M&A Vocabulary – Understanding for Experts: “Signing & Closing”

The transaction phase of a company acquisition concludes after the drafting and negotiation of the company purchase agreement with its signing and the transfer of the company. Following Anglo-Saxon practice, the day the contract is signed is referred to as Signing. Through Signing, the parties to the purchase agreement commit to transferring ownership of the purchased asset. The day of completion, and thus the transfer of ownership of shares in the case of a share deal or assets in the case of an asset deal, is called Closing. Weeks, if not several months, can pass between Signing and Closing. The reason for this usual separation of dates is that completion is not yet desired or possible for practical reasons and/or due to the complexity of the transaction, and/or it is not yet legally permissible.

The interim phase between the signing of the contract and the transfer of the company typically serves to fulfill contractually agreed and/or legally necessary closing conditions (Conditions Precedent or Closing Conditions), e.g.:

• Provision of documents;
• Waiver of pre-emption rights;
• Granting of necessary approvals;
• Clearance of board reservations;
• Obtaining permits or licenses;
• Clarification of change-of-control situations, which may grant important contractual partners a right of termination upon a change of ownership;
• Management change;
• Antitrust clearances;
• Carve-out actions.

Further practical motivations for the interim period include securing the financing of the purchase price by the acquirer or implementing an orderly handover. In practice, this means establishing suitable structures (administration, IT infrastructure, accounting). As a rule, the transition is significantly facilitated if it occurs on the balance sheet date or at the end of a month.

In smaller transactions, Signing and Closing often coincide, as there is no need to fulfill closing conditions or facilitate the transition.

The interests of the seller and buyer typically conflict regarding the closing conditions. The seller’s interest is to keep the closing conditions minimal and narrow. The buyer, on the other hand, is interested in increasing their transaction security through comprehensive closing conditions; granting the buyer the right to waive the fulfillment of closing conditions is advisable.

For the phase between Signing and Closing, it is also common to agree on ancillary agreements (so-called covenants, which prohibit the seller from undertaking certain actions), rights of withdrawal, indemnification, and material adverse change clauses. The latter address the case where the economic situation of the company or, in some cases, the overall economic situation, may significantly and adversely change.

On the Closing Date, the agreed closing actions and closing deliveries are carried out. These include, among other things, the payment of the purchase price or proof of payment, the reappointment of committees and resignations from office, and the handover of other central documents. Upon fulfillment of all Closing Conditions and the execution of all Closing Actions, the legal and economic transfer of the company to the new owner takes place. With this, the company acquisition is legally concluded. The closing of the company acquisition is usually documented by a signed Closing Memorandum.

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