In the event there is a period of time between the signing of a definitive acquisition agreement and the closing of the acquisition, the parties will have to agree on a set of conditions that must be satisfied (or waived) before the acquisition may be closed. These conditions are generally referred to as “closing conditions.”
The failure to satisfy a closing condition gives the other party a right to refuse to close the acquisition but does not make the failing party liable to the other party, unless such failure is the result of, or the cause of, a separate breach of the acquisition agreement. In addition, because of the period of time between signing and closing, events may occur that may result in a party’s desire to terminate the acquisition agreement prior to closing. Accordingly, the parties often negotiate provisions granting the right to terminate the acquisition agreement upon mutual agreement or upon the occurrence of certain specified events. This article summarizes the principal closing conditions and termination rights that parties seek to include in an acquisition agreement.
Closing conditions generally provide that the obligations of each party to consummate the transactions contemplated by an acquisition agreement are subject to the satisfaction (or waiver) at the closing of an agreed upon set of conditions. In an acquisition agreement, the closing conditions are generally divided into conditions to the performance of the buyer and conditions to the performance of the seller. Occasionally, where closing conditions are applicable to both parties, such closing conditions may be separately identified as conditions to the performance of both of the parties. If a party fails to satisfy a closing condition of the other party, then the other party will not be obligated to consummate the transaction.
The following closing conditions are typically included in acquisition agreements:
No Legal Impediments: Parties typically include as a joint closing condition that no governmental authority shall have enacted any law or issued any order that has the effect of making the consummation of the transactions contemplated by the acquisition agreement illegal or otherwise restrains or prohibits the consummation of the transaction.
HSR Filing: In the event that the transaction is subject to the Hart-Scott-Rodino Act (HSR), the federal premerger notification program, the acquisition agreement will include as a closing condition of both parties that, with respect to the HSR filing previously made by parties, the applicable governmental authorities shall have either granted early termination or the applicable waiting period shall have expired.
Regulatory Approvals: In the event that the parties to the transaction are engaged in an industry regulated by one or more governmental authorities, the acquisition agreement will include as a closing condition of both parties that the applicable governmental authorities shall have approved the transaction.
Bring-Down of Representations and Warranties and Compliance with Pre-Closing Covenants: These conditions generally provide that the other party’s representations and warranties made in the acquisition agreement are true as of the closing date and that such party has complied with all pre-closing covenants. Parties to the acquisition agreement will often negotiate whether these conditions are qualified by materiality or a material adverse effect. There may also be some negotiations as to whether the bring-down of the representations and warranties should be as of the closing date only or as of both the closing date and the signing date.
Delivery of Closing Certificates: In order to verify the accuracy of each party’s satisfaction of its bring-down of the representations and warranties and compliance with the pre-closing covenants, parties will include a condition that the other party deliver a certificate of an officer certifying as to the satisfaction of such condition. Each party is also typically required to provide a certificate of the party’s secretary certifying as to the party’s resolutions authorizing the consummation of the transaction.
Delivery of Ancillary Documents: As will be described in a subsequent article, acquisition agreements generally include a number of ancillary documents and agreements the form of which are agreed upon in advance and executed and delivered at closing. This closing condition therefore provides that each party is required to deliver to the other party executed copies of each of these ancillary documents and agreements.
Delivery of Purchase Price: The seller will include a closing condition that provides that the buyer shall have delivered the purchase price to the seller and, if applicable, one or more third parties, such as an escrow agent or creditor.
Third-Party Consents: The buyer in an acquisition transaction will typically seek to include a condition requiring the seller to obtain certain third-party consents required under contracts to which the seller is a party, such as customer contracts, supply contracts, and/or leases, prior to the closing of the acquisition. Although there may be numerous agreements that require consent, the parties may negotiate the specific agreements for which the seller must obtain consent prior to closing the acquisition.
Material Adverse Effect: While this condition is partially covered by the bring-down of the representations and warranties, it is often desirable for the buyer to include as a separate condition that no “material adverse effect” has occurred since signing. The definition of “material adverse effect” is typically the subject of substantial negotiations.
Litigation: Buyers and sellers may also consider including a condition that no litigation has been commenced that would restrain or prohibit the transaction.
Financing Condition: The buyer may attempt to include a closing condition that would make the closing subject to the buyer securing financing to pay the purchase price. The financing condition is especially important in acquisitions in which the buyer expects to borrow money to pay the purchase price.
Deal-Specific Conditions and Deliverables: If the buyer has any special concerns about an acquisition, such as the employment of certain employees, the settlement of certain liabilities, or the termination of certain liens, the buyer should address those concerns by including a deal-specific closing condition. In addition, the buyer may want to include certain deal specific deliverables that are required by the buyer to close. These deliverables may include legal opinions, evidence of termination of any liens or security interests, and any real property-related deliverables.
As noted above, if there will be a period of time between signing of the acquisition agreement and closing, the parties will need to agree on certain rights pursuant to which a party may terminate the acquisition agreement prior to closing. Parties generally include the following termination rights in an acquisition agreement:
Mutual Agreement: This right permits the acquisition agreement to be terminated upon the mutual written consent of both parties.
Breach of a Representation or Failure to Perform a Covenant: If a party is not in breach (generally, material breach) of the agreement, then such party may terminate the agreement for a breach or failure by the other party of its representations and warranties or covenants following an agreed-upon opportunity to cure.
“Drop Dead Date”: Parties typically will include a termination provision relating to a “drop dead date” for the acquisition. This provision provides that if a party’s closing conditions have not been satisfied by the agreed upon date, then the other party may terminate the agreement (provided that the terminating party is not in breach of the acquisition agreement).
Termination Due to Legal Impediment: Either party may terminate the acquisition agreement in the event any law makes the consummation of the transaction illegal or any governmental authority issues an order restraining or prohibiting the consummation of the transaction.
The acquisition agreement sometimes includes provisions imposing financial penalties on the party terminating the agreement. These provisions, commonly referred to as "break fees" (in the case of termination by the seller) or "reverse break fees" (in the case of termination by the buyer), are complicated and are often the subject of intense negotiation. The topic of break fees will be the subject of a separate article in this publication.
Although the most common closing conditions and termination rights are summarized in this article, the parties may include other closing conditions and termination rights based on deal-specific concerns. In addition, closing conditions and termination rights may vary depending on whether the transaction is a public or private acquisition.