Conditions to closing: Overview, definition, and example
What are conditions to closing?
Conditions to closing refer to the specific requirements or obligations that must be fulfilled by one or both parties before a transaction, such as a merger, acquisition, or sale, can be finalized. These conditions ensure that all necessary legal, financial, and operational steps are completed before the deal is closed.
For example, in a business acquisition, conditions to closing might include obtaining regulatory approvals, completing due diligence, or securing financing.
Why are conditions to closing important?
Conditions to closing are important because they provide a clear roadmap for completing a transaction. They ensure that all parties meet their obligations and that risks are minimized before finalizing the deal.
For buyers, these conditions help verify the accuracy of the seller’s representations, protect against potential liabilities, and ensure the business is ready for transfer. For sellers, conditions to closing confirm the buyer’s ability to complete the transaction, such as securing payment or financing.
Understanding conditions to closing through an example
Imagine a company agrees to purchase a manufacturing business. The purchase agreement specifies several conditions to closing, such as:
- The buyer securing financing from a bank.
- The seller providing updated financial statements.
- Both parties obtaining necessary regulatory approvals for the transaction.
If any of these conditions are not met, the closing may be delayed or the deal may be canceled.
In another scenario, a startup raising venture capital includes conditions to closing in its funding agreement. These conditions might require the startup to achieve specific milestones, such as obtaining intellectual property rights or resolving any outstanding legal disputes, before the funding is disbursed.
An example of a conditions to closing clause
Here’s how a conditions to closing clause might look in a contract:
“The obligation of each Party to consummate the transactions contemplated by this Agreement is subject to the satisfaction or waiver of the following conditions prior to the Closing Date: (a) receipt of all necessary regulatory approvals; (b) delivery of all required closing documents; and (c) no material adverse change occurring to the subject business.”
Conclusion
Conditions to closing outline the key steps and obligations that must be completed before a transaction is finalized. They provide transparency and protect both parties by ensuring all legal, financial, and operational requirements are met.
By including a clear conditions to closing clause in agreements, businesses can manage expectations, reduce risks, and ensure a smooth transition in complex transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.