Two public litigations occurring during the pandemic evidence the importance of the “Conditions to Closing” section of equity (M&A, Venture Capital, and Private Equity) and financing transactions, including deals involving Brazil.
The first one relates to Boeing/Embraer joint venture. The other one refers to Carlyle-GIC acquisition of American Express Global Business Travel involving US$ 1,5 billion.
Conditions to Closing (or CCs) is a part of contracts that provides for withholding or terminating conditions that (i) in equity transactions, need to be satisfied by seller and buyer for the deal to be complete, and (ii) in financing transactions, need to be fulfilled by borrower and guarantor for drawing the credit line.
In practice, the party who has more obligations in closing sections is the seller (in M&As) and the borrower/guarantor (in financings).
Three key points in CCs are (i) the format of how they are drafted, (ii) if the party responsible for delivering the condition is capable of satisfying it, and (iii) how to resolve “Material Adverse Changes” that may arise until the date of closing the transaction.
1. Re. the formatting: CCs must be straight, clear, and almost mathematical. All to avoid questioning and disputes of interpretation if a particular condition was satisfied or not.
2. Re. viability of satisfaction: the obliged party must assess if it has or not control over the delivery of the conditions it is supposed to fulfill, as well as the immediate consequences of not satisfying them.
3. Re. Material Material Adverse Changes (MAC Clause): the experience with the current pandemic and the public cases reported above shows that it is key in contracts, one, define what means “Material Adverse Change”, and two, if the parties have the right to call at any time such relief until the date of closing and what will be the consequences of such calling.
Based on this context, contracting parties that negotiate equity and financing agreements involving Brazil must devote time and attention to the Conditions to Closing section as it will be important during blue skies period and decisive in times of turmoil and pandemic as the one we are all now facing.
