Closing notice, agreement when purchasing businesses

 

Godknows Hofisi-Business Law

Mergers and acquisitions or acquisitions or disposals of businesses, particularly companies, are common as investors look for the dollar.

In this article I share with you some documents used and are commonly referred to as Notice of Closing and Closing Agreement.

Mergers and acquisitions

In mergers and acquisitions investors may combine businesses to establish bigger ones or some investors may acquire businesses from existing owners or shareholders.

Business sale agreements

When existing shareholders sell business to new ones they usually sign a Business Sale Agreement, Share Sale Agreement, Business Acquisition Agreement, by whatever name that may be called.

It may also happen that existing shareholders want to invite a strategic partner to inject funds into the business and in return the company will issue or allot new shares to the incoming investor.

In that case they may sign a Share Allotment, Share Purchase Agreement or similar Investment Agreement.

In Business Acquisition Agreements it is common to find the following provisions:

Parties to the agreement, being the seller and purchaser.

Preamble, to give background and context to the transaction.

Definition of key words or terms.

Conditions precedent, if any. These may include a due diligence by the purchaser or on the purchaser, proof of funds by the purchaser, internal approvals of the seller and purchaser, any regulatory approvals required, etc.

Sale and purchase provision. Just like in the case of an agreement of sale of a property, this defines what is being sold. It can be shares in the company, a division of the company, etc.

Purchase price and payment terms.

Representations and warranties.

Breach.

Dispute resolution mechanisms.

Address for service commonly known as domicilum citandi.

Confidentiality.

Closing of transaction.

Closing Agreement

A closing agreement can be incorporated as a clause in the acquisition or sale agreement if  possible or desirable at the time the main agreement is signed. Alternatively, parties may include a provision that the terms and conditions of closing shall be agreed upon at a later stage though this may cause problems later on.

Closing agreements vary in form and content. They may depend on jurisdictions, complexity of transactions, preferences of parties, conditions precedent, assessed risks, etc. Herein I explain some of the key provisions found in a closing agreement, which now follow.

That the purchaser will need to give notice of closing.

What will trigger closing, for example the happening or non- happening of certain things of events. Events may include the successful completion of a due diligence or passage of time. The purchaser has to make a decision and give notice of closing to the seller.

Conditions to be met or obligations to be discharged by the seller before the purchaser can pay.

Manner and timing of payment. This is usually the main issue.

Any security arrangements that may be required before or after payment. Security arrangements may include use of a third party as an Escrow agent to hold certain things or documents in trust. Alternatively, the third party may be entrusted to carry out certain processes such as transfer or updating company secretarial work.

When effective control of the business will be transferred from the seller to the purchaser.

Paperwork to be generated or signed to confirm completion of the transaction.

Notice of Closing

A Notice of Closing is given by the purchaser to the seller that the purchaser wants to proceed to conclude the transaction, usually through payment of the purchase price and to receive transfer or delivery of what is being purchased. The form and content also varies as explained below depending on:

Whether there already exists a closing agreement, or

No closing agreement already exists.

Where closing agreement already exists

Such an agreement may exist as part of the acquisition or main agreement or as an addendum and signed for.

In that case the purchaser simply gives notice in order to activate his or its rights to progress the transaction. The terms and conditions would have been already agreed upon and signed for.

Where there is no signed closing agreement

A purchaser will send a Notice of Closing and then propose terms and conditions for closing. The parties will have to negotiate and agree, sign the closing agreement and then close the transaction. Problems may arise as parties may want to negotiate or renegotiate what favours them.

Conclusion

Notice of closing and closing agreements are used widely in complex transactions such as business acquisitions or mergers.

Disclaimer

This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit.  He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com.  Visit www//:hofisilaw.com for more articles.

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