Signing Is Not Closing: Conditions Precedent and the Gap Period

One of the most important distinctions in M&A is also one of the least intuitive for anyone approaching a transaction for the first time: signing the acquisition agreement does not necessarily mean that the acquisition has completed.

In some transactions, signing and closing occur simultaneously. The SPA is executed, the purchase price is paid and ownership of the shares transfers on the same day.

In many others, however, the parties sign the SPA first and complete the acquisition only weeks or months later. Between those two dates lies what is commonly referred to as the gap period.

This period is not simply an administrative delay. It is a distinct phase of the transaction in which the parties are already contractually committed to the deal, but the seller still owns the company and the buyer has not yet acquired control.

The SPA must therefore regulate two fundamental questions: what still needs to happen before the buyer is required to close, and how should the business be operated while everyone waits?

Why do signing and closing happen on different dates?

The simplest transaction may require very little between signing and completion. But more complex acquisitions often depend on events that cannot be satisfied instantaneously.

Regulatory approvals are a common example. A transaction may require merger-control clearance, foreign investment approval or consent from a sector-specific regulator before ownership can legally change hands.

Third-party consents may also be required. Important financing agreements, licences, leases, joint ventures or customer contracts may contain change-of-control provisions that need to be dealt with before closing.

The parties may need to complete an internal restructuring, repay existing debt, release security, obtain shareholder approval or take other specified steps before the transaction can complete.

The existence of a gap period therefore usually reflects execution conditions that remain outstanding after the commercial deal has been agreed.

This distinction matters because the legal commitment to acquire the company and the legal ability to complete the acquisition are not necessarily achieved at the same time.

Conditions precedent: what must happen before closing?

The SPA will normally identify the events that must occur before the parties are required to complete the transaction. These are commonly referred to as conditions precedent or conditions to closing.

Their precise scope depends on the deal.

Typical examples include obtaining competition clearance, securing foreign investment approval, receiving specified third-party consents, completing a pre-closing reorganisation or obtaining relevant corporate approvals.

The SPA may also make closing conditional upon the seller having complied with material pre-closing covenants or upon certain representations and warranties remaining sufficiently accurate at completion.

The important point is that a condition precedent is not merely another contractual obligation.

If the relevant condition is not satisfied or waived in accordance with the SPA, the obligation to complete may never arise.

For that reason, the negotiation over conditions precedent is ultimately a negotiation about closing certainty.

Not every desirable outcome should become a condition precedent

From the buyer’s perspective, it can be tempting to make closing conditional upon resolving every outstanding issue identified during diligence.

That approach may provide maximum theoretical protection, but it can also make the transaction extremely difficult to complete.

A condition precedent should generally be reserved for matters that genuinely need to occur before ownership changes hands.

Suppose due diligence reveals a small historical employment claim. That issue might be better addressed through an indemnity rather than making the entire acquisition conditional upon final resolution of the dispute.

By contrast, if the target cannot legally operate without a regulatory licence that will be affected by the change of control, obtaining the necessary approval may be essential before closing.

This is where legal analysis and deal judgment need to operate together.

The question is not simply whether a problem exists. It is where in the transaction architecture that problem should sit.

Some risks belong in the purchase price. Others belong in warranties, indemnities or insurance. Only some genuinely belong as conditions to completion.

The gap period creates an unusual ownership problem

Once the SPA is signed, the buyer has agreed to acquire a particular business at an agreed economic value.

But until closing, the business still belongs to the seller.

This creates an obvious tension.

The buyer does not want to arrive at closing and discover that the company has materially changed since signing. The seller, however, cannot simply stop operating the business or surrender control to someone who does not yet own it.

The SPA therefore commonly requires the seller to operate the target in the ordinary course of business during the gap period.

At the same time, certain actions may require the buyer’s consent.

These restrictions may cover material acquisitions or disposals, significant new borrowing, dividends, changes to share capital, major contracts, unusual capital expenditure, changes to senior management or other actions outside the ordinary course.

The purpose is to preserve the business the buyer agreed to acquire.

But the drafting needs to be carefully calibrated.

The buyer cannot own the company before it owns the company

Buyer consent rights create an important legal and practical boundary.

The buyer may reasonably want protection against material changes to the target, but it should not effectively begin controlling the company before closing.

This concern is particularly acute where merger-control rules apply.

Competition law can restrict the parties from implementing a transaction before the required clearance has been obtained. If the buyer begins directing the target’s commercial decisions, approving ordinary business activities or integrating operations prematurely, the parties may create gun-jumping risk.

The seller therefore needs enough autonomy to continue managing the business.

The buyer needs enough protection to ensure that extraordinary decisions do not materially alter what it has agreed to buy.

Good gap-period drafting tries to preserve that balance.

The objective is not to freeze the company. It is to ensure that it continues to operate normally while preventing decisions that could fundamentally change its value or risk profile.

What does "ordinary course" really mean?

The phrase "ordinary course of business" appears frequently in acquisition agreements, but its application can be less straightforward than it sounds.

A company may need to make decisions during the gap period that are commercially sensible but unusual.

Perhaps an important supplier becomes insolvent and needs to be replaced urgently. Perhaps the company receives an attractive opportunity to sign a large new customer contract. Perhaps market conditions require an unexpected increase in inventory.

