Deal Contingency

A Deal Contingency is a condition in a merger or acquisition agreement that must be satisfied (or waived) before the buyer is obligated to close the transaction. If the contingency is not satisfied, the buyer can walk away or, in some cases, renegotiate price. Contingencies shift risk from buyer to seller and protect the buyer from adverse changes between signing and closing.

Financing contingency

The financing contingency protects the buyer if it cannot secure funding to complete the acquisition. A buyer might sign an acquisition agreement conditional on obtaining a loan commitment. If the lender denies financing (or imposes terms so unfavorable they are unreasonable), the buyer can terminate without penalty. This contingency was critical during financial crises: buyers signed deals, then walked away when credit markets froze and financing became unavailable.

Sellers hate financing contingencies because they create uncertainty. If the deal is for cash, a buyer in financial distress might struggle to close. Buyers in strong cash positions can eliminate the financing contingency to appear more committed. Conversely, a buyer lacking certainty of funding must negotiate for the financing contingency or risk being forced to close at a price that strains the balance sheet.

Material Adverse Change (MAC) contingency

The MAC contingency allows the buyer to terminate if a material adverse change in the target’s business occurs between signing and closing. A MAC is a dramatic shift in business fundamentals: a major customer exits, key management quits, a product fails, or a regulatory crisis emerges. The definition of “material” is contested. A 10% revenue decline might or might not be material depending on the industry and deal size. Courts have interpreted MAC narrowly, requiring truly severe deterioration (30%+ decline in value) rather than normal business fluctuations.

The COVID-19 pandemic created MAC disputes: some buyers walked away from deals claiming pandemic impacts triggered MAC clauses, while sellers argued the pandemic was foreseeable and covered by standard market risk. Courts sided with sellers in many cases, narrowing the MAC defense.

Regulatory approval contingency

If the acquisition requires antitrust approval, foreign direct investment clearance, or sectoral regulatory blessing, the buyer conditions closing on regulatory approval. A buyer might sign a deal to acquire a defense contractor but need Department of Defense approval. If regulators reject the acquisition, the buyer can terminate. However, the agreement usually specifies that the buyer must diligently pursue approval; if the buyer half-heartedly seeks approval to avoid deal termination, the seller can sue for breach of the duty to close.

Third-party consents

If the target has contracts (leases, licenses, customer agreements) with change-of-control provisions, closing requires consent from the other party. A real estate company might have a major office lease that terminates if ownership changes. The buyer conditions closing on obtaining the landlord’s consent to the lease continuing. If consent is not obtained, the buyer can walk away.

Inspection and due diligence contingency

Though less common in large deals (due diligence occurs before signing), smaller transactions sometimes include an inspection period after signing. The buyer has 30–60 days to conduct due diligence; if material problems are discovered, the buyer can terminate or negotiate a price reduction. This contingency shifts discovery risk to the post-signing period, allowing the buyer more time to investigate.

No-shop and exclusivity obligations

A related concept is the “no-shop” clause: once the buyer and seller sign an agreement, the seller agrees not to solicit or engage alternative bidders. This is not a contingency (the buyer cannot terminate based on it), but it creates certainty of closing if contingencies are satisfied. Sellers often negotiate for a “fiduciary out”: the right to discuss superior proposals and potentially terminate for a higher bid, subject to a termination fee payable to the original buyer.

Walk-away and renegotiation

If a contingency is not satisfied, the buyer has two options. The buyer can waive the contingency and close anyway, accepting the risk. Or the buyer can invoke the contingency, terminate, and walk away. Some contingencies allow renegotiation: if financing is harder to obtain than expected, the parties can adjust price rather than terminate. This is less common; most buyers simply walk away or waive.

Sellers’ protections: reverse termination

Some deals include reverse termination fees: if the buyer breaches or fails to close without valid contingency justification, the buyer pays the seller a fee (typically 2–5% of deal value). These fees are meant to incentivize buyer performance and compensate sellers for deal uncertainty. However, reverse termination fees are smaller than termination fees for sellers, reflecting the reality that buyers have more downside risk.

Indemnification and post-closing adjustments

Even if contingencies are satisfied and closing occurs, the buyer retains protection through indemnification and purchase-price adjustment mechanisms. The seller represents and warrants that assets are in good condition, liabilities are accurately stated, and no material undisclosed problems exist. If a breach is discovered within a defined period (often 12–24 months), the buyer can recover from an indemnification escrow or a holdback. This is less absolute than a pre-closing contingency but provides some post-closing recourse.

Negotiating contingencies

The breadth and number of contingencies reflects deal dynamics. A buyer in a competitive auction with multiple bidders will eliminate contingencies to appear more committed. A seller confident in the business will narrow MAC definitions and tighten financing contingency language. Private-equity buyers often eliminate financing contingencies (confident in debt markets) and take broad MAC definitions (they can absorb some adverse change). Strategic buyers (corporations) often retain broad contingencies and negotiate hard on representations.