How Statements of Fact and Preclosing Obligations Relate to Conditions to Closing

With some trepidation, I now tiptoe into law-and-economics territory. Specifically, how standards for statements of fact and preclosing obligations in mergers-and-acquisitions contracts relate to standards for conditions to closing.

Widgetco and Acme (both private companies) enter into a contract under which Widgetco would acquire Acme. The contract provides for a delayed closing. Acme makes a statement of fact in the contract that before closing is found to have been inaccurate. Or Acme breaches a preclosing obligation. In either case, Widgetco has a remedy, whether it’s a remedy available under law or an exclusive remedy under the contract (presumably indemnification). Statements of fact and preclosing obligations express the economic bargain of the parties, so Widgetco might have agreed to exclude from the scope of one or more statements of fact or preclosing obligations that which is trivial.

But another issue is how the inaccurate statement of fact or the breached obligation relate to the conditions to closing stated in the contract, specifically the bringdown condition and the compliance-with-obligations condition.

What’s at stake in the conditions to closing is whether the deal gets done. Because of the remedies available to Widgetco, it wouldn’t make sense for the inaccurate statement of fact and the breached obligation (as applicable) to constitute grounds for not closing unless they put at risk something more than the economic bargain of the parties, namely the entire rationale for the deal. The inaccurate statement of fact and the breached obligation should give Widgetco an out only if they’re of a sort that could be characterized as a dealbreaker.

So that’s my proposition: in negotiating statements of fact and obligations, the party benefiting from them might be willing to ignore trivial stuff, but when it comes to the bringdown condition and the compliance-with-obligations condition, it’s appropriate to ignore everything except that which is a dealbreaker.

Conspicuously absent from this summary is any mention of how these concepts are expressed in a contract. That, friends, is intentional.

I’d be pleased to hear from those who think about this sort of stuff.

Categories M&A

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.