they want an out. So they include a closing condition that allows them to get out if they are not satisfied with the diligence results.
- Disclosure Schedule Updates: Reps and warranties often refer to “disclosure schedules” that expand on or provide exceptions to a rep and warranty. For example, a rep and warranty might say “schedule X lists all property owned by the company” or “except as disclosed on schedule Y, the company has no outstanding tax obligations”. If these are effective on signing, buyers will want them updated for any changes at closing.
The above conditions are just a few of what you may need or see in your own M&A deal. One of the things our M&A attorneys often see that can kill a deal or at the very least drive up legal expenses significantly is a failure to negotiate closing conditions up front in a term sheet or during initial negotiations, which can often be avoided by bringing in corporate attorneys at the outset. Asking for a closing condition late in negotiations — especially one that is out of the ordinary – can be a dire mistake.