DealLawyers.com Blog

A recent Goodwin memo says that the amount of time required to complete major M&A transactions has risen across the globe, with the average time between signing and closing for $10+ billion mega deals rising by 66% in the US, 19% in Europe, and a staggering 125% in the Asia-Pacific region.  timeframe. Not surprisingly, the primary culprit here is the regulatory review process, and the firm has some thoughts on how parties can navigate the delays associated with these longer time frames. This excerpt discusses the implications of potential delays that buyers and sellers should consider when negotiating closing conditions:

Plan for Regulatory Approvals. Buyers and sellers must identify which specific approvals are required from regulatory authorities (e.g., antitrust regulators, foreign investments regulators or industry-specific agencies) to legally complete the transaction but also to measure the expected length of the interim period, set the long stop date (which is the deadline for transaction completion, beyond which it will be abandoned unless both parties agree to extend) and negotiate the availability of the financing commitments (see below).

Carefully Negotiate the Material Adverse Change (MAC) Clause. A MAC clause allows buyers to exit a deal if significant negative events occur that affect the value or operation of the target company between signing and closing. This clause is particularly important during prolonged interim periods, as extended timelines increase the likelihood of unforeseen events.

When defining a MAC, buyers should aim for the broadest (e.g., events affecting the industry) and most subjective terms. Conversely, sellers should strive for narrow criteria, focusing on events with significant and lasting impacts on the target while excluding external events such as health crises, wars, terrorism, natural disasters, or market fluctuations. Sellers may also define a materiality threshold based on revenue, net assets, EBITDA, a percentage of the transaction consideration, or another criterion.

Buyers Must Secure Financing. Buyers can stipulate that the deal will close only if the required financing is available at the closing date. In any event, for deals with prolonged timelines, buyers must negotiate financing commitments that remain valid for the entire duration of the interim period, up to the long stop date (and any extension). They should also be prepared for the lenders to charge ticking fees given the extended timeline.

Make Deal Completion Contingent on Covenant Compliance. Longer deal timelines increase the likelihood of covenant breaches in which one party fails to fulfill its agreed-upon obligations. Buyers may require that the deal’s completion be contingent on the absence of any breaches in business conduct or other material covenants between signing and closing, rather than seeking indemnification.

Other topics addressed in the memo include the possibility of negotiating “hell or high water” divestiture obligations and reverse termination fees, the need to address potential valuation changes during the period between signing and closing, and the need to manage the disclosures against reps & warranties.

– John Jenkins