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What’s Involved in Closing a Business Deal?

What are some of the considerations that go into buying or selling a company? Professor Robert Miller discusses some of the issues that have to be routinely addressed in a business transaction. Corporate lawyers write contracts to properly assign risk to the various parties involved and to specify circumstances that would render the contract void. https://youtube.com/watch?v=XMeSOGfLJ-s


Imagine you're buying a house. When people buy a house, it's always, what we, corporate lawyers, would call, a two-step transaction. In step one, you enter into a contract to buy the house. But there's this time lag, between the time you enter into the contract to buy and sell the house, and the closing, when you pay the purchase price, and the seller gives you the house, or the deed to the house, and hands you the keys. One of the reasons, usually, is that the buyer wants to hire a home inspector to come check the home, the buyer may have to line up his financing to get a mortgage. It also might be certain transactional problems like arranging for movers to get furniture in and out, and so on. When you buy or sell a company, you often face a similar problem. When you sign up to buy a company, and the buyer agrees to buy, and the seller agrees to sell the company, almost always, if the transaction is of any significant size, you have the same problem of a delay between signing and closing. Why? If you're operating in a regulated industry, banking, for example, you may need to get the approval of some other regulator, before you're allowed to close your merger. And, if you have a public company, at least the selling shareholders have to have a shareholders meeting to vote on the transaction. And that can't be done instantaneously either. So there's usually a delay between signing and closing in any large business combination transaction. That produces all kinds of problems. Because between signing and closing, things can go wrong. Like what? Well, imagine you signed up to buy a company in January of 2020, and you expected the closing to occur later in 2020. And then, oh, I don't know, a worldwide pandemic breaks out. And that adversely affects the company you intended to buy. When something like that happens between signing and closing, is the acquirer still required to close the deal? Or is it allowed to walk away? That's a risk that all transactional lawyers worry about. The way we deal with that contractually is that, we say that the obligation of the acquirer to close the deal, that is to say to show up with the purchase price and pay it, is conditional. And it'll be conditioned on a set of expressed conditions set out in the merger agreement. Some of those conditions are easy to understand. There will always be a condition that says, "No court of competent jurisdiction will have entered an injunction restraining the closing of the deal." Obviously, if that happens, you can't expect the buyer to close. There will be other conditions that say, "If shareholder approval is required for this deal, the shareholders will have approved." We're not going to make the acquirer close, if the shareholders haven't actually approved the deal. The most interesting one, however, is the so-called no material adverse effect condition. There, the seller will say that it's a condition of the buyer's obligation to close, that there has occurred no material adverse effect. What we try to do in material adverse effect clauses is, we look at all the possible risks that could materialize, between signing and closing, that could adversely affect the value of the target, the company being sold. And we allocate them, some to one party, and some to another. So this is a good example of transaction engineering that transactional lawyers do. The whole game is to move every right to the party who values it most highly, every obligation to the party who can fulfill the obligation most cheaply, and every risk to the party who is the cheaper cost avoider or superior risk bearer of that risk. One of the most obvious examples is what we call deal risk, bad things that can happen between signing and closing. And, the way to handle it, as I say in the material adverse effect definition, is to carefully allocate each risk to the party who can best bear it.

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