M&A Vocabulary – Understanding Experts: “Long Stop Date”

Transactions are typically time-critical – markets can change, competitors may become aware of the transaction activity and attempt to obstruct it or force their way in, employees or partner companies such as suppliers and customers may reconsider their business relationships or terms.

As such, transaction processes – particularly in bidding procedures – are subject to a strict timeline in which firm deadlines are set for the key phases such as due diligence, submission of a binding offer, negotiation of transaction documentation, signing, and closing.

This typically tight scheduling is reflected in the contractual documents, which establish a clear framework for the fulfillment of conditions precedent/closing conditions and the completion of the closing procedure. This usually includes a provision for the Long Stop Date: This date marks the latest point by which each party must have fulfilled all obligations incumbent upon it, or by which other services or declarations to be provided by third parties must be available. These may include both the conditions for completing the closing, such as submission of consent from a bank or contractual partner to the transaction (in the case of change of control clauses in the contracts), as well as the steps required for the legally effective transfer of shares (e.g., registration in the commercial register or antitrust clearance). Should this not be the case by the agreed date, the contract contains provisions for termination of the agreement.

The reason for agreeing on a Long Stop Date is that, due to the external circumstances mentioned above that can influence the effects of the transaction expected by the parties, it may become unreasonable for one or the other party to remain bound by the contracts beyond a certain point in time. Particularly in the case of impossibility of prerequisites to be fulfilled by a third party, the conclusion of a termination agreement would otherwise be the only way for the parties to release themselves from the contractual obligations of the transaction documentation.

When agreeing on the date for the Long Stop Date, it should be considered that, despite all time pressure, sufficient time remains to realistically enable the fulfillment of all respective prerequisites, as a dissolution of the contractual agreements creates the need for the seller to find another buyer for the target company and go through the entire sales process again (unless it is a bidding procedure and the seller succeeded in keeping the initially “unsuccessful” interested party in a waiting position). For the buyer, this means being unable to combine the costs advanced with a successfully acquired project.

Particularly in externally financed projects, care must be taken to ensure that the timeframes and conditions of the individual contractual arrangements are closely coordinated to avoid the unwelcome situation where, due to the premature expiration of a Long Stop Date in the agreements concluded with the bank, the financing for the project, for which the Long Stop Date has not yet been reached, lapses.

These points must also be considered when deciding whether termination should occur automatically, meaning that the Long Stop Date is designed as the occurrence of a condition subsequent, or whether only the respective non-defaulting party (or possibly both parties in the case of externally fulfilled factors) is granted a right to terminate the contractual relationship by unilateral declaration. In our view, the latter approach offers greater decision-making flexibility (particularly in the case of unforeseen events such as the COVID-19 pandemic, which led to a significant extension of deadlines) and is therefore generally preferable to an automatic mechanism.

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