How to Navigate Deal Delays and Completion Uncertainty in an Era of Heighted Deal Complexity and Prolonged Interim Period

Prolonged or failed M&A transactions can tie up capital, increase transaction costs, and delay returns of exit proceeds. Managing the interim period between signing and closing is increasingly critical in M&A transactions, especially as regulatory scrutiny rises and deal timelines grow longer.

The following strategies can help buyers and sellers prepare for and navigate these delays, ensuring deals successfully close.

Calibrate the Conditions to Completion

Plan for Regulatory Approvals. Buyers and sellers must identify which specific approvals are required from regulatory authorities (e.g., antitrust regulators, foreign investments regulators or industry-specific agencies) to legally complete the transaction but also to measure the expected length of the interim period, set the long stop date (which is the deadline for transaction completion, beyond which it will be abandoned unless both parties agree to extend) and negotiate the availability of the financing commitments (see below).

Carefully Negotiate the Material Adverse Change (MAC) Clause. A MAC clause allows buyers to exit a deal if significant negative events occur that affect the value or operation of the target company between signing and closing. This clause is particularly important during prolonged interim periods, as extended timelines increase the likelihood of unforeseen events.

When defining a MAC, buyers should aim for the broadest (e.g., events affecting the industry) and most subjective terms. Conversely, sellers should strive for narrow criteria, focusing on events with significant and lasting impacts on the target while excluding external events such as health crises, wars, terrorism, natural disasters, or market fluctuations. Sellers may also define a materiality threshold based on revenue, net assets, EBITDA, a percentage of the transaction consideration, or another criterion.

Buyers Must Secure Financing. Buyers can stipulate that the deal will close only if the required financing is available at the closing date. In any event, for deals with prolonged timelines, buyers must negotiate financing commitments that remain valid for the entire duration of the interim period, up to the long stop date (and any extension). They should also be prepared for the lenders to charge ticking fees given the extended timeline.

Make Deal Completion Contingent on Covenant Compliance. Longer deal timelines increase the likelihood of covenant breaches in which one party fails to fulfill its agreed-upon obligations. Buyers may require that the deal’s completion be contingent on the absence of any breaches in business conduct or other material covenants between signing and closing, rather than seeking indemnification.

Set the Long Stop Date with Precision

Regulatory investigations follow timelines influenced by various factors, priorities, and ‘stop-the-clock’ mechanisms. Parties must consider this when timing deals and setting a long stop date. Buyers must ensure that the long stop date, including any of its extensions, aligns with its financing commitments.

Sellers Might Seek ‘Hell or High Water’ Provisions

A "hell or high water" provision obligates the buyer to take all necessary steps, such as divestitures in a likely antitrust scenario, to secure each regulatory approval. This provision aims to provide sellers with a higher level of deal certainty, noting that required remedies may vary by authority.

Negotiate ‘Termination’ Fees

Sellers may seek termination fees (also known as breakup fees) as indemnity for the risks and costs associated with prolonged deal timelines. Termination fees compensate the sellers if regulators block, or appear likely, to block a deal or if delays or regulatory issues derail the transaction, while holding buyers accountable for completing the deal.

Prepare for Valuation Challenges During Extended Interim Periods

Extended interim periods introduce uncertainties that can disrupt the initial valuation of the target company, requiring buyers and sellers to carefully assess and negotiate mechanisms to preserve or adjust the deal’s financial terms to reflect the target’s actual condition at closing.

In locked-box transactions, where the purchase price is fixed based on the target’s financial position at a specified date (the locked-box date) with non-leakage provisions to prevent the seller from extracting value—such as dividends or asset transfers—after that date, sellers will negotiate ticking fees to compensate for the cash generation due to long closing delays and to incentivize the buyer to expedite the closing process.

Given the potential for significant changes during prolonged interim periods, buyers will consider adjusting the purchase price (in locked-box transactions) or the enterprise value (in post-completion price adjustments transactions) based on agreed financial metrics such as net debt, working capital, or EBITDA to reflect the actual financial position of the target company at the closing date. Buyers may also consider reassessing the purchase price or the enterprise value at a different set date closer to completion date.

Dealmakers may also consider earn-out provisions to address extended interim periods, though these can lead to disputes and delayed payments.

Prudently Manage Target Company Business During the Interim Period

During extended interim periods, it is even more crucial for buyers to ensure that the target business is managed prudently to maintain its value and stability. To safeguard their interests, buyers will seek a comprehensive list of actions that the sellers and the target company cannot undertake without their consent, while avoiding 'gun jumping', i.e. exercising control over the target business before obtaining antitrust clearances. Conversely, sellers will want to limit the number of actions requiring buyer consent to prevent unnecessary delays and adverse effects on the target business's daily operations and growth, especially if regulatory approvals are not granted.

Manage the Disclosures Against the Representations & Warranties

During a long interim period, new information (disclosures) may emerge that could alter the accuracy of the original representations & warranties. Sellers should resist buyer pushback on the usage of unrestricted exculpatory disclosures, which protect the sellers from liability related to inaccuracies in their original representations & warranties. A compromise may involve the buyer assuming the risk of exculpatory disclosures up to a specified ‘materiality’ amount threshold or incorporating a MAC clause.

Conclusion

While traditionally the focus was on signing, it is now equally crucial to plan for the period between signing and closing when significant delays may occur. By taking proactive measures, buyers and sellers can manage their expectations when facing extended timelines.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.