Classification: Deal Driver
Section: Conditions to Closing
Negotiation Time: Minimal to Moderate
Transaction Costs: Intermediate
Major Impact: Risk Management and Transaction Completion
Conditions to Obligations
What is This? This provision contains a comprehensive list of requirements that must be completed by the Buyer or waived by the Seller in order for the Seller to be obligated to complete the purchase. If the Buyer fails to fulfill any condition included in the list, the Seller can walk away from the deal without penalty.
The Middle Ground: The main difference between this provision and the Conditions to Obligations of Buyer is that there aren’t as many conditions to the Seller’s obligations since its paramount concern in most instances is whether the Buyer can pay the Closing payment. With that said, the typical list of requirements in this provision includes conditions to be completed at (or before) Closing such as:
The Buyer’s representations and warranties are true and correct in all (material) respects at the time of signing the Agreement and at the Closing;
The Buyer has complied with all terms of the Agreement and the Transaction Documents in all material respects;
No Governmental Authority has issued an order or injunction restraining the transaction;
The Buyer has obtained all third-party consents listed in its Disclosure Schedules, if applicable to the transaction;
The Buyer has delivered signed copies of the Transaction Documents;
The Buyer has transferred the Closing payment by wire transfer and the amount to be held in escrow to the Escrow Agent, if applicable;
The Seller has received a signed copy of the Buyer Closing Certificate;
The Seller has received a signed copy of the Buyer’s Secretary’s Certificate; and
The Buyer has provided other documents and instruments reasonably requested by the Seller and that are reasonably necessary to consummate the transaction.
Purpose: If the Buyer does not meet any one of the conditions listed in this provision, the transaction could fall apart instantly. This provision places the risk of that happening on the Buyer. It’s important to note here that the risk allocation scheme created by this provision and the previous one is not unfair to either side; both are afforded the opportunity to walk away if the other side does not meet its obligations, and the obligations each must meet are the product of negotiation and, typically, within the control of the party who must meet them.
Buyer Preference: The Buyer wants as few conditions listed here as possible, with those listed being wholly within its control, if possible. Furthermore, the Buyer will want materiality qualifiers included, particularly relating to conditions (1), (2), (3), and (4). However, this is another area where the requirements applicable to the Buyer will largely mirror those of the Seller, so the Buyer will have to decide what level of accuracy it is comfortable promising regarding its own deliverables. One condition for which it makes sense to have some divergence between Buyer is Seller is the “litigation out” listed in condition (3). With that condition, the Buyer is rightfully worried about any litigation whatsoever affecting the Seller’s Business since the Buyer will undoubtedly be impacted by that litigation. Depending on the Seller’s post-transaction plans and the nature of the litigation, it may or may not be concerned with a lawsuit brought against the Buyer. In regard to the third-party consent condition, it may not be necessary for the Buyer to obtain any such consents, but if it is the Buyer will want the condition limited to those consents which are material to the transaction.
Seller Preference: Here, the Seller is looking for equality. In the Seller’s mind, whatever standards are applied in the Conditions to Obligations of Buyer section should also be applied here. For example, the Seller will want the Buyer’s representations and warranties qualified by materiality only to the same extent that its own are subject to those qualifications. More specifically, it will want any representations or warranties already qualified by a general materiality standard or a Material Adverse Effect standard to not be qualified by any such standard in this section. Going even further, it will not want the Buyer’s representations regarding its organization and authority to conduct the transaction to be subject to any materiality qualifier whatsoever.
While the Seller’s overall goal in this section is parity between the conditions applicable to the Buyer and the conditions that it must meet, to retain its negotiating credibility the Seller only wants to insist upon parity when it makes sense in the context of the transaction. By the nature of the deal, not every condition that the Seller must fulfill will need to be fulfilled by the Buyer. So, the Seller’s best approach is to be aware of its interests, have an understanding of the conditions necessary to meet those interests, and fight for the conditions that matter while not wasting resources on those that don’t.
Differences in a Stock Sale Transaction Structure: None.
We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.