In M&A transactions, parties sometimes use the term “Closing” to mean a myriad of things.
However, there are practical differences between (i) simultaneously signing and closing the transaction contemplated by a purchase agreement (Type A) and (ii) signing the purchase agreement and closing the transaction at a later date (Type B).
The stock sale referred to in my last article recently closed. Closing was contingent upon (a) from Buyer’s perspective, obtaining third-party financing to fund the purchase price, and (b) from my client, Sellers’ perspective, obtaining the Landlord’s consent to the change of control, getting Sellers released from their “good guy” guarantees, and having Buyer serve as a replacement guarantor. Unfortunately, my client’s lease required, but didn’t guarantee that Landlord would grant its consent. In fact, the Lease provided that the Landlord had 30 days to consider any such request, and if denied, had the right to terminate the Lease.
What Are the Practical Differences?
Although parties sometimes use the word “Closing” interchangeably with the “Signing” of a purchase agreement, when third-party consents are required, as was the case in my recent deal, the actual “Closing” of the transaction takes on a different significance. There can be a lapse of days, weeks, or even months before the actual closing can occur. In these deals, “Closing” is synonymous with “Funding” or the flow of funds from Buyer to Seller, or in this case, from Buyer’s lender to Sellers.
Type A arrangements are typically used in simple transactions. This eliminates many provisions in the definitive purchase agreement, including how the business of the target company will be operated between signing and closing, as well as certain closing deliverables, such as “bring-down” certificates.
Type B arrangements are used in more complex transactions, where among other things, governmental or other third-party approvals are required. In these transactions, the closing conditions can be heavily negotiated, often resulting in higher/increased transaction costs and potentially increasing risk that the transaction never closes because one or more closing conditions are not satisfied or waived.
In the deal I just completed, I thought Buyer’s counsel understood these practical differences since the draft purchase agreement they prepared contemplated a bifurcated (2-step) sign and close. We dutifully negotiated the closing conditions, but before the purchase agreement was finalized, Buyer advised that its lender was ready to “close” and wanted to fund the transaction immediately.
Buyer’s inability/refusal to understand and respect the natural progression of the Type B structure it initially proposed, created quite a bit of tension between me and Buyer’s counsel.
Due to the compressed time frame, my client was put in an awkward position, and forced to submit its request for Landlord consent BEFORE the purchase agreement was signed. The parties anxiously waited for nearly 3 weeks while the Landlord considered the financial wherewithal of Buyer, requested payment of an additional security deposit, and payment of the Landlord’s legal fees. In an act of hopefulness, my client (still without a signed purchase agreement) went out on a limb and made the requested payments.
After much cajoling and follow-up, the Landlord’s consent was eventually granted, the signature pages on all transaction documents were exchanged, Buyer’s lender funded the purchase price, and the transaction was deemed closed when the purchase price was received by Sellers.
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