M&A Vocabulary – Explained by the experts: Signing and Closing

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner each present an important term from the English specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give a basic understanding or refresher of a term and some useful tips from our consultancy practice.

The transaction phase of the acquisition of a company ends after the drafting and negotiation of the purchase agreement, with its signing and the transfer of the company. In accordance with Anglo-Saxon legal practice, the date of undersigning of the agreement is referred to as the signing. By signing a purchase agreement, the parties undertake to transfer the ownership of the object of purchase. The date of execution and thus the actual transfer of ownership of shares in the case of a share deal or of assets in the case of an asset deal is referred to as closing. Several weeks, or even months, may pass between signing and closing. Practical reasons and/or the complexity of the transaction (e.g. the transaction is not yet wanted, possible or legally permitted) are the reasons for this common divergence in timing.

The interim phase between signing and closing allows the fulfilment of contractually agreed and/or legally required terms of execution (conditions precedent or closing conditions) e.g.:

providing documents;
waiver of pre-emptive rights;
obtaining required approvals;
lifting reservations by control bodies;
obtaining permits or licenses
clarifying change-of-control circumstances which may give important contractual partners a right of contract termination in the event of a change in ownership;
replacing management;
antitrust approvals;
carve-out measures.

Other practical reasons for the transitional period include obtaining financing for the purchase price by the purchaser or the implementation of an orderly transfer. In practice, this means establishing suitable structures (administration, IT infrastructure, bookkeeping). As a rule, the transition is significantly easier if it takes place at the end of a financial year, or at a month end.

For minor transactions, signing and closing often occur together, since neither the fulfilment of closing conditions nor simplification of the transition are necessary.

The interests of sellers and buyers are typically opposed when it comes to the closing conditions. The seller’s interest is to keep the closing prerequisites minor and brief. On the other hand, the buyer is interested in increasing the security of the transaction from his perspective by increasing the closing preconditions; allowing the buyer the right to waive the closing conditions is advisable.

For the phase between signing and closing it continues to be common practice to reach additional agreements (covenants that prohibit the seller from carrying out certain actions), rights of withdrawal, compensation and material adverse change clauses. The latter refer to the case that the company’s economic situation, or in some cases, the overall economic situation changes significantly to its detriment.

On the date of closing the agreed closing actions and closing deliveries are performed. These include, among other things, the payment of the purchase price and/or provision of proof of payment, appointing new members of boards and other such bodies, resignation of officers and the transfer of further central documents. With the fulfilment of all closing conditions and taking all closing actions, the company’s legal and economic transfer to the new owner is effectively complete. This concludes the acquisition from a legal perspective. The closing of the transaction is usually documented by a closing memorandum.