31 Aug Considerations in Deal Closing Speed
Motivation to close without delay when both buyer and seller are in agreement that an acquisition or merger should proceed is idyllic. In fact, any due diligence lasting greater than 60 days has the tendency to cause deal implosion. In the middle market, any due diligence over 90 days further increases the probability of a deal completely falling apart. However, no two deals are cut from the same cloth and sometimes delay is necessary for M&A completion at all. This is especially true in the case of necessary third party (including governmental) approval or when delay may be required to facilitate financing for the transaction. For example, larger deals may often require FTC approval while others may require filings and blessing from the SEC (like in the case where the purchaser issued as consideration shares that may constitute a public offering). The SEC will most certainly slow acquisition speed by requiring doc filing, especially when the acquirer represents a publicly traded entity subject to the proxy rules of the SEC.
Acquisition agreements with provision for simultaneous closings help speed the acquisition process by simplifying the financial engineering as well as generally requiring less paperwork. Additionally, documentation governing the time between signing and closing can be completely eliminated, reducing one less step in an already elongated process.
In delayed closings provisions such as “no shop,” “options” and “break-up fees” are often included in agreements involving a deal with delayed closing. Other reps and warranties and related indemnification provisions further slow the closing process, especially in the event of a two-step closing.
Unfortunately not all deals can conveniently be placed in the simultaneous closings category. Thanks to a Delaware Supreme Court decision in 1996, two step mergers that follow a change in majority control during the transition period require that any value added during said period are then
…accrued to the benefit of all shareholders and must be included in the appraisal process on the date of the merger.
In this case, holdout shareholders can become a major problem. If dissenting shareholders do not sell their shares in the first step in a two step acquisition, then they may be entitled to their pro rata share of the pie with the value added to the acquired business during the transition period. This forces the buyer to pay a higher-than-the-original price to the selling shareholders as part of the second step of the acquisition. Hence, the somewhat obvious benefit that simultaneous closings can happen more rapidly, not to mention the money saved by not being required to payout the increased value to resisting seller shareholders.