Unit 5 - Conditional Contracts and Completion Flashcards
What are the buyer’s choices if there’s a delay or issue with the transaction?
Total delay until condition fulfilled Complete – who takes commercial risk of non-fulfilment (negotiate price reduction to compensate for risk/cover with indemnities) Walk away (incur transaction costs to date) Enter into conditional contract – requires delay between signing and closing (exchanging and completion)
What are the main reasons for conditionality?
Need for shareholder approval – e.g. the issue of shares to the seller is the consideration for the target
Regulatory clearance – e.g. from the OFT or HMRC or some other regulatory body
3rd party consent – for release of security or the novation/assignment of important licences (e.g. IP or environmental licenses) or from a landlord for the assignment of the lease
Satisfy listing arrangements as required by the listing rules
What are the things that both parties need to agree on terms?
satisfaction of the conditions
how and when completion will finally take place
how the target business will be conducted during the period between signing the sale and purchase agreement and completing the acquisition.
What should the SPA state to show risk allocation if the SPA is conditional?
each party’s obligations in respect of each condition
the date by which each condition must be met
any right to terminate the agreement prior to completion
what would the buyer usually seek in the SPA conditional contract?
Contractual right to withdraw from the purchase if major issues occur before completion.
what are conditions precedent?
these are conditions that needs to be fulfilled by the parties before they can proceed with the agreement.
what provisions are normally found in CPs?
Obligation for one party to take all the reasonable steps to get the satisfaction of the condition
long-stop date which the conditions would need to be satisfied
conditions are satisfied before the long stop date, this means that the completion would only take place within a certain period.
what does best endeavours in the SPA mean?
you’ll do everything you can
Why is best endeavours significant in the SPA?
If they don’t go to the extent that was expected, they can be sued for the breach of contract.
Best Endeavours means you’re protecting your position with all you got.
It’s a high standard.
what does reasonable endeavours mean in the SPA?
You are taking one course of action.
Why is best endeavours significant in the SPA?
f they don’t go to the extent that was expected, they can be sued for the breach of contract.
Reasonable endeavours means that you are weighing up the costs and the commercially of your action to fulfil the main objective –> less standard or lower standard.
What are management restrcitions?
It’s when the buyer s contractually allowed to go with the acquisition after exchanging the SPA (signing) but they don’t have the control over the target business yet until completion (closing) occurs.
why do the buyer would want to impose on management restrictions?
They are at risk because the seller may not want to operate the business as much as they used to.
What does the buyer need to do to impose management restrictions against the seller?
Obtain an undertaking from the seller that they will run the business between the signing of the SPA and completion.
May also obtain an undertaking by prohibiting the seller from lending or borrowing money, settle any claims or dispute, buy or agree to get any property, enter into any agreement or change the terms of employment.
why would the buyer want warranties and representations in the SPA to be repeated at the date of completion?
To Protect the buyer against any matters that may come between signing the Agreement and Closing.
