How to Draft Clear and Effective Conditions Precedent in M&A Transactions

Drafting

The fulfilment of conditions precedent in an M&A transaction signifies that a sale and purchase agreement has become unconditional and the parties are obliged to complete the transaction. Failure by any party to complete the transaction after conditions precedent are fulfilled usually results in that party being liable to compensate the other party.

Therefore, it makes sense to draft the clauses in relation to conditions precedent clearly.

Key elements include:

1. What needs to be done?

Specify the exact actions or requirements to be fulfilled.

2. Which party is responsible for fulfilling or ensuring the fulfilment of each condition precedent?

3. When must the condition precedents be fulfilled?

4. What is the required standard of fulfilment of a condition precedent?

For example, is a condition precedent relating to obtaining approval from a particular authority fulfilled upon approval granted by the authority regardless of conditions imposed, or only when the authority grants unconditional approval, or only when the authority grants approval with conditions acceptable to both the seller and buyer?

5. What is the required standard of effort the relevant party must apply to satisfy the condition precedent?

Best endeavour is a higher standard than reasonable endeavour.

To avoid disputes, set out the specific actions a relevant party should take to satisfy a particular obligation. For example, specify whether a party must appeal if the approval granted by a particular authority is subject to a condition which is not acceptable to the buyer or seller.

If appropriate, set a limit on the amount of expenditure a party may need to incur in fulfilling a condition precedent.

6. What is required to prove that a condition precedent has been met?

7. What is the timeline for notifying the other party that a condition precedent has been met?

8. What is the consequence of failure to meet a condition precedent?

For points 1 and 2, I prefer using active verbs to passive verbs.

Where there are ambiguities, we may infer from the context, but I much rather everything is worded clearly in the sale and purchase agreement.

#malaysiancorporatelawyer

#mergersandacquisitions

This post was posted on LinkedIn on 16 May 2024.

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