Several litigations occurring during the pandemic evidenced the importance of the “Conditions to Closing” section in equity (M&A, Venture Capital, and Private Equity) and banking/financing transactions involving Brazil.
Conditions to Closing (or CCs) is a part of contracts that provides for conditions that are required to be satisfied (i) in equity transactions, by seller and buyer for the equity to be transferred and price to be paid, and (ii) in financing transactions, by borrower and guarantors 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/guarantors (in financings).
See below 3 key points in Closing Conditions in transaction related to Brazilian parties:
1. Re. the format of the CF clause: It must be objective, clear and almost mathematical – everything to avoid doubts and disputes of interpretation about any condition being satisfied or not. It is common to see confusing contracts and with subjective language, often leading to litigation in courts and arbitration, with one party claiming satisfaction with a certain condition and the other not accepting it.
2. Re. the feasibility of satisfaction: Whenever negotiating a closing clause, each party must assess whether it can effectively deliver the agreed conditions, as well as the immediate consequence of its non-fulfillment. Investors and lenders need to pay attention to put a specific deadline for the target company/borrower to fulfill each condition to closing.
3. Re. Force Majeure and Material Adverse Changes (MAC): Experience with the pandemic shows that it is essential to define whether the contract allows one of the parties to invoke “Force Majeure” for not fulfilling any closing condition and what the parties define as being “Force Majeure”. The same rationale applies for Material Adverse Change. Does the pandemic qualify as “Force Majeure” in the deal being closed? Does the state of public calamity constitute a “Material Adverse Change”? The contract must provide these answers.
Based on this context, contracting parties that negotiate equity and loan 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 as we are all now facing.