A Guide to Acquisition Agreements - Conditions to Closing and Termination
Conditions to the Parties’ Obligations to Close
This is where the rubber hits the road. For each party, there’s a list of the conditions that must be met before that party is obligated to close. The conditions essentially break out into three categories:
- One set of conditions requires the other party to complete its obligations, including tasks it covenanted to complete between signing and closing and items it promised to deliver at closing (such as officers’ certificates).
- A second set of conditions is tied to the other party’s representations and warranties, usually requiring that the representations and warranties were materially true at signing and continue to be materially true at closing (there are important variations on this). Note that a failure of these conditions may not involve anything under the seller's control.
- A third set of conditions has to do with outside constraints, for example a third-party lawsuit trying to prevent the transaction from closing.
You need to understand these conditions are and concentrate on any condition that seems like it might not be met. In other words, you can rely on the lawyer to think through purely technical conditions, such as delivering officers’ certificates, but you need to think hard about concentrate on conditions that key off of the covenants and representations and warranties. You should make sure that those conditions reflect what you actually need in order to close and that the other side’s conditions aren’t overly open to abuse (unfortunately, some abuse is always possible).
It’s worth noting that each party can decide not to insist on any or all of its conditions (“waive” the conditions in lawyerspeak) if it wants to close. In other words, the conditions in a one party’s list never give the other party an excuse not the close.
This portion of the contract says when a party can terminate the contract.
Before discussing what it is, it’s worth noting what it is not. First, it’s not the same as the conditions to closing. The termination provisions may allow a party to terminate for failures of those conditions, but usually only if other circumstances exist. Often, if one party’s conditions to closing aren’t met, that party can postpone closing but can’t immediately terminate. Second, the termination provisions are not the same as the remedies for breach of the contract. Those depend on a different section (discussed in another post) and general contract law.
So don’t assume you understand how the contract can be terminated after you’ve understood to conditions to closing. Think through the termination conditions and make sure they meet your expectations. Otherwise, you could get stuck with a pending sale for much longer than you would like or you could find yourself without a deal when you thought you were all signed up.
One provision often found in the termination section deserves special attention: The so-called “drop dead date.” This is a fixed date after which a party (often either party) can terminate the contract if it hasn’t closed. The reason for a drop-dead date is that things change over time in unpredictable ways. Over time, the deal is likely to get out of whack at some point if it hasn’t closed through no fault of the parties (there’s usually a provision barring a party from using drop-dead termination if it caused the delay). So it’s a good idea to provide an escape valve. That doesn’t mean the deal automatically comes to an end at the drop-dead date. Parties regularly agree to extend the date if they both still like the deal and are willing to wait.
Depending on the circumstances, one or both parties sometimes agrees to pay the other a fee if it terminates the deal. If you do this, make sure you understand what you’re trying to accomplish. There are legal constraints to the size and purpose of these payments under some circumstances. The circumstances are complicated and the rules, unfortunately, are not very clear. So make sure you work closely with your lawyer before you reach agreement on break-up payments.