Contingencies and Conditions: Maintaining Control in Complex Negotiations
Posted October 17, 2017 in Articles
As deals come down the wire, negotiations can often hit a frenetic pace. Despite both sides’ best efforts to come to terms well in advance of the scheduled closing, it is not uncommon for buyers, sellers and their respective advisors to find themselves working long hours in the final days to hammer out and “paper” the deal terms they need in order to close.
In many cases, this last-minute deal making can be both the product of and the driving force behind the parties’ use of contingencies and conditions. Due to the inherent uncertainty in the initial stages of complex mergers and acquisitions, parties will frequently couch their obligations upon certain information being true, or upon their counterparties satisfying certain commitments. When uncertainties remain or unexpected information comes to light as the closing nears, the parties may agree that they will keep their closing date with certain contingencies or conditions remaining intact.
Limiting “If-Then” Clauses in M&A Transactions
Although contingencies and conditions can keep deals moving forward, they can also lead to an uncomfortable level of uncertainty. In protracted high-value negotiations, it is expected that the party with the most leverage will want to maintain as many “outs” as possible.
While introducing a certain amount of risk into the transaction can be acceptable under the right circumstances, parties also need to be able to recognize when enough is enough, and it may be necessary to find alternatives to contingencies and conditions that can be negotiated into the parties’ agreement. Parties may also have obligations to financing sources that prevent acceptance of certain deal terms; and, when a deal requires third-party approval, it will be necessary to determine whether any proposed contingencies or conditions have the potential to void the transaction’s approval and jeopardize the deal.
Mitigating Risk with Conditional Commitments
Of course, if avoiding an unqualified commitment is in your best interests, then introducing contingencies and conditions into the negotiations can help keep you in control. When it comes to keeping a deal on the rocks, the options you have available are only limited by your imagination. From economic factors to financial due diligence, and from closing related transactions to keeping certain key personnel on board, there are limitless options for both buyers and sellers to protect themselves when they are not yet fully committed to seeing a deal through.
What is the best strategy for your deal? In short, it depends. Even when maintaining flexibility is a top priority, parties also need to be cautious about introducing too much uncertainty and scaring off their potential counterparties. As with all aspects of complex transactions, there are several factors to consider, and making informed and strategic decisions requires a critical assessment of all of the unique facts and circumstances involved.
Contact Mithras Investments | Consulting for a Greater Advantage
Mithras Investments is a global consulting firm that advises buyers and sellers in complex mergers and acquisitions. If you need to take a strategic approach to your deal negotiations, we can help. To speak with a consultant at our offices in Miami, FL, please call (305) 517-7911 or get in touch online today.