Share purchase agreements ("SPA") generally always include conditions precedent which must be satisfied or waived prior to a specified date (generally referred to as the long stop date) before the parties are obliged to complete the transaction. In the UAE, completion of the transfer of shares in a limited liability company is generally defined as the date on which the revised register of partners is issued by the relevant authority (such as the Dubai Department of Economic Development). In the event that a condition precedent is not satisfied (or waived) prior to the long stop date, the party for whose benefit the relevant condition is granted should have the right to terminate the agreement without prejudice to any rights or remedies that the terminating party may have with regard to the other party's failure to comply with the terms of the agreement (e.g. a failure to use all reasonable endeavours to satisfy a condition precedent).

Conditions precedent in the agreement are usually included for the benefit of the buyer to ensure various matters of concern for a buyer such as the following:

(i) material commercial issues that are identified during the due diligence exercise are addressed by the seller in a manner that resolves the commercial issue in some meaningful way prior to completion;

(ii) third party consents that would prevent or affect completion are obtained;

(iii) assets are transferred or entities are restructured to enable a buyer to purchase the intended interest in shares; and

(iv) the buyer has an opportunity (if required) to obtain financing to purchase the shares in the target company.

Any risk with regard to the state of the business of the target company during the period between signing and completion is borne by the seller. The seller would naturally wish to restrict the number of conditions precedent to be satisfied prior to completion of the transaction so that the seller has more certainty with regard to the deal and the SPA does not effectively become an option agreement in favour of the buyer. The seller should ensure that the conditions precedent in the agreement should be drafted in a clear, concise and reasonable way to avoid the buyer being able to take advantage of an ambiguous condition to justify walking away from a transaction.

Below we highlight certain issues which should be taken into consideration at the time of negotiating the conditions precedent to be included in the SPA.

Issues identified during due diligence

After the due diligence exercise in respect of the target company has been carried out, the buyer should assess which issues are sufficiently material to require rectification prior to completion and should therefore be conditions precedent. The buyer would normally require the seller to rectify any issues which potentially materially affect or could materially affect the operation and management of the business of the target company if not resolved prior to completion. Often it is easier for the seller to resolve such issues because it is generally more familiar with the target business and often has personal relationships with the counter parties and other third parties whose assistance or co-operation is needed to resolve any relevant issue. For example, the buyer may require the seller to:

(i) obtain the consent of significant suppliers or customers of the target company to the proposed transaction where the contract with such suppliers or customers include change of control provisions;

(ii)  procure the renewal of material agreements with the target company (on terms acceptable to the buyers) where those agreements may be due to expire;

(iii) renew licenses which have expired or rectify any issues regarding permits or licenses required by the underlying businesses;

(iv) complete the restructuring of a target group so that the buyer is able to acquire shares with a clear corporate structure;

(v) provide the buyer with satisfactory evidence that bespoke operational issues have been resolved; or

(vi) secure new service contracts with key management (on terms acceptable to the buyer).

Specific Requirements

There are often situations where conditions precedent relate more to where the purchaser needs to obtain finance to fund the purchase price which can be quite problematic for sellers to accept without careful scrutiny. If the purchaser is a listed company or fund whose corporate governance requires certain internal approvals (e.g. investment committee), the SPA may need to include such approvals as a condition precedent. Whilst the inclusion of such conditions may be unavoidable, the seller will want to obtain sufficient comfort from the buyer that there is a high probability of obtaining such approvals. For example, before executing the SPA, the seller may require the buyer to provide documents evidencing the intention of a financial institution to provide finance for the transaction. If a transaction fails to complete, apart from the time and expense involved, the seller may find it more difficult to find a new buyer, in particular, if the other potential purchasers' offers were initially rejected during an auction process.

Also, failure to complete a transaction could be misinterpreted by the market as being due to issues with the target company (as opposed to being due to a buyer's failure to obtain internal approvals or funding). This can potentially be a significant issue for sellers so should be managed appropriately through minimising the risk of the conditions not being satisfied (and ensuring that the seller has the right to issue appropriate press releases in the event that the conditions are not satisfied and the transaction does not complete).

Risk Allocation

As there can often be a significant delay between signing the SPA and completion due to the time taken to satisfy some conditions precedent, the parties need to agree upon who bears the risk of the occurrence of any event during this interim period which materially adversely affects the target company and its business. Often, a purchaser will try to allocate this risk to the seller by including a condition precedent that the target company is not subject to any material adverse change (MAC) during the period between signing and the satisfaction, or waiver, of the other conditions (usually supported by the argument that the seller is in control of the business during this period). The seller's counter-argument is that the buyer should be committed to the transaction and bear the risk in relation to the target business from the date of signing the SPA and should rely upon the sellers undertakings to carry out the business within certain prescribed parameters during the interim period.

If a seller accepts a MAC condition precedent, it should endeavour to draft the condition precedent so that it relates to material adverse changes that specifically affect the target company's business (as opposed to being a general downturn in the market) and the consequences of which are quantifiable (e.g. decrease in net asset value or profits).

From a seller's perspective a MAC condition precedent needs to be drafted precisely to limit the ability of the purchaser to use it as an opportunity to terminate the agreement if it changes its outlook on the target company or the market in general.

Another way to allocate risk to the seller is to require the seller to repeat the warranties in the SPA at completion and/or include a condition precedent that the sellers warranties are true and correct at completion. In these circumstances, if an event arises which is a breach of the warranties in the SPA, the buyer would have the option to either:

(i)  terminate the agreement on the basis that the condition precedent has not been satisfied; or

(ii) waive the condition precedent, complete the transaction and make a claim against the seller for breach of warranty.

The seller may compromise on this issue by agreeing to repeat the warranties and representations at completion but with the right to update the disclosure schedule to include any events which need to qualify the warranties due to events which have occurred between signature of the agreement and completion.

Conclusion

Conditions precedent in a SPA generally capture key matters that transpire from due diligence or the disclosure exercise that are fundamental to a buyer's decision to proceed with the purchase of shares in the target group. The balancing act that needs to be achieved are where conditions precedent seek to rectify material issues only which, if not rectified, would have a financial impact on valuation or be of such a material nature that the risk of the underlying condition precedent not being satisfied is not one which the buyer would proceed and assume. However, conditions precedent should not try to "perfect" minor issues that generally arise with any purchase of shares in a target group, unless there is a clear understanding between a buyer and seller that this is a key basis for the transaction.

© Hadef & Partners 2013