Key considerations for split signing and closing in a Share or Asset Acquisition

This article, the third in our series of articles regarding acquisition agreements, considers provisions that buyers and sellers might include in an acquisition agreement to safeguard their interests during the interim period, including conditions precedent to completion (CPs), buyer control over the business, repeating warranties, and the potential for a second round of disclosures.

Please see our guides on the share and asset acquisitions/disposals stages here and here.

CPs: these conditions can include regulatory approvals, the absence of material adverse changes, financing approval and third-party consents. The parties should progress the CPs as much as possible before signing to reduce the possibility of the deal not completing.

1. Buyers should consider a walk-away right if CPs are not satisfied, along with any remedies.
2. Sellers should carefully evaluate CPs to anticipate their impact on timing, and include drafting such that the deal completes as soon as possible after the final CP is completed.

Funding: sometimes a buyer will use finance (equity, debt or a hybrid) to fund their purchase. This presents risks for both parties as a failure to secure finance or comply with a lender’s requirements during the interim period may delay completion.

1. Buyers should ensure that the sellers are on board to assist with any lender requirements in a timely fashion, and that there are no risks to them of financing not being obtained (e.g. no cost recovery by the sellers).
2. Sellers should push for finance to be finalised as soon as possible, before completion and other CPs. Failing that, the buyer should be required to provide proof that such financing is likely to be granted or evidence that it otherwise has the funds to satisfy the purchase price. Ideally, a Seller would want comfort knowing that finance is in place before signing/exchanging and the start of the interim period.

Material adverse change (MAC) clause: MAC clauses allow a buyer to terminate the agreement if there is a significant adverse change in the target company’s business, financial condition, or prospects before completion. This could include events such as a significant decline in revenue, loss of key contracts, or adverse regulatory developments.

1. Buyers should aim to define the scope broadly to encompass any adverse event that could reasonably affect the target company’s business, financial condition, or prospects.
2. Sellers should carefully define criteria, negotiate specific carve-outs to exclude known risks or changes within the parties’ control, and balance the buyer’s protection with provisions for the seller to remedy adverse changes, aiming to limit termination due to genuine, unforeseen circumstances significantly impacting the transaction’s value or viability.

Interim Period Covenants: interim period covenants are obligations on or promises by a seller to conduct the business in the ordinary course and restrict certain activities (such as entering into significant new contracts, acquiring or disposing of material assets, hiring or terminating key employees or making major capital expenditures without the buyer’s consent).

1. Buyers should ensure that the restrictions imposed on the seller’s actions during the interim period are necessary to protect the buyer’s interests without unduly hindering the seller’s ability to operate the business effectively.
2. Sellers should carefully evaluate the restrictions placed on their ability to conduct business during the interim period to ensure that they are able to maintain operational flexibility while fulfilling their obligations to protect the buyer’s interests.

Repeating Warranties: warranties given at signing will typically be repeated every day during the interim period and/or at closing. This requirement ensures that the warranties remain true throughout the interim period and at the point of completion (or are just repeated at the point of completion), protecting the buyer against changes that may occur post-signing.

1. Buyers should ensure that the warranties are sufficiently broad to cover the entire interim period and are backed by adequate disclosure mechanisms to address any changes or developments that may arise during that time and that they would wish to have knowledge of.
2. Sellers should carefully assess the ongoing obligation to warrant the accuracy of information provided, ensuring they have adequate processes in place to monitor and disclose any material changes or developments throughout the interim period, ideally via a second disclosure letter. A second disclosure letter would allow the seller to disclose any material changes or breaches of warranty that occurred after signing.

Comment
The period between signing and closing is an important period in any share or asset acquisition. Buyers and sellers should carefully negotiate the terms that apply to this period to protect their interests.

Contact our Corporate & Commercial team if you need advice concerning an M&A deal, we can help.