Depending on the nature of the contract, different types of conditions are called for. M&A transactions require different conditions than loan facility agreements. In the ordinary course of business contracts, conditions are rarely found, except that individual contract clauses may well be ‘conditional’. A party with strong bargaining power may require the satisfaction of many conditions before becoming obliged to perform itself.
M&A transactions. Some typical conditions for large M&A-transactions are:
- Internal approvals. Large companies have typically established internal contract approval policies: before a transaction may be consummated, an internal body must have approved it.
- Competition clearance. Transactions of a certain size often trigger a regulatory requirement to obtain clearance by national or European competition authorities.
- Other regulatory approvals. If the transaction contemplated by the agreement requires a governmental approval, neither party will want to be obligated to close unless the approval is obtained.
- Third party consents. Similarly, both parties will want all material consents from third parties to be in hand before closing.
- No breach or MAC. Performance is not required if the business has been affected by a truly major event (a MAC, material adverse change or, in other words, a material adverse event). Such material adverse change would be negotiated to be something coming from outside the business with a very large impact (measured against the value of the business) on the acquired business. A stronger purchaser might be able to negotiate that performance is not required if the other party has breached its covenants or representations.
- Bringdown of warranties. Warranties first made at signing may be required to be repeated (‘brought down’) at closing. This is often an implicit effect of the warranty provision, but sometimes a seller is required to submit a written statement expressly confirming that the warranties are still ‘valid’.
- Legal opinions. These are letters from counsel to one party addressed to the other party, stating legal conclusions relevant to the transaction.
Certified organisational documents. Entities will often be required to deliver copies of their certificates of incorporation, by-laws or other organisational documents, certified as accurate by an official in the jurisdiction of the organisation or by an officer of the entity.
U.S. particularities. In the U.S., certain closing conditions are very standard, which are highly unlikely to appear in EU-sourced agreements. For example, agreements to which a company or other legal entity is a party may require the following closing documents (in the U.S., such documents are often referred to as “certificates”):
- The certificates of incorporation, certified by the secretary of state
of the jurisdiction where the company or legal entity is incorporated.
- The company’s by-laws, certified as accurate by the corporate secretary.
- A statement of good standing issued by the secretary of state of the (U.S.) state of incorporation and certificates from other (U.S.) states indicating that the company or legal entity is entitled to do business in those states.
- A board resolution of the acquired company or legal entity’s board of directors authorising the transaction, certified by the corporate secretary.
- A statement of the corporate secretary certifying the signatures and incumbency of the officers who are signing the transaction documents.
Whereas a European lawyer (of the purchaser) will ascertain that the local equivalents of the above items are in order; a purchaser’s interest in such documents is normally limited, given the scope of the First E.C. Company Directive on the representation of companies. Nevertheless, any complications that might arise are best identified early. In particular, conditions that require a lengthy process to be completed or the consent of a third party are two potential closing condition pitfalls. For instance, if a condition requires the delivery to the other party of a satisfactory environmental report, a transaction lawyer should initiate the preparation of the report as soon as possible following signing of the transaction.
Closing certificates. It would appear, especially in U.S. originating M&A agreements, that closing conditions often require the delivery of a certificate executed by the seller of shares or a complete business, stating that all the warranties made by the party are correct. Such a certificate adds nothing to what is already reflected in the agreement. The rationale behind this practice is that requiring an individual to sign a formal-looking document induces a normal person to double-check the correctness of the warranties (or other certified matters). This is different in revolving credit facilities, which invariably require that the borrower, at the end of a term of loans drawn under the facility, delivers a certificate confirming that certain warranties are (still) correct and that the borrower is in full compliance with certain financial covenants.
The title ‘certificate’ is more commonly used in U.S. legal practice than it is in a European context. A ‘certificate’ is in fact nothing more a simple document signed by an individual, in which statements of fact are made.
Legal opinions. The requirement for legal opinions at a transaction’s closing deserves special mention. A legal opinion is a written statement of legal consequences of the agreement, delivered by one party’s lawyer to the other party. Especially in financing transactions, legal opinions are common practice.
Most law firms have a review process before legal opinions bearing the firm’s name may be delivered. If the parties agree that certain legal opinions be provided, the lawyers involved will focus on the scope of the opinion and the necessary legal conclusion that must be reached. Accordingly, a condition requiring the delivery of an opinion “in form and substance satisfactory” to the other party may be incapable of being fulfilled. Therefore, it is recommended to agree on the scope and conclusions of the opinion in advance and attach them as an exhibit.