Unlike a simultaneous sign and close, in a stock purchase agreement with a deferred closing the parties agree to the terms of the transaction in advance of the close. The challenge with a deferred closing is that it creates an additional interval not contemplated in a sign and close document. This requires the Buyer and Seller to negotiate what parties can and cannot do during this interval, and the reasons that either party could abandon the transaction. The latter would be defined under the Termination section of a Stock Purchase Agreement, and has the potential to create substantial friction between the parties.
The potential to eliminate unnecessary negotiation makes it more efficient to move forward with a simultaneous sign and close. But there are practical reasons for why this may not be possible. Given that a Seller’s primary concern in most transactions is securing the purchase price, a deferred closing is generally driven by the Buyer.
Deferred Closing Rationale
The Buyer may require a deferred closing for any one of the following reasons:
- To raise capital to close the transaction.
- To obtain corporate (e.g., stockholder) approvals.
- To obtain third party (e.g., landlord or key customer) consents.
- To restructure internally.
- To restructure its balance sheet.
- To secure the required regulatory and governmental approvals (e.g. HSR).
- To await the outcome of specific litigation.
Assuming the stock purchase agreement does not contain a financing or diligence out, the Seller may opt for a deferred closing in order to bind the Buyer to a contract for the sale of the target company. Moreover, the Seller may not want to initiate the required third party and governmental approval processes until it is certain that the Buyer will consummate the transaction.
In the time required to complete any item on the list above, many variables or events could make the contemplated acquisition unattractive to one of the parties involved. Imagine the number of reasons that, as a Buyer, you might be inclined to walk away from a transaction. A few examples follow:
- The Company could lose a large client or significant employee.
- An environmental or economic disaster (e.g., the effects of a pandemic such as Covid-19) could make the acquisition much less attractive.
- A sudden swing in the price of a particular commodity could change the cost structure of the Company.
Any reason that a Buyer sees fit to walk away from the transaction must be agreed to by the Seller, and the associated negotiation is often demanding and time consuming. But while the approach is more costly and arduous, there are benefits to both parties. From the Seller’s perspective, it provides an opportunity to secure the purchase price with a Buyer that has restrictions placed on terminating the transaction. From the Buyer’s perspective, the ability to restrict the Seller from entertaining or soliciting new bids provides the comfort needed to move forward on a task or responsibility that it would only pursue as part of the contemplated transaction.
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