Transaction
Timing

INTRODUCTION

In addition to deciding on a transaction structure, buyers and sellers need to agree on a transaction’s timing.

A transaction can be staged in one of two ways:

• simultaneous signing and closing, where signing and closing take place at the same time (i.e., without an interim period); or

• staggered signing and closing, where signing and closing take place at different times (i.e., separated by an interim period).

If a deferred closing is chosen, parties will negotiate additional provisions not found in simultaneous transactions, principally: (i) pre-closing covenants, (ii) closing conditions, and (iii) termination rights and fees. Transaction financing and breakup fee backstops may be relevant, too.

Both timing sequences will require closing deliverables and often include post-closing covenants like non-competition, non-solicitation, and post-closing tax cooperation agreements.

KEY INDICATORS

A simultaneous signing/closing is the straightforward way to structure a potential transaction’s timing. However, if the transaction has one or more of the below characteristics, flipping to a staggered signing/closing is likely:

• ANTITRUST APPROVALS

If a transaction triggers antitrust review in the United States (whether at the federal or state level) or another jurisdiction, it will almost always be structured as a staggered sign/close. The antitrust filings will be filed shortly after signing, and antitrust approval will be a closing condition.

Note in the United States it is possible to file for federal antitrust (HSR) approval on a binding term sheet, thereby retaining a simultaneous sign/close structure if desired. However, this is a relatively uncommon approach.

• OTHER REGULATOR APPROVALS

If there are other regulatory consents that need to be obtained, the transaction’s timing will likely be staggered sign/close.

• PRE-CLOSING REORGANIZATIONS

If the target business is commingled with other businesses or assets not part of the contemplated transaction, or the target holds assets not being sold, then pre-closing reorganizations will need to take place to preserve the target’s operational integrity. When spin-offs, divestitures, separations, or other restructurings comprise a transaction’s structure, timing will ordinarily be staggered. The seller will complete the reorganization(s) following signing and before closing. 

However, in some instances, parties may agree to complete certain tax restructurings in advance of signing to maintain the relative simplicity of a simultaneous transaction.

• 3P CONSENTS & NOTICES

If third parties like landlords, customers, suppliers, and vendors are required to consent to or be notified of a transaction, the parties may want to pursue a staggered sign/close. Consent requests and notices will be sent following signing, and receipt of designated consents (like those from top customers or irreplaceable suppliers) may be made closing conditions.

• DEBT FINANCINGS

Where third party debt financing is included as a buy-side source of funds, the transaction will likely be structured as staggered. In this scenario, a buyer will typically present a debt commitment letter at signing to give the seller comfort that a lending source has agreed in principle to provide the debt financing needed to close the transaction. During the interim period, the buyer will negotiate the long-form credit agreement with the lender, and the lender will fund at closing. Note that whether the receipt of debt financing is a closing condition is a matter of separate negotiation.

• WIDESPREAD EQUITYHOLDERS

Where a target business has a large equityholding base, it may be impractical to pursue widespread approval of the transaction before closing. In this case, key equityholders might be asked to commit to approving the transaction once it is signed, and the balance will be contacted after signing—but before closing—using instruments like letters of transmittal seeking consent. In some cases, receipt of a minimum level of approval will be a closing condition.

DEAL CERTAINTY

Some say transaction timing ultimately speaks to deal certainty, or the likelihood that a transaction will be completed once final terms are agreed.

That is misleading. Deal certainty is not about whether a transaction’s timing is papered as simultaneous or staggered.

Instead, an assessment of certainty requires a holistic view of: (i) closing contingencies, whether or not technically appearing as closing conditions in a purchase agreement; (ii) the likelihood of the closing contingencies being satisfied; and (iii) the recourse options available to a party if another party frustrates closing, whether or not simultaneous with signing.

For example, in a transaction requiring HSR approval, parties may think filing an HSR application on a binding term sheet increases deal certainty: if approval is granted, the parties can proceed to sign and closing, but if the petition is denied, the parties never have to sign in the first place.

The document the parties use to seek HSR approval has no bearing on the Department of Justice’s substantive review of the transaction under antitrust law. By filing on a term sheet the parties have traded speed for contract protections (like pre-closing covenants governing regulatory filings) usually appearing in agreements with deferred closings. The decision may be perfectly reasonable for quick execution, but it will not have increased certainty.

CONCLUSION

A transaction’s timing depends on a realistic assessment of practical realities, like if regulatory or third-party consents are triggered by the transaction and if any pre-closing reorganizations need to take place.

Experienced counsel can balance the need for speed typical of any prospective transaction with pragmatic advice on whether a simultaneous or staggered sign-and-close is appropriate.