Closing structure and post-closing obligations in M&A transactions should be considered early on in the deal negotiation process, as they will heavily influence the provisions of the operative transaction agreement.
Simultaneous Signing and Closing vs. Deferred Closing
The terms and conditions of the operative agreement (i.e., the stock purchase agreement, asset purchase agreement, or merger agreement) will vary depending on whether the transaction is structured as a simultaneous signing and closing or as a deferred closing. In a simultaneous signing and closing, the parties sign the transaction documents and close on the deal at the same time. In a deferred closing, the closing occurs sometime after the transaction documents are executed.
A simultaneous signing and closing can be advantageous to both parties because it eliminates transaction risks during the intervening period. For example, the target company may suffer an environmental disaster or lose a key customer contract after signing but prior to closing. A simultaneous closing not only eliminates these risks, but also saves time and resources by eliminating the need for lengthy negotiations over who should bear the risk of such events. But a simultaneous closing may not be possible when the deal is, for example, conditioned on obtaining buyer financing or third-party or stockholder approval. A simultaneous closing may also increase stockholder risk, since the target company may have to "go public" about the transaction by soliciting stockholder consent and contractual consent from customers, suppliers, and other third parties without having a binding contract in place. In these situations, a deferred closing structure allows the parties to determine the rights and remedies of each party in the event the required consents are not obtained.
In a deferred closing situation, more time and resources are devoted to negotiating pre-closing covenants and other important provisions in the operative agreement. Typical pre-closing covenants restrict actions that the target company may take prior to closing, including refraining from entering into material agreements and incurring additional debt. A "no-shop" provision is a specific type of pre-closing covenant that restricts the seller from soliciting competing bids from other potential buyers. Other important negotiating points in a deferred closing situation include termination provisions and purchase price adjustments for matters such as working group or inventory counts. In addition, the operative agreement will normally contain a "bring down" closing condition that requires all representations and warranties to be true at the time of closing. This allows the buyer to walk away from the deal if, for example, the target company's business or financial condition materially changes between signing and closing.
Virtual vs. In-Person Closing
Historically, closings occurred in person with representatives of both parties and their counsel present. It is now common practice, however, to complete closings by phone, fax, e-mail, and/or wire transfer without an in-person meeting. Nonetheless, in-person closings still occur, and some transactions, including those involving the sale of real estate, require that certain documents be signed in person.
Typical closing deliveries in an M&A transaction include:
- The operative transaction document, such as the stock purchase agreement or the merger agreement, if not already executed
- Board and stockholder consents authorizing the transaction
- Secretary's certificate certifying the accuracy and effectiveness of the relevant authorizing resolutions and charter documents of the target company
- Legal opinions
- Ancillary agreements and documents, such as promissory notes, bills of sale, employment agreements and escrow agreements
- Consideration (e.g., stock or cash)
- Regulatory approvals
- Evidence of third-party consents
- Evidence of the release of any liens
In a deferred closing situation, the buyer will typically require an officer's certificate in which an officer of the target company certifies, with respect to the operative agreement, that the representations and warranties are true and correct as of the date of closing, all covenants and agreements have been performed, and all conditions to closing have been satisfied. These "bring downs" are often qualified by materiality.
The parties' obligations will often not end at closing. The seller is normally required to enter into a number of covenants restricting its conduct for a defined period of time after closing. These may include covenants not to compete with the target company or to hire the company's employees. Depending on the specifics of the transaction, the buyer may also be subject to post-closing covenants, such as a requirement to provide similar employee benefits for a period of time or to provide director and officer insurance and indemnification for outgoing directors and officers of the target company. Other typical post-closing obligations include making certain state filings (such as articles of merger or an amendment to the party's certificate of incorporation to change the company name), filing press releases, and obtaining third-party consents not received at closing. Public companies also have to comply with SEC reporting requirements, such as the requirement that a Form 8-K be filed within four business days of closing.