Class 7 Readings1 - Class 7: Closing Conditions,...

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[[[NYCORP:2569798v8:4434W:10/02/08--06:52 p]] Class 7: Closing Conditions, Termination Rights I. Closing Conditions (or “Paying only when you are happy with the known and have shifted the risk of the unknown” ) f Under contract law, one party will be excused from performing its contractual obligations in a variety of circumstances, including (a) “fundamental” breach of the contract by the other party, (b) a “fundamental” misrepresentation by the other party and (c) supervening illegality. However, contract law generally permits the parties to specify additional conditions to their obligations or to modify the conditions that would otherwise be implied by law. In most private company acquisitions, Buyer and Seller will negotiate, and set forth in the acquisition agreement, specific conditions that must be met or waived by a party before that party has an obligation to consummate the acquisition. ± Certain conditions are reciprocal, such as the requirement to obtain the necessary governmental or third party consents to the transaction. Other conditions encompass circumstances beyond the parties’ control, such as the absence of an injunction against the transaction. In addition, there may be conditions that are specific to Seller, such as the absence of a MAC in Seller’s business. ± Other conditions that are specific to Seller may relate to the performance of covenants which are aimed at preserving the status quo of Target’s business between the signing and closing of the agreement. Often, the parties confirm these conditions by providing the other party with a closing certificate signed by one or more principal executive officers, certifying compliance. f Standards of Compliance with Conditions. Covenants may include materiality qualifiers, requiring only that the condition be satisfied in all material respects. However, this will usually be inappropriate with respect to regulatory approvals. f Effect of Failure of Certain Conditions. The failure to satisfy a condition will generally provide the non-breaching party with the option to terminate. However, the agreement may also permit the non-breaching party to seek damages for breach of the covenant not performed. ± Under certain circumstances (e.g. where a Buyer ends a deal on MAC grounds) the non-terminating party may seek legal remedies against the terminating party for terminating the deal. Another potential consequence a Buyer that has terminated a deal must consider is that Target’s shareholders will commence an action against Buyer. Shareholders may seek to enforce the acquisition agreement or recover damages based upon a theory of diminution in value of Target’s stock. f Representations, Warranties and Obligations. It is typically a condition to each party’s obligations that all representations and warranties of the other party are true and all
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[[[NYCORP:2569798v8:4434W:10/02/08--06:52 p]] obligations of the other party to be performed prior to the closing have been performed.
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Class 7 Readings1 - Class 7: Closing Conditions,...

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