Signing and Closing in Mergers and Acquisitions (M&A)Comments Off on Signing and Closing in Mergers and Acquisitions (M&A)
Negotiations of business acquisitions are often complicated and drawn out. After successful contract negotiations, the parties are usually keen to complete the business purchase quickly. However, due to the complexity of such transactions, it is common practice that the actual economic transition takes place with a significant delay after the date of the signing of the contract. We outline the terminology surrounding business takeovers and the concept of “signing” and “closing” below.
The difference between signing and closing in case of the sale of a company
The conclusion of a contract and the transfer of ownership may occur nearly simultaneously in some cases, for example, when a new television is purchased. However, every business person is familiar with the legal separation of agreement and transfer in other cases, such as property transactions or the purchase of a vehicle, where the completion of a transaction requires official registration. Also, company shares cannot generally be sold immediately, as the transfer of shares requires a registration at the company registry.
Hence, there are two critical dates in the actual process of selling a company: the dates of signing and closing. The date of the conclusion of the contract (signing) is the date on which the written agreement is signed. The choice of the signing date is at the discretion of the parties. Usually, the parties jointly set a date (for example, January 1) on which the business is then transferred. It is only on this date that the transaction is completed (closing), and the company ownership is transferred to the purchaser. While the purchaser is only entitled to receive ownership with the date of signing but has no rights to the ownership itself, he is the actual legal owner from the date of closing the transaction.
The discrepancy between signing and closing allows the parties to fulfill the closing conditions, complete technical processing, meet accounting requirements or obtain official approvals. Furthermore, it is easier for accounting-related reasons to execute the transaction at the balance sheet date or the end of the month. This usually reduces the accounting effort considerably.
The period between signing and closing is a transition phase that should be kept as short as possible. Although the previous owner is usually still the decision-maker, the seller should work closely with the purchaser and communicate with him as much as possible concerning the business operations. In particular, decisions with implications for the future should be coordinated jointly in the interests of a smooth transition.
Closing the transaction
When the closing date agreed in the purchase agreement is reached, ownership is transferred to the purchaser under the agreed conditions. Usually, several measures are necessary for the purchase agreement’s consummation, explaining the frequently longer duration between signing and closing. While many steps are taken before closing, the completion of the delivery of assets or transfer of the company shares takes place only on the closing date.
Further measures up to and at closing may include:
- Necessary registrations with the commercial register (for example, transfer of shares, directorship, company name)
- Obtaining the consent of third parties (other shareholders, spouses, contractual partners in the case of an agreed change-of-control clause)
- Obtaining official approvals (for example, building control law, antitrust authorities)
The essential element for the seller is, of course, the payment of the purchase price, which should be stipulated in the purchase agreement as a condition of completion. Especially in the case of credit-financed company purchases, the bank pays the seller directly and requires the signed company purchase agreement in advance.
In addition to the closing conditions, a company purchase agreement contains more or less extensive rescission rights for the period between signing and closing. On the purchaser side, in the case of an asset deal, a link is often desired to notice periods under labour law, that in the event of an objection by a key employee, the purchaser can withdraw from the contract. In general, a so-called MAC clause (Material Adverse Change) is also advantageous for the purchaser, which entitles him to rescind the contract in the event of significant adverse effects on business operations (for example, a drop in sales or the loss of a key customer). To control management during the transition phase, purchasers usually demand extensive control options and specify a framework catalogue of permitted transactions.
While signing determines the conclusion of the contract, closing refers to the actual act of delivering the business as a contractual object. In between, the so-called closing requirements are created, and closing obstacles are cleared so that the company’s ownership can be transferred. A time gap can rarely be avoided in this process and can last from a few days to several months in complex cases. During this time, the former owner is still wholly autonomous but is usually intensively supervised by the purchaser. He is also in a duty of care towards the purchaser, who is entitled to rescind the contract in certain cases, given the appropriate contractual provisions.
Due to this state of limbo and the many potential conflict points, the time interval between signing and closing should always be as short as possible. The seller should insist on a down payment at signing; if the purchaser refuses to complete the transaction (fails to pay the purchase price), the seller is entitled to rescind the contract and to retain the down payment as a penalty. Furthermore, rights of rescission and covenants should be agreed to the lowest possible extent. The seller should exercise particular caution in managing the business, documenting relevant business transactions, and coordinating them with the purchaser. In this way, security for the seller is sufficiently guaranteed even in the critical phase of the transition, and nothing stands in the way of the successful sale of the business.
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