Closing Condition

A closing condition is a contractual requirement that must be fulfilled before a merger or acquisition is deemed complete and ownership transfers. Closing conditions protect both buyer and seller by allowing either party to walk away (or renegotiate) if key assumptions change between signing and closing. Common conditions include receipt of shareholder approval, financing commitments, regulatory clearance, and absence of material adverse changes.

Structure: Sign versus close

In a typical M&A transaction, the signing date is when buyer and seller agree on price and terms, exchange signatures, and make public announcements. The closing date is typically 30 to 180 days later, when funds change hands, ownership transfers, and the deal is legally complete. The interval between sign and close is the “interim period,” during which closing conditions must be satisfied. This gap exists because major deals require time to secure regulatory approval (which can take months), financing (banks need time to syndicate loans), and shareholder votes. Closing conditions define what must happen during this interim period for the deal to actually close.

Financing conditions: Critical in leveraged deals

In a leveraged buyout, the buyer does not have the purchase price cash in hand at signing. Instead, the buyer has a commitment letter from a lender stating the bank will lend the agreed-upon amount at closing. That financing commitment is conditioned on no material adverse change to the target and typical closing mechanics. If markets seize up (e.g., a banking crisis) and lenders back out, the buyer cannot close. Strong buyers sometimes waive financing conditions to signal confidence, but weaker or speculative buyers often retain the right to walk if financing falls through. Conversely, sellers generally negotiate away financing conditions for creditworthy buyers to reduce the risk of deal failure.

Material adverse change (MAC) clause

A MAC clause allows the buyer to terminate or renegotiate if the target’s business materially deteriorates between signing and closing. The definition of “material” is critical and heavily negotiated. A 5% revenue miss might be immaterial; a 50% revenue collapse is clearly material. But what about a 20% miss? Most MAC clauses set quantitative thresholds (e.g., “adverse change exceeding $10 million to EBITDA”) and qualitative exceptions (e.g., “excluding general economic conditions affecting the industry as a whole”). The COVID-19 pandemic in 2020 triggered numerous MAC disputes; buyers claimed lock-downs materially harmed targets, while sellers argued pandemics were industry-wide and not unique to their company. Courts generally sided with sellers because MACs are read narrowly, and industry-wide events are often carved out.

Regulatory approval: Antitrust and jurisdiction-specific

Large deals must obtain antitrust clearance from the Federal Trade Commission (FTC) and Department of Justice (DOJ) in the US, and equivalent bodies abroad. A deal might be signed contingent on FTC approval, meaning if the FTC blocks the deal, both parties are released. For mega-deals in sensitive industries (defense, telecom, airlines), regulatory approval is uncertain and closing is at risk. Conversely, small deals often clear regulatory review with a phone call. The closing condition specifies which approvals are required and typically includes a timeline (e.g., “closing within 180 days of signing or either party may terminate”).

Third-party consents

The target company often has contracts with major customers, suppliers, lenders, or landlords that include “change of control” clauses. These clauses allow the counterparty to terminate the contract or demand renegotiation if ownership changes. If the target depends on a contract (e.g., exclusive distribution agreement, long-term supply deal) and the counterparty refuses to consent to the new owner, that breach can prevent closing. Buyers typically obtain representations from sellers that such consents will be obtained, with a termination right if they are not. Sometimes the buyer and seller share the risk by placing money in escrow to compensate for lost contracts.

Representations and warranties: The certification

Sellers provide reps and warranties—statements about the target’s financial condition, legal compliance, liabilities, and operations. At closing, the seller issues a certificate stating that all reps and warranties remain true and correct, or identifying specific breaches. If material reps are breached (e.g., the target disclosed $5 million in undisclosed litigation or a major customer contract was terminated), the buyer can refuse to close and seek indemnification from the seller. Representations are typically subject to a “material adverse effect” or “material adverse change” definition; immaterial breaches do not give the buyer a termination right.

Earnouts and post-closing adjustments

Some deals include earnout provisions—part of the purchase price depends on post-closing performance. The earnout is itself a closing condition; if the target hits revenue targets in year one, the buyer pays an additional $50 million. This structure aligns incentives and reduces upfront cost for the buyer, but it extends the deal beyond the initial closing and creates disputes over whether targets were maintained or integrated correctly.

Waiver and amendment

Either party can waive a closing condition (agree it need not be satisfied) or amend the terms. Sellers often pressure buyers to waive financing conditions or MAC clauses as closing approaches, especially if market conditions have changed. Sophisticated sellers obtain insurance (rep and warranty insurance) to protect against post-closing breaches, which allows them to close deals with smaller escrows.