M&A Vocabulary – Explained by the experts: Conditions Precedent

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 a basic understanding or refresher of a term and some useful tips from our consultancy practice.

In the case of company acquisitions, the agreement (signing) and execution (closing) of a contract typically occur at separate times. The execution of the contract is subject to preconditions, i.e. it is only when these are met that the contract can be executed. Any preconditions that may delay completion are referred to as "Conditions Precedent". They delay the desired legal impact from taking effect until one or more future events have occurred. These future events are specified in detail by the contracting parties and included in the contract. Conditions Precedent are significant in the transactional practice.

On the closing date, the parties will check and confirm that all conditions precedent have been met in full. Usually, this is recorded in a closing memorandum. In practice, the following conditions are common: 

• Submission of proof of all the required internal decisions (such as a shareholders’ resolution)
• Submission of all the necessary approvals (such as official permits, like antitrust approval or private acceptances by e.g. lessors, customers)
• Submission of all the necessary approvals from banks
• Proof of the fulfilment of the purchase conditions, e.g., agreeing and executing a settlement with a departing manager.

The buyer should make sure that no relevant assets are removed from the target between signing and closing. If the operations of the company are to be continued, it must be ensured that all required permits and approvals are present. In foreign countries, special attention must be paid to investment law requirements.

The seller should also ensure that the required purchase price can be paid on time and in full. For example, this may entail the buyer providing a bank guarantee for the transaction.

A distinction needs to be made between this and other closing actions or closing deliveries, where the parties agree to carry out further actions or provide other documents. These are not preconditions for the performance of the contract, but rather are further obligations on the parties, which may require expansion.