So next in our blog we move
forward to conditions precedent (or CP clauses as these are called). The
substance of these CP clauses consists of the items that need to be satisfied
before the deal is actually done and transaction completed. When these
conditions precedent are completed, then you can have a closing and finally
after all closing formalities, and of course champagne, title to the shares
passes from the seller to the purchaser. We will in our next blog talk about an
issue whether to have a simultaneous or separate signing and closing so we do
not go there yet, but save that fascinating topic for later date. The main
concern for the seller is in CP terms is that if these are too flexible, these
give to a buyer a way out of the deal or exit so to speak without incurring any
liability so one needs to be careful. But do you know what are the typical
conditions precedent that seller or buyer should require?
As to the seller I would say that
at the minimum there should be reference to approvals by the Competition
Authorities, or a waiver that merger clearance is not needed. This could be
expanded to cover other licenses and regulatory approvals, as well as
violations of laws, judicial orders or similar.
Regarding merger control I think
it is also worth explaining how this Finnish system works. So the applicable law
in Finland is the Competition Act (No. 948/2011) (the Competition Act), which
entered into force on 1 November 2011, which mainly harmonize the Competition
Act with EU rules. The meaning of the merger control is to protect the
effective competition in the Finnish market and control particularly such
concentrations which results in creation or strengthening of a dominant
position. The procedure in merger control matters is that the Finnish
Competition and Consumer Authority (FCCA) investigates a concentration in the
first stage and either clears it or submits a request to the Market Court to
prohibit it. Clearing of the concentration may be subject to conditions. This
is an area were we have lots of interesting clauses like “hell or high water”
or similar and perhaps I write on these separately at some point. The Market
Court shall investigate the case on the basis of FCCA’s request and it has also
an authority to review appeals made from FCCA’s decisions. The decisions made by
the Market Court can be further appealed to the Supreme Administrative Court.
FCCA’s investigation right depends on the turnover threshold set in the
Competition Act. Parties are obligated to make concentration notification if
the combined aggregate worldwide turnover of the parties exceeds €350 million
and the aggregate turnover in Finland of each of at least two of the parties
exceeds €20 million. Parties must file the notification prior to the
implementation of the concentration. Filing of the notification is made free of
charge but sanctions are possible if the transaction is closed before clearance
of concentration. The fine which can be up to 10 percent of the total turnover
of the relevant undertakings will be imposed by the Market Court on the basis
of FCCA’s request.
Another typical condition
precedent for the seller is that there shall have occurred no breach of the buyer’s undertakings. There could
be a discussion whether this breach should be material or not or whether this
breach is incapable of being remedied. Finally, financing for the
Purchaser and all corporate authorizations and resolutions to be secured and
reviewed before the signing of the Agreement could be one to be require as
well.
In case of the Buyer these
conditions precedent typically arise from due diligence investigation and these
might cover wide variety of situations so this list is not in any way
exhaustive. The same as mentioned above for the Seller apply here as well, but
in addition, there could be for example:
- Approvals from third parties are satisfactorily acquired which could include whatever approvals there are from the transfer of governmental licenses to change of control - approvals in material agreements;
- The representations and warranties of the Seller herein contained having been true and correct as of this date and continuously until the closing;
- The related agreements have been signed (e.g., transition services, distributions or delivery agreements or similar)
- There could be classical MAC –clause (so no “Material Adverse Change” having taken place between signing and closing, as naturally if there were material adverse change the buyer might want to walk away);
- Key employees could be required to sign new agreements, lock-in agreements or similar;
- The Company has not received, e.g., claims or terminations relating to most important agreements typically referred to as “Material Agreements”; and
- Many others depending on the situation.
In IP-intensive deals there is often a need to fulfill some loopholes like require assignments IP rights to the company retrospectively from the owners, employees or partners. I have a good example on the last one when we advised one venture capital investor in the Finnish game-sector company some time ago. There was a situation that most parts of the software engine that was running target company’s online game were coded by the founders of the company prior to the time the company was incorporated. Here we did not find a single document that would have granted the company any right to use such code not to mention a document in which copyright and all intellectual property rights should be assigned to the company. Gladly they were able to secure retrospective assignments as conditions precedents and the deal went forward. Finally, while these are conditions precedent, these are still something that the buyer should be allowed to waive these rights if they wish to proceed.
Hopefully this helps someone and I wish all of you very pleasant weekend!
Regards,
Limppu
