“Closing”

[Updated 12:05 p.m. EST Feb. 24, 2010]

Three variations on a closing theme:

Does “Closing” Refer to a Process or a Moment in Time?

Does closing mean the moment a transaction is consummated? Or does it refer to the process leading up to that moment, with contracts being finalized and signed, opinions being issued, and funds being sent whizzing through the banking system? I suggest that it means both—in other words, closing is an example of lexical ambiguity. The suggested alternative meanings bring to mind the alternative meanings of foreclosure, which I discussed in this May 2007 blog post. A spot in the AdamsDrafting Blog hall of fame is reserved for the first person who points me to a dispute in which the meaning of closing was at issue in this manner.

In connection with this, consider the defined term Effective Time. It’s used in merger agreements and invariably is defined to mean the time that the certificate of merger is filed with the appropriate secretary of state’s office or any later time specified in the certificate of merger. (If a merger involves corporations from different states, Effective Time will be defined to refer to filing of a certificate of merger with each state.) If that’s what Effective Time means, then what the freak does Closing mean? Does it refer to some other point in time? Or does it simply refer to the time spent hanging around a conference room eating takeout Chinese? Given that a company’s ability to walk or make a claim for indemnification is, or should be, keyed to accuracy of the other guy’s representations at closing, the meaning of closing in the context of a merger is matter of some significance.

Does “Closing” Refer to When Documents Are Signed or When the Money Is Paid?

In a bold bid to make the AdamsDrafting Blog hall of fame, reader Ben Diederick pointed me to Benavidez v. Benavidez, 145 P.3d 117 (2006 N.M. App.), a case in which the plaintiff argued that the closing in a real-estate transaction occurred when the warranty deed was signed, not when the plaintiff paid for the property. Those weren’t the alternative meanings I had in mind, but here at the AdamsDrafting Blog, we reward that kind of impertinence with a spot in the hall of fame. Congratulations, Ben!

For something to be considered ambiguous, the alternative meanings have to be apparent to the reasonable reader. I suspect that the plaintiff in Benavidez was more belligerent than reasonable. But in contracts, you have to go the extra mile to avoid giving ammunition to someone looking for a fight. If in a given transaction closing does mean consummation of the transaction, maybe you want to say as much in the definition of closing, or use that phrase instead of the word closing.

“Closing” Versus “Closing Date”

Finally, I routinely see the defined term Closing Date used when it would make a bit more sense to use the defined term Closing:

Each of the other representations and warranties of the Company contained in Article 3 of this Agreement shall be true and correct as of the date of this Agreement and the Closing Date as though made on and as of the Closing Date, except …

Immediately following the Closing Date, the officers of Parent shall consist of those individuals nominated by DE Qinba.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

6 thoughts on ““Closing””

  1. Ken, as no-one else has commented, I will pitch in. First, I should point out that the equivalent word in English legal practice is “completion”.

    Where an agreement refers to completion, I would expect the term to be defined. Clearly, it is only needed where there is a two-stage process of signing the agreement and [later] consummating it, in the latter case usually by executing formal documents to transfer title (often executed as deeds, but that’s another story…) and handing over of records, etc.

    I have come across some clients who confuse completing the agreement in the above sense with completing work to be done under the agreement, eg the completion of services under a services agreement. There is probably less scope for such confusion with the word closing.

    If there is no separate stage of completion/closing, then I am not sure there needs to be any reference to it in the agreement.

    Reply
  2. Mark: I agreed that closing applies only when you have a two-stage transaction.

    I’d wager that closing is used in English M&A contracts, simply because the language of M&A contracts is increasingly the same the world over.

    I’m disappointed that no one has taken up my challenge regarding the meaning of closing in a contract that uses the defined term Effective Time. But I’ve noticed that I can’t rely on my M&A posts attracting comments, no matter how juicy I think they are. I won’t speculate why that is.

    Ken

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  3. Ken, your wager offer is unclear as to its terms and financial value. Also the conditional “I’d” makes it unclear whether it is an immediate offer. Presumably you intended it that way…

    Mark

    Reply
  4. Mark: The conditional was no accident! And anyway, such a shocking wager would doubtless be void as counter to public policy in England and the U.S. Ken

    Reply
  5. This is a metaphysical question that challenges me every time I write or review a two stage agreement (and then imagine the consternation when a sign-and-close agreement is being prepared—you sign and close all at once! Reps are true at signing *and* at Closing, but all of it happens at the same time! Sheesh….my brain hurts).

    For me, I have tried to stick to the convention that the Closing (with a capital C) is the moment in time when the deal is legally “done”, “finished”, “consummated”. The closing (lower case c) is the colloquial term the lawyers use when describing that process of making the Closing happen—signing documents, getting payoff letters signed, ironing out the last minute wrinkles, finalizing wire instructions, etc. The closing happens over time (i.e., several minutes for the easiest transaction I ever did, to a week for the hardest I ever did). The closing culminates in the Closing (and then, still at the closing, but after the Closing, handshakes and congratulations are exchanged, the champagne bottles are popped and their contents consumed by the deal-weary participants).

    The Closing Date is the date on which the Closing occurs. As I rationalize it, the reason the first item you quoted refers to reps being true on the Closing Date is that the Closing cannot occur if that condition is not satisfied. So, for the parties to declare the Closing as having occurred, the condition must first be satisfied, and that ostensibly occurs in the millisecond before the Closing—on the Closing Date. Other closing conditions, like stockholder approval, regulatory clearance, etc., usually happen a day or two or more before the Closing Date. Of course, then there is the chicken and egg problem that most M&A agreements say the Closing has to X business days after all conditions to closing are satisfied, other than those that are to be satisfied at the Closing (just to add to the confusion).

    The second quote you listed seems an incorrect use of Closing Date—a prudent buyer would swap out the officers and directors either by having resolutions made effective at the Closing, or if the transaction was a merger, by specifying that the officers/directors of the acquisition sub become those of the surviving corporation after the *Effective Time* (which would be the right term to use here).

    In a merger, the Effective Time occurs at the same time as the Closing—in other words, the occurrence of the Effective Time is one of a few things that happens at that moment called the Closing (like payment). Things that refer to the Effective Time refer to merger mechanics and not more general merger agreement mechanics. Naturally, the Effective Time has to happen for the target stockholders to be entitled to be paid, so there is a little bit of legal fiction being used here—if you had to sequence it, you would slice up the moment of Closing into (i) things that have to happen to make the Closing happen, and (ii) things that follow as a necessary consequence of the Closing happening. The Effective Time has to happen for there to be a Closing, and it also has to happen to trigger the stockholders rights to be paid for their shares—but deal lawyers will continue to insist on the fiction that everything happens at the exact same moment in time.

    That’s my (admittedly confusing) contribution, after many years spent worrying about how these things could blow up based on the technicalities of the verbiage.

    Reply

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