The seller may consider these decisions essential to running the business properly. The buyer may argue that they fall outside the historical ordinary course and require consent.

A well-designed SPA therefore needs to provide enough flexibility for the company to respond to genuine business needs.

The consent process should also be workable. If every meaningful operational decision requires prolonged discussion with the buyer’s lawyers, the provision can interfere with the business the parties are supposedly trying to preserve.

From an advisory perspective, the contractual mechanism should reflect how the target actually operates, rather than relying solely on generic drafting.

Efforts obligations: who is responsible for getting the deal to closing?

Many conditions precedent depend on action by one or both parties.

A regulatory filing needs to be submitted. Information must be provided to an authority. A consent may need to be requested from a contractual counterparty.

The SPA therefore commonly imposes obligations requiring the parties to use an agreed level of effort to satisfy the outstanding conditions.

The precise drafting matters because not every effort standard requires the same degree of commitment.

The central commercial question is usually straightforward: how far must each party go to make closing happen?

This becomes particularly sensitive in regulatory matters.

Suppose competition authorities indicate that approval will only be granted if the buyer divests part of another business. Is the buyer required to accept that remedy? What if the required divestment is economically significant?

The agreement may need to determine in advance how much regulatory burden the buyer is expected to accept.

Otherwise, both parties may sign the transaction believing that the other has assumed more closing risk than it actually has.

The long-stop date: a deal cannot remain pending forever

Even where both parties are working toward closing, the transaction cannot normally remain open indefinitely.

The SPA therefore often establishes a long-stop date by which the conditions precedent must be satisfied or waived.

If closing cannot occur by that date, one or both parties may acquire a right to terminate the agreement, subject to the agreed terms and responsibility for the delay.

The long-stop date is particularly important in transactions requiring regulatory approval, because the timetable may not be entirely under the parties’ control.

It therefore needs to be realistic.

A deadline that is too short may create unnecessary termination risk. One that is excessively long can leave the seller’s business effectively constrained by an unresolved transaction for an extended period.

From an advisory perspective, this is another reminder that execution certainty has economic value.

A seller agreeing to a long and uncertain gap period is accepting more than a delayed payment date. It may be accepting months of operational restrictions, management distraction and reduced strategic flexibility.

What if the business changes before closing?

A more difficult question arises where something significant happens during the gap period.

A major customer may terminate a contract. A factory may suffer serious damage. A regulatory investigation may begin. The company’s financial performance may deteriorate sharply.

Whether such an event allows the buyer to refuse to close depends on the SPA.

The agreement may address the issue through the accuracy of representations and warranties, compliance with pre-closing covenants, specific conditions or a Material Adverse Change / Material Adverse Effect provision.

The MAC concept will be examined separately in the next article, but its role in the gap period is important: it attempts to define how severe a deterioration must be before the buyer is entitled to treat the transaction as fundamentally different from the one it signed.

The threshold is usually intended to be high.

Ordinary fluctuations in business performance should not automatically allow the buyer to abandon a signed acquisition.

Otherwise, the seller would have transaction certainty only for as long as everything continued exactly as expected.

Bring-down of representations and warranties

Representations and warranties may also become relevant again at closing.

In many transactions, the seller gives them at signing and is required to repeat, or bring down, some or all of them at completion.

The buyer therefore receives confirmation that the contractual picture of the target has not materially changed during the gap period.

But this raises another negotiating question.

Must every warranty remain perfectly accurate, or only accurate subject to an agreed materiality standard?

If a relatively minor warranty becomes technically inaccurate, should that allow the buyer to refuse to complete a major acquisition?

The answer depends on the drafting, but the commercial objective is generally to distinguish between breaches that genuinely affect the transaction and those that should instead be dealt with through post-closing remedies.

The closing condition should protect the buyer from a materially different business, not necessarily provide an easy exit for immaterial technical breaches.

The advisory perspective: the gap period is execution risk

From a purely contractual perspective, the gap period is the period between signing and completion governed by conditions, covenants and termination rights.

From an advisory perspective, it is a period of concentrated execution risk.

The transaction has been publicly or internally committed to, advisers remain engaged, management attention is diverted and the seller may be restricted from pursuing alternative strategic opportunities.

Yet ownership has not transferred and the purchase price has not necessarily been received.

This means the quality of the closing plan matters enormously.

Regulatory filings should be mapped before signing. Third-party consents should be identified during diligence. Responsibility for each condition should be allocated. Timelines should be realistic. Potential bottlenecks should already be understood.

The best gap-period strategy is not simply to draft strong contractual protection.

It is to reduce the number of things that can still go wrong after signing.

Signing creates commitment; closing creates ownership

The distinction between signing and closing captures an important feature of M&A.

At signing, the parties agree to the transaction.

At closing, they actually perform it.

Between those moments, the SPA must protect the business, allocate responsibility for satisfying the remaining conditions and define what happens if completion becomes impossible.

Conditions precedent determine whether the parties are required to close. Interim covenants regulate the target while they wait. Efforts obligations determine how hard each party must work toward completion. The long-stop date prevents uncertainty from becoming indefinite.

The gap period therefore should not be viewed as the empty space between two important dates.

It is a transaction phase in its own right.

And in many deals, getting from signing to closing can be just as important as negotiating the agreement that was signed in the first place.