First closing: Overview, definition, and example
What is a first closing?
The term "first closing" refers to the initial event in a multi-stage or structured transaction, particularly in financial deals, investments, or mergers and acquisitions (M&A). It marks the first moment when the parties involved formally complete a part of the transaction, often by meeting certain conditions such as the exchange of funds, transfer of ownership, or the execution of critical documents. In a typical deal structure, the first closing is followed by one or more subsequent closings or phases, with each closing representing a milestone toward the final completion of the transaction.
The first closing is crucial because it sets the transaction in motion and establishes the terms under which subsequent closings will occur. It is often associated with the initial release of funds in a private equity deal, real estate transaction, or capital raising, marking the point when the buyer or investor begins to take control of the transaction.
Why is the first closing important?
The first closing is important because it signifies the beginning of the formal, legal phase of a transaction. It ensures that both parties have met certain requirements and conditions outlined in the agreement, such as due diligence, financing arrangements, or regulatory approvals, which were necessary to move forward.
For investors or buyers, the first closing can provide access to the asset or opportunity they have invested in, while for sellers or companies raising funds, it indicates the receipt of initial funds or commitments. In many cases, it also serves as a foundation for future closings or installments, ensuring that the deal progresses in an orderly manner toward final completion.
Understanding first closing through an example
Let’s say Company A is acquiring Company B in a staged M&A deal. The first closing could occur after both parties have satisfied certain conditions, such as securing financing, completing due diligence, or obtaining regulatory approval. At the first closing, Company A may pay an initial portion of the purchase price and begin integrating Company B's operations.
Subsequent closings could follow, where the full payment is made, and the final transfer of ownership or assets occurs. The first closing essentially sets the stage for the rest of the transaction by formalizing the initial commitments and actions required.
In another example, a real estate development firm might raise capital in multiple stages. The first closing could occur when the firm secures the first round of investment commitments and releases funds to begin the project. Additional closings could follow as more investors commit to the project or as milestones are reached in the development process.
An example of a "first closing" clause
Here’s how a "first closing" clause might appear in a transaction agreement:
“The First Closing of the Transaction shall occur within thirty (30) days of the date of this Agreement, subject to the satisfaction of all closing conditions, including the receipt of the necessary financing and regulatory approvals. At the First Closing, the Buyer shall pay an initial amount of $X million to the Seller, and the Parties shall execute all necessary documents to transfer ownership of the Assets.”
Conclusion
The first closing is a critical step in multi-stage transactions, marking the initial completion of a deal. It serves as a formal acknowledgment that specific conditions have been met, allowing the parties involved to begin executing the transaction and preparing for subsequent closings. The first closing sets the tone for the rest of the deal, ensuring that the parties are on track to complete the transaction according to the agreed terms. Whether in mergers, acquisitions, or investment agreements, the first closing is a key milestone in the overall process.
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.