418 12 Acquisition of Shares in a Privately-owned Company for Cash
Typical conditions precedent to closing. Conditions precedent are used because it
is always better to walk away from a terrible contract before it is too late than be
sorry afterwards. The conditions precedent are fairly similar in different kinds of
business acquisition contracts. Conditions precedent typically address things that
can make the transaction commercially meaningless or unattractive to the ac-
quirer:
- The absence of material adverse change (MAC) is a catch-all provision that
also deals with the risk that the target has changed between signing and closing.
The definition of MAC is typically heavily negotiated (see below).^39 - In individually negotiated contracts, the representations and warranties are re-
quired to be valid both at the time of signing and at the time of closing.^40 Fur-
thermore, all the pre-closing covenants must have been performed or fulfilled
prior to the closing. - The availability of funding is a core condition in individually negotiated trans-
actions. - The acquirer will want to obtain control over the shares or assets. In share
deals, the acquirer will often require a mimimum share block that confers par-
ticular majority rights such as the right to amend articles of association or
squeeze-out rights. - The acquirer will also require the receipt of all necessary government approvals
and third party consents.
Conditions precedent normally contain even the following conditions:
- receipt of legal opinions and other closing documents; and
- satisfactory completion of the prospective acquirer’s due diligence of the tar-
get’s business.
The acquirer should always prefer an option to finalise the transaction even when
conditions precedent have not been fulfilled.
(^39) See, for example, Goldberg L, Acquisition Agreements from a Business Perspective
(Principal Focus: Private Company Acquisition for Cash). In: PLI, Doing Deals 2008:
Understanding the Nuts & Bolts of Transactional Practice, Corporate Law and Practice
Course Handbook Series. New York City (2008) pp 216–218.
(^40) Phillips J, Runnicles J, Schwartz J, Navigating trans-atlantic deals: warranties, disclo-
sure and material adverse change, JFRC 15(4) (2007) pp 479–480: “In the USA, the
practice is invariably to require warranties and representations to be repeated as at clos-
ing, and usually the accuracy of warranties/representations at closing is a condition to
closing. In the UK, while it is not uncommon for warranties to be repeated at closing,
sellers will seek to resist that principle and at worst argue for repetition of only those
warranties over which they have direct control. In addition, in the UK, it remains un-
usual for the accuracy of all warranties at closing to be a pre-condition of closing. In
some UK deals, the buyer may have the right to terminate as a result of a material
breach of the warranties given at signing and, in some cases, as repeated at closing.”