Conditions Precedent

Conditions precedent are conditions that must be fulfilled before a deal can be completed. These include, for example, regulatory approvals or approval by corporate bodies. Closing can take place once all required conditions are satisfied or any waivable contractual conditions have been validly waived.

A distinction is drawn between statutory and agreed conditions. Depending on the transaction, statutory standstill obligations may arise from merger control or foreign investment review. The necessary clearance or relevant end of the review process must then be awaited. Contractually agreed conditions regularly include consent of key customers or suppliers under change of control clauses, resolutions of the shareholders' meeting or supervisory board, release of existing security, completion of financing, the departure of specified individuals and the absence of a material adverse change. The catalogue is a negotiation with a clear direction: every additional condition shifts completion risk to the seller, who therefore presses for the shortest possible list and in auctions typically refuses financing conditions altogether. Conversely the parties agree efforts obligations defining how far a party must go to obtain clearance, up to a commitment to accept remedies imposed by the competition authority unconditionally.

The catalogue is complemented by a long stop date, after which contractual termination rights may become available, and by interim covenants requiring the seller to run the business in the ordinary course. In practice it matters who must satisfy which condition and what applies if a party delays. Express cooperation duties, deadlines for filings and reporting obligations on the status of proceedings are therefore customary. The handling of a conditional clearance also needs settling, because a commitment to divest a business unit can change the economic basis of the transaction, which is why the buyer often negotiates a materiality threshold for remedies it must accept.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.