Common conditions: M&A practice

After discussing best practice principles on drafting conditions, I feel it may be helpful to give a few examples. In this blog post, conditions commonly found in share purchase agreements (SPA’s), asset purchase agreements (APA, if you like) will be tagged. In a subsequent blog I will give some insight in the somewhat more expansive US-practice.

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 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 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 organizational documents. Entities will often be re­quired to deliver copies of their certificates of incorporation, by-laws or other organizational documents, certified as accurate by an official in the jurisdiction of organization or by an officer of the entity.

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