Closing
Conditions

DEFINITION

Closing conditions are requirements appearing in a main transaction agreement that must be met for a transaction to be completed. Only relevant to a staggered sign/close transaction.

CONDITION TYPES

Closing conditions come in two varieties: (i) mutual conditions, which are for the benefit of all parties; and (ii) unilateral conditions, which are only for the benefit of one party.

A condition’s type depends on its exact nature and, in particular, whose rights the condition is protecting. A party may waive a condition that is to its benefit.

GENERAL CONDITIONS

Every staggered sign/close deal will have a similar set of general closing conditions, such as: (i) an authority has not blocked the transaction, or a law has not been enacted that would prevent it; (ii) representations and warranties are brought down (i.e., made anew) at closing; (iii) the parties have complied with their pre-closing covenants; (iv) no material adverse effect has occurred; and (v) the parties have finalized, and delivered their respective signature pages to, all ancillary agreements and certificates.

Even though these are generally applicable closing conditions, the exact formulation in a given deal will vary depending on negotiations and the particulars of the transaction. At the very least, materiality and other appropriate qualifiers will be added.

Some general conditions are mutual (like the first example above). Others (like the remaining examples) are unilateral, because they need to be tailored to exact parties.

Parties typically rely on counsel to ensure a transaction agreement contains the standard package of closing conditions that are applicable to all deals.

UNIQUE CONDITIONS

Transactions may have additional closing conditions depending on the circumstances, including:

• ANTITRUST APPROVALS

If antitrust approvals are being sought, a mutual closing condition requiring their receipt (or the expiration of applicable waiting periods) is typically added.

• 3P CONSENTS

If a buyer will not close without receiving certain third-party consents triggered by a transaction—like from key customers or suppliers—the buyer may insist on a unilateral condition to its benefit requiring receipt of these consents prior to closing.

Similarly, if a seller identifies consents a buyer must obtain to close—like from pre-existing lenders—the seller may require a corresponding unilateral closing condition to its benefit.

• DEBT FINANCING

If a buyer is procuring third-party debt in connection with a transaction, the buyer may want a closing condition requiring its receipt of debt proceeds before it has to close.

When a buyer takes that position, a seller will usually push back. A condition of that nature is typically viewed as giving the buyer a right to walk away from the transaction without any cost.

Failure of original debt financing is addressed in an alternative financing covenant and ultimate failure of debt financing is addressed by a reverse termination fee.

• PRE-CLOSING REORGANIZATIONS

If pre-closing reorganizations are part of the transaction structure, their completion is usually a unilateral condition to the other party’s benefit.

For example, if a seller needs to spin off certain assets from a target business for a transaction to close, the completion of the spin-off may be a closing condition to the buyer’s benefit.

SATISFACTION OF CLOSING CONDITIONS

Once all closing conditions are satisfied (or waived by the applicable party), closing is required to take place within a specified number of days, after accounting for any marketing period.

There are certain closing conditions that can be satisfied only at closing, like bring-downs of representations and warranties. Correctly drafted closing mechanics will (i) clarify that closing must occur once all conditions—other than those that can only be satisfied at closing—have been satisfied and (ii) reiterate that conditions that can only be satisfied at closing will indeed be satisfied.

Finally, some transactions align closing with a target company’s natural financial recordkeeping to avoid stub-period accounting. In these instances, either month-end, beginning-of-month, or mid-month closings are specifically mandated by the agreement.

For example, if an agreement mandates a month-end closing and closing conditions are satisfied within the first week of a month, closing will be postponed to the last day of the month unless the parties agree otherwise.

Alignment provisions such as these raise numerous operational, working capital, and other complexities, which counsel can advise on.

FAILURE TO CLOSE

If a party is not prepared to close after the closing conditions have been satisfied, then—depending on the transaction agreement’s terms—the non-breaching party may either sue for specific performance to force the closing or (if applicable) terminate the agreement and collect a termination fee. The latter is most relevant in a leveraged buyout where there has been a financing failure.

Where both specific performance and a termination fee are available to a non-breaching party, the non-breaching party must usually choose a course: either: (i) sue for specific performance to close the deal, if the debt financing is available; or (ii) terminate the transaction agreement (thereby abandoning the transaction) and sue to collect a reverse termination fee.

In transactions with equity commitment letters, debt commitment letters, and limited guarantees, the funding conditions under those agreements must be carefully coordinated with closing conditions and specific performance provisions in the main transaction agreement.

PITFALLS

• BENEFITTING WRONG PARTIES

A party who is required to perform certain actions (like obtain a designated third-party consent or undertake a pre-closing reorganization) should not benefit from the corresponding closing condition.

Otherwise, if that party fails to obtain the consent or complete the reorganization, the party can simply waive the condition and force the other party to close.

• NOT TAILORING REGULATORY CONDITIONS

Regulatory approvals, including antitrust clearances, are complex and nuanced. The exact formulation of any closing condition relating to them should reflect the underlying rules, regulations, and procedures.

For example, in the United States, HSR clearance is usually deemed received after a 30-day waiting period following filing if the Department of Justice makes no inquiries or requests.

Accordingly, an HSR closing condition should include two avenues for satisfaction: (i) affirmative clearance has been received or (ii) the applicable waiting period (including any extensions of it) have expired or been terminated. If the second prong is missing and DOJ never responds to a filing, the parties will find themselves with a condition that cannot technically be satisfied.

To avoid post-closing amendments to regulatory closing conditions, it is important to work with a qualified lawyer, including local counsel, to tailor each condition to the relevant regulatory framework.

• NOT AGREEING TO FORMS

If third-party consents or notices, or pre-closing reorganizations, are required to close, then all sides should agree and sign off on related agreements and documents before their transmission, signature, or filing. It is not appropriate for a seller to send consents or notices to third parties, or effectuate pre-closing reorganizations, without a buyer confirming that the seller’s plan will satisfy the structure deck and corresponding closing conditions, and vice versa. Coordination beforehand lessens the likelihood of future dispute.

• FAILING TO CONFIRM AND COLLECT

Prior to closing, the satisfaction of each closing condition should be expressly confirmed and, if there is a related written record—e.g., an agreement, certificate, or email—the record should be saved.

Counsel is typically responsible for tracking the satisfaction of closing conditions via closing checklists, saving records, and producing closing sets comprised of all transaction agreements, documents, and other records.