M&A Vocabulary - Experts explain: Long Stop Date

published on 19 October 2021 | reading time approx. 3 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

As a rule, time is a crucial factor when you think of transactions – markets can change, transactions may attract the attention of competitors who may then try to prevent them from taking place or to get involved in them, employees or partnering companies, such as suppliers or customers, may reconsider their business relations or business conditions.

In this sense, transaction processes – particularly in the case of tenders – are subject to a tight time schedule providing deadlines for all significant stages of the process, such as due diligence, submission of a binding bid, negotiation of transaction documents, signing and closing.

Such usually really tight scheduling is reflected in contractual documents which set a clear framework for the fulfillment of conditions precedent/closing conditions and the course of the closing procedure. They usually include a provision on the long stop date: This date marks the latest moment by which the respective party has to fulfil all of its obligations or by which other third-party services or statements have to be delivered. They may include both the conditions for closing, e.g. submission of the consent of a bank or a contracting party to the transaction (if the contracts include change of control clauses) and the measures required for the  transfer of shares to be legally effective (e.g. entry in the commercial register or antitrust approval). Should this not be fulfilled by the agreed deadline, the contract includes provisions relating to the termination of the agreement.

The reason for agreeing on a long stop date is that – due to the above described external circumstances which may affect the results of the transaction expected by the parties – it may be unreasonable after a certain date for either party to be still bound by the terms of the contracts. Particularly in the case where requirements to be met by a third party cannot be fulfilled, concluding a termination agreement would be the only option for the parties to free themselves from the contractual obligations under the transaction documentation.

When agreeing on the long stop date it should be considered that, given all the scheduling pressure, there has to be enough time left to be reasonably able to meet the respective requirements, if, however, due to the termination of the contractual arrangements, the seller is forced to find another buyer for the target company and to go through the entire selling process again (unless this is a bidding procedure and the seller manages to have  the initial “underdog” bidders stay put). For the buyer this means that he cannot allocate the incurred costs to a successfully acquired project.

Especially in the case of externally financed projects it should be ensured that the timeframes and conditions of the individual contracts are closely coordinated to avoid situations in which – due to the premature expiry of a long stop date in the agreements concluded with the bank – the financing of a project for which the long stop date has not  yet expired will no longer be granted.

These issues need to be considered when deciding on whether the contracts should terminate automatically, i.e. where the long stop date is meant to be a condition subsequent, or whether only the respective non-defaulting party (in the case of factors to be met externally – both parties) will be granted the right to terminate the contractual relationship by a unilateral declaration. Particularly the last structure offers, in our opinion, greater decision-making freedom (especially with respect to unforeseeable events, such as the coronavirus pandemic which led to a considerable extension of deadlines) and thus should have preference over an automatism as a general rule.