Acquisition Agreements: a Closer Look at Seller Obligations Pending Closing, Buyer's Conditions of Closing, and the Closing
Although they may have differing names, most acquisition agreements will have provisions dealing with Seller Obligations Pending Closing, Buyer's Conditions of Closing, and the Closing.
Obligations of Seller Pending Closing. This provision sets out actions seller must take before closing. These can require seller to:
Operation of Assets. Run the business in its usual, regular, and ordinary manner and preserve its business organization.
Maintain Assets. At its expense, maintain the assets in customary repair, order, and condition, reasonable wear and use excepted, and not commit or permit any waste of the assets.
Compliance. Duly follow all governmental requirements.
Disposal of Assets. Not sell, mortgage, lease, or dispose of the assets except in the ordinary course of business.
Prohibition of Certain Contracts. Not enter into any contracts relating to the operation or ownership of the assets except in the ordinary course of business, nor amend, change, terminate, cancel, or allow to end any contract delivered nor enter into any employment contracts with any employees.
Maintenance of Insurance. Maintain insurance in such amounts as is customary in the ownership and operation of the assets, but not less than that carried by it.
Notice of Adverse Change. Give buyer written notice of any material adverse change in the assets or the business.
Prohibited Agreements. Not enter into any agreement or instrument or take any action which would encumber or bind buyer or the assets after the closing or which would be outside the normal scope of maintaining and operating the assets.
Prohibited Removals. Not remove any property unless it is replaced with an item of at least equal value and properly suited for the intended purpose.
Compliance with Agreement. Take any actions required to be taken by seller.
Inspection of Assets. Grant buyer the right to inspect its records and to consult with its officers, employees, attorneys, and agents to determine the accuracy of the representations and the compliance with covenants.
Preservation of Business Organization. Preserve its business organization intact; keep available to buyer seller's employees; and preserve the goodwill of seller's suppliers, customers, and others having business relations with it.
Absence of Contractual Obligations. Do not become obligated on any contract or commitment, incur any liability beyond the closing date, or make any capital expenditures.
Other Obligations of Seller Pending Closing. Perform all of its obligations under all agreements relating to seller's business and assets; notify buyer in writing of any claims; legal, administrative, or other proceedings, suits, investigations, or notices of violation against that could adversely affect seller; not increase the compensation to any employee; and not negotiate any proposal about any acquisition of seller.
Buyer's Conditions of Closing. Most agreements provide that all buyer's closing conditions must be satisfied before the buyer is required to close. These conditions usually require that:
Seller's Performance. The seller has followed the terms of the agreement.
Satisfaction of Terms. The representations, warranties, and covenants of seller are true and correct at the date of closing.
Permits. Buyer has obtained all necessary permits and approvals for the acquisition and operation of the business.
Audit and Subsequent Events Review. The Seller has provided updated financial statements.
Seller's Ownership interest holder Approval. The seller's ownership interest holders have approved the agreement.
Obtaining Funding. Buyer has obtained the loan proceeds in a designated amount, on such terms as agreed to by the parties, if the deal is contingent on financing.
Closing. The agreement will set out the date and location of the closing and what must happen at the closing. It will typically provide what documents will be exchanged, such as ownership certificates, deeds, bills of sale, assignments, certificates about representations and warranties, updated operating statements, originals of documents, certified copies of consents of the seller's governing persons and owners approving the transaction, and a certificate that the warranties and representations of the seller are valid as of the closing date and that all the terms, covenants and conditions have been followed and performed. Other documents may be required at closing, such as consulting agreements, a covenant not to compete, a certificate from seller that no material adverse change in the operations or financial condition has occurred, and seller has suffered no material loss or damage to the assets.
This informational memorandum is provided to provide items of interest in the business acquisition area. It is not intended to be an exhaustive treatment of its subject matter but an overview of some elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please call.