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M&A Vocabulary – Understanding the experts: “Conditions Precedent”
In this ongoing series, various M&A experts from RÖDL's global offices introduce a key term from English transactional terminology, accompanied by notes on its usage. The goal is not scientific-legal precision, linguistic subtleties, or an exhaustive presentation, but rather to convey or refresh the basic understanding of a term and provide some useful tips from consulting practice.
In acquisitions, signing and completion (closing) of the agreement typically do not take place at the same time. Completion of the agreement is subject to conditions precedent; only once these are fulfilled does closing occur. These conditions precedent postpone the intended legal effects from taking effect until one or more future events occur. The future events are specified by the contracting parties and included in the agreement. In transaction practice, conditions precedent play a key role.
On the closing day, the parties review and confirm that all conditions precedent have been fulfilled; this is usually documented in a so-called closing memorandum.
In practice, the following conditions are common:
- Submission of all necessary internal resolutions (e.g., a shareholders’ resolution)
- Submission of all necessary approvals (e.g., regulatory approvals such as antitrust clearance, or private approvals such as from landlords, customers, etc.)
- Submission of all necessary bank consents
- Evidence that deal-specific conditions have been fulfilled, such as the conclusion and performance of a settlement agreement with a departing manager
The buyer should ensure that no material assets are removed from the target between signing and closing. If the business is to be continued, it must be ensured that all required approvals are in place. In cross-border transactions, particular attention should be paid to foreign investment law requirements.
The seller should also ensure that the agreed purchase price can be paid on time and in full. For this purpose, the seller may, for example, require the buyer to provide evidence of transaction security through a bank.
This should be distinguished from so-called closing actions or closing deliveries, in which the parties agree to take further steps or provide documents. These do not prevent closing; rather, they are treated as other obligations of the parties.
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