Once the negotiations have concluded and the purchase agreement has been finalized, the parties must then turn their attention to the closing process. This process involves various steps and will be transaction dependent, but important steps usually include obtaining third party consents and regulatory approvals, ensuring the shares or assets being acquired are free from encumbrances, and preparing the ancillary closing documents.
After the purchase agreement is signed, the parties may either (i) proceed with a simultaneous “sign and close”, where the signing of the purchase agreement and the closing of the transaction occur at the same time, or (ii) or enter an interim period. An interim period between the signing and the closing may be required where there are certain pre-closing matters that must be addressed before the transaction can close, such as obtaining third party consents or regulatory approval to the transaction, which the seller is not comfortable going ahead with without having a binding purchase agreement in place. Where there is an interim period, closing typically occurs a few weeks after the purchase agreement is executed – often at the next month end, but the timeline will vary based on the transaction’s complexity.
Third Party Consents and Regulatory Approvals
The parties will have identified and set out in the purchase agreement disclosure schedules which agreements, licences, permits and regulatory approvals relating to the business being sold have “anti-assignment” or “change of control” provisions in them that trigger a need for consent or approval from one or more third parties as a result of the proposed transaction.
The responsibility for obtaining the third party consents and approvals will typically fall on the seller as these would be for the existing contracts for the target business being sold. However, certain industries (e.g. healthcare) or assets that require regulatory approvals or permits for transfers may require the buyer to apply for a new permit or licence.
The seller will need to reach out to the third parties and regulatory authorities in accordance with the notice period as set out in the applicable agreement, licence, permit or authorization. These third parties and regulatory authorities will require information regarding the proposed transaction and the buyer and they may also request to see copies of the final purchase agreement and the ancillary closing documents.
Ensuring Assets or Shares being Acquired are Free from Encumbrances
Encumbrances are claims, liens or liabilities that can limit an asset’s use, value or transferability without necessarily prohibiting the transfer of title. It is therefore essential for the buyer to verify that the seller owns the shares and/or assets free and clear of encumbrances, except for any permitted encumbrances. Permitted encumbrances are legal claims, liens, or restrictions on a property or assets that are allowed by the parties to the transaction to remain after the sale and are usually set out in the purchase agreement disclosure schedules.
In Ontario, the buyer will rely on representations from the seller in the purchase agreement and conduct searches in the appropriate jurisdictions where the business and seller are located or operate in to confirm the title of the shares and/or assets.
A search conducted through Ontario’s Personal Property Security Registration (PPSR) system may show existing security interests and liens registered by third party creditors against the seller either for assets unrelated to the transaction at hand or where it is not clear which assets the security registration is being registered against. In these situations, the seller may need to obtain a no interest letter from the third party creditor to confirm that the security interest does not encumber the shares and/or assets being sold to the buyer.
Any existing liens, charges or encumbrances on the business assets or on the shares being purchased which are not permitted encumbrances must be discharged by the seller either before closing or upon the closing of the transaction. The seller will need to obtain a payout statement from the creditor and pay the amount owed. It is common for the seller to direct the buyer to pay any outstanding payout amount directly to the seller’s creditors from the closing funds and for the seller to follow up with the creditors for a discharge of the applicable security interest immediately following the closing of the transaction.
Ancillary Closing Documents
Ancillary closing documents play a vital role in ensuring the smooth transition of ownership and the protection of the buyer’s interests. These documents act as supporting agreements related to the purchase agreement and transaction and ensure the ownership of the shares and/or assets are legally transferred. While the closing documents are transaction specific, they may include employment agreements with key employees, non-competition and non-solicitation agreements with the seller, escrow agreements, bills of sale, assignment agreements, share transfers, post-closing purchase price adjustments, leases, and transition services agreements. The ancillary closing documents required to be prepared, negotiated, and delivered by each side as part of the closing process will usually be listed in a closing agenda prepared by the buyer’s legal counsel.
Once all of the closing documents have been settled by the parties and their legal counsel and all of the closing conditions have been met or waived by the benefitting party, the parties will be ready to exchange signed closing documents. The buyer will also pay the purchase price due on closing to the seller or their legal counsel. Upon the parties confirming that all closing requirements and conditions have been satisfied, they will mutually confirm closing and the release of all signed documents and closing deliverables from escrow. With this final confirmation, the M&A process will come to an end and the transaction will have successfully closed.
Conclusion
The closing process for M&A transactions involves several critical steps, including obtaining third party consents and regulatory approvals, ensuring that shares and/or assets being acquired are free from encumbrances, and preparing the necessary ancillary closing documents. By following these steps and addressing the relevant legal issues, parties can ensure a smooth and successful closing process for their M&A transaction. For strategic guidance on the closing process for your M&A transaction, kindly contact our firm.
