Closing Conditions
In private equity transactions, the most important thing that needs to happen before a closing occurs is the buyer needs to raise the financing needed to pay the seller the cash portion of the purchase price. Sometimes this is stated as an express condition, meaning that if financing cannot be obtained, the private equity firm will not be in breach of the agreement. If it is not an express condition, then the private equity firm will be in breach of contract if the financing cannot be raised. But because the private equity firm generally forms a special purpose entity for the sole purpose of completing the acquisition, there isn’t a company against which seller can assert a claim. For this reason, even where financing is not stated as an express condition, as a practical matter there is a financing condition in most private equity transactions.
Smart sellers sometimes require that a buyer provide firm financing commitments from equity and debt sources before a binding purchase agreement is signed. Alternately, sellers may demand that the buyer place cash in escrow that becomes forfeit in case financing is not raised by a stipulated date.
Buyer’s obligation to complete the purchase of the business is subject to the fulfillment of a number of standard conditions. These conditions may include further due diligence in case certain matters are left for review after the contract is signed. The more conditions loaded into the contract, the less the contract is a firmly binding agreement. Some contracts can have so many conditions and due diligence requirements that they amount to no more than an option to purchase the company.
The standard closing conditions are as follows:
Continued Truth of Warranties. The representations and warranties of seller in the purchase agreement must continue to be true and correct in all material respects. In essence, seller must reiterate the representations at the time of the closing.
Performance of Covenants. Seller must perform in all material respects all covenants and obligations and comply with all conditions required by the purchase agreement to be performed or complied with prior to the closing date.
Material Adverse Effect. No event, occurrence or circumstance shall have happened that has had or could reasonably be expected to have a material adverse effect on the business or prospects of the business. This section gives buyer one last chance to cancel the transaction if something material and unexpected happens to the seller between signing the purchase agreement and the closing.
Permits and Consents. Seller must obtain all of the consents, approvals and clearances that it’s required to get before the closing, such as third party consents under contracts that require such consents in order to be assigned.
No Litigation. There must not be any litigation or proceeding pending or threatened to restrain or invalidate the sale and purchase of the business. Such proceedings might include a governmental antitrust action or securities law matter.
Authorization. All corporate action necessary to authorize the execution, delivery and performance by seller of the purchase agreement, and the consummation of the transactions contemplated thereby, must have been duly and validly taken by seller. This is generally performed even before the agreement is signed, although sometimes shareholder approvals are not obtained until after the agreement is signed.
