A Guide to Closing Conditions in Merger Agreements
A Guide to Closing Conditions in Merger Agreements
Many months elapse between the time of signing a merger agreement and closing the mergertransaction. After the signing of a merger agreement is publicly announced, the parties must complete a series of steps before the merger can be successfully completed.
Closing conditions, also known as conditions precedent, must be satisfied or waived prior to closing the merger transaction. These conditions are expressly outlined in the merger agreement. Common closing conditions in M&A deals include obtaining all required regulatory approvals, confirming that the representations and warranties in the merger agreement remain accurate as of the closing date, and delivering closing certificates and legal opinions to the applicable transaction parties.
Obtaining regulatory approvals can be a particularly lengthy process. Mergers between dominant players in an industry can face an especially complex antitrust approval process. Transactions involving non-U.S. buyers acquiring the assets of U.S. companies, particularly when thetransaction is perceived to threaten U.S. national security interests, face a tough review process by the Committee on Foreign Investment in the United States (CFIUS). Additionally, companies with many international subsidiaries have to navigate a number of different foreign investment and competition laws.
In the interim period between signing and closing, it is possible that changes occur to the business. The parties will typically negotiate a Material Adverse Changes (MAC) or Material Adverse Events (MAE) clause that enables the buyer to terminate or renegotiate the deal if the target company’s business or financial condition has significantly declined.
Both parties are required to use commercially reasonable efforts to obtain third-party consents prior to closing. The parties should carefully diligence business contracts for any anti-assignment or change of control provisions. Obtaining necessary consents from customers, suppliers, and other third parties to transfer contracts is critical to the smooth operation of the combined company post-closing.
In most cases, shareholder approval from a majority of the target company’s shareholders is required to sell a company. Shareholders may receive a proxy statement or a joint proxy statement/prospectus describing the proposed merger transaction and providing the board’s recommendation on whether to vote to approve the merger. The proxy statement will also provide voting instructions and the shareholder meeting date.
If funds are being obtained from external financing sources in order to fund part of the merger consideration, the financing condition in the merger agreement must be satisfied prior to closing. Consummation of the merger would be contingent upon the buyer securing the necessary debt or equity financing.
There are also typically a number of closing certificates and other documentary deliverables required under the merger agreement. Each party may be required to deliver to the other party anofficer’s certificate certifying that the conditions precedent in the merger agreement have been satisfied or waived as permissible. The officer’s certificate may also certify that the representations and warranties remain accurate as of the closing date. The buyer may request that the target company’s legal counsel provide a legal opinion regarding the tax treatment of the transaction.
