ACQ5
Conditional Contracts and Closing
Conditional contracts
Reasons for conditionality
Before completing an acquisition various approvals, consents and clearances may be required (problems holding
up deal), and ideally should be obtained before the sale and purchase agreement is signed. However, obtaining the
necessary consents and approvals can take some time, and the parties may prefer not to delay exchange of
contracts until all such matters have been resolved.
CHOICES
Total delay until condition fulfilled
Complete – who takes commercial risk of non-fulfilment (negotiate price reduction to compensate for
risk/cover with indemnities)
Walk away (incur transaction costs to date)
Enter into conditional contract – requires delay between signing and closing (exchanging and completion)
The sale and purchase agreement may, therefore, be made conditional on one or more matters
Thereby creating a DELAY between exchange and completion until condition fulfilled
This is an allocation of risk between B and S for the period between exchange and completion
Look at WHO CAUSED delay as this will affect the provisions in the conditional SPA (e.g. if purchaser caused
delay, seller will not want to repeat warranties/indemnities)
Main reasons and further examples
Need for shareholder approval – e.g. the issue of shares to the seller is the consideration for the target
Regulatory clearance – e.g. from the OFT or HMRC or some other regulatory body
3rd party consent – for release of security or the novation/assignment of important licences (e.g. IP or
environmental licenses) or from a landlord for the assignment of the lease
Satisfy listing arrangements as required by the listing rules
in the UK, HMRC issuing a clearance, say, on a share acquisition in relation to roll-over relief from capital tax on a
securities exchange
the CMA, or the jurisdictional equivalent competition authority, notifying the buyer that the acquisition will not
be subject to a Phase 2 investigation
the provision or transfer of a regulatory licence for the particular industry, for example environmental licences
for regulated industrial processes
a substantial customer or landlord providing its consent to an assignment, or confirming that it will not exercise a
contractual right to terminate an agreement with the target company on the change in control of the target
company
the shareholders of a corporate buyer passing a resolution, for example for the issue of shares to the seller in
consideration for the target and, if required, making arrangements for such shares to be listed on a market.
In some of these situations, the parties will not want to make the required applications, so making the
proposed acquisition public knowledge, until both parties are contractually committed to the acquisition.
In other circumstances, the conditions may simply be those required to complete the agreed terms of the
purchase.
1
Conditional Contracts and Closing
Conditional contracts
Reasons for conditionality
Before completing an acquisition various approvals, consents and clearances may be required (problems holding
up deal), and ideally should be obtained before the sale and purchase agreement is signed. However, obtaining the
necessary consents and approvals can take some time, and the parties may prefer not to delay exchange of
contracts until all such matters have been resolved.
CHOICES
Total delay until condition fulfilled
Complete – who takes commercial risk of non-fulfilment (negotiate price reduction to compensate for
risk/cover with indemnities)
Walk away (incur transaction costs to date)
Enter into conditional contract – requires delay between signing and closing (exchanging and completion)
The sale and purchase agreement may, therefore, be made conditional on one or more matters
Thereby creating a DELAY between exchange and completion until condition fulfilled
This is an allocation of risk between B and S for the period between exchange and completion
Look at WHO CAUSED delay as this will affect the provisions in the conditional SPA (e.g. if purchaser caused
delay, seller will not want to repeat warranties/indemnities)
Main reasons and further examples
Need for shareholder approval – e.g. the issue of shares to the seller is the consideration for the target
Regulatory clearance – e.g. from the OFT or HMRC or some other regulatory body
3rd party consent – for release of security or the novation/assignment of important licences (e.g. IP or
environmental licenses) or from a landlord for the assignment of the lease
Satisfy listing arrangements as required by the listing rules
in the UK, HMRC issuing a clearance, say, on a share acquisition in relation to roll-over relief from capital tax on a
securities exchange
the CMA, or the jurisdictional equivalent competition authority, notifying the buyer that the acquisition will not
be subject to a Phase 2 investigation
the provision or transfer of a regulatory licence for the particular industry, for example environmental licences
for regulated industrial processes
a substantial customer or landlord providing its consent to an assignment, or confirming that it will not exercise a
contractual right to terminate an agreement with the target company on the change in control of the target
company
the shareholders of a corporate buyer passing a resolution, for example for the issue of shares to the seller in
consideration for the target and, if required, making arrangements for such shares to be listed on a market.
In some of these situations, the parties will not want to make the required applications, so making the
proposed acquisition public knowledge, until both parties are contractually committed to the acquisition.
In other circumstances, the conditions may simply be those required to complete the agreed terms of the
purchase.
1
