Practical completion tips

In any M&A transaction, the final stage of signing the acquisition documents is often the most frantic period during the acquisition process, as the parties strive to agree the final drafting and terms of the principal acquisition and any relevant ancillary documents. We have noticed that insufficient attention is often given to whether certain conditions precedent and pre-completion obligation mechanics can be readily achieved in a manner that is both practical and reflects the way in which businesses operate in the GCC. Conversely, some points are not considered in sufficient detail in the acquisition agreement which can also lead to a transaction potentially fraying during the period between signature and completion when the parties discover that by finally considering the detail, there are still important points which need to be agreed.

A well managed process and well structured transaction will ensure that the number of issues that require third party approvals are kept at a minimum, in addition to ensuring that any issues or terms that need to be agreed are reflected in the acquisition agreement. One of the core rules of completion in M&A is to ensure that completion is a mechanical process that does not require further agreement between the parties and that any approvals sought or required can be deemed to be satisfactory, as objectively as possible.

What Does Completion Mean?

For the purchaser in an M&A transaction, completion in their view occurs when they obtain legal title to the shares or legal title to the assets depending on whether the transaction is a business sale or share sale. This point of transfer of legal title needs to be considered within each jurisdiction within the GCC and the transaction structured accordingly. For a purchaser in the GCC, completion does not simply occur on the date on which legal transfer documentation is notarised.

However, many sellers assert that completion occurs when they have signed and notarised all legal transfer documentation, at which point they argue they should also receive the purchase price for the purchased shares or assets.

As a result of these competing views as to what constitutes completion, a number of practical issues can affect the parties. The choice of potential solution to this issue, together with other issues, depends on the nature of the underlying deal.

Points to note in Completion

Some of the typical issues to consider in completing transactions within the GCC are set out below (although there are of course a range of other issues which invariably arise and also need to be solved).

1. Deal structure

This is often one of the key determinants for whether a deal will be able to close. It is the starting point for ensuring that all of the relevant stakeholders are in agreement and have engendered enough confidence to invest the time, energy and funds to really shape and commit to a deal. From a legal perspective, the right level of strategic depth and analysis together with relevant local experience can ensure that a range of workable deal structures are offered to the parties to consider.

2.  Approvals

These can range from those within the parties ambit, such as board or shareholder approval, to those which are not such as third party approvals, which usually relate to regulatory or third party contractual consents. As the likelihood of obtaining approvals is not a certain process, it is important to consider the processes involved in obtaining each and strategically consider the effort required to obtain an approval or mitigate the effects of an approval not being obtained, or being only partially obtained. If these points are considered early and properly, then this can help reduce the risk of this adversely affecting completion.

With certain third parties, it may be straightforward to obtain their consent if required, due to the size of the entity or the existing relationship the parties with those third parties. However, often parties underestimate the difficulty of obtaining consents or releases. For example, where a release is required from a bank with respect to personal or corporate guarantees which are in place as part of a banks security package, there are a number of internal processes within the bank to consider in order to obtain the relevant consent, all of which together can take significant time.

3.  Consideration structure

This is usually driven by the client's financial advisers but there should be a strong role for lawyers to play in terms of assisting with structuring various matters such as the effects of capitalizing shareholder loans, earn-outs and deferred consideration or completion accounts adjustments (including net working capital considerations). These will all need to be tightly drafted so understanding these concepts in sufficient depth so that they can be grasped and creative solutions designed for each is critical to ensuring that financials on completion are clearly structured to avoid or reduce the space within which the parties can disagree.

4. Other principal/ancillary documents

The level and range of documentation required should be minimized where possible but it is clearly important to ensure that corners are not cut in a manner which would create unacceptable legal risks. As stated previously, the types and extent of documentation required should be considered early on in the process when carrying out the deal structuring. Although it is clearly important to be able to draft and deliver documents in a tight timeframe, it is also important to be able to query and ensure that each has a relevant purpose and is well understood.

5. Disclosure

A number of points that should have been disclosed in the disclosure letter (or schedule) or which should have arisen in a seller's response to due diligence questions can often arise following signature of the acquisition agreement. Again, the commercial effect of these needs to be carefully considered within the context of the deal but the acquisition agreement should include a standard process for resolving such reasonably foreseeable events.

6. Completion checklist

A clear and full completion process drafted in a share or business purchase agreement always helps as it should provide certainty as to all the requirements to achieve completion. In implementing a completion process, it is critical to ensure that communication between all of the relevant parties is excellent (as it is with most causes of dispute).

A well drafted and considered completion checklist is a valuable transaction document that assists with communication flow between the parties and, as such, acts as a very important project management tool. The completion checklist should assist the parties to focus on the key outstanding issues and help mitigate risks that could affect closure. The completion checklist should enable the parties to highlight the documents and actions of a deal that will need the most attention and tick off the actions and documents that require less attention and are already agreed.

Conclusion

We believe that even those transactions that are very difficult to close and complete can be closed if the right balance of detail and preparation is included in the acquisition agreement, if the conditions precedent and pre-completion obligations are considered from a practical, commercially realistic and strategic perspective and if sophisticated deal structuring strategy is combined with knowledge of local nuances.

Author: Sameer Huda
s.huda@hadefpartners.com

Author: Rajiv Nawbatt
r.nawbatt@hadefpartners.com

The views expressed in this article do not necessarily constitute the views of Zawya.

© Hadef & Partners 2013