Letter of Intent: Conditions to Close

When you are asked “Hi – it’s been fun to date. Will you marry me?” you usually don’t expect the person asking the question to say “Oh – and it’ll only happen if my mother says it is ok.” (although I expect this happens occasionally, especially if the person asking hasn’t had enough therapy.)

Buyers are like this and will normally include certain conditions to closing in the LOI. These can be generic phrases such as “Subject to Board approval by Acquirer,” “Subject to the Company not having a material adverse change,” or “Subject to due diligence and agreement on definitive documents.” They can also be phrases that are specific to the situation of the seller such as “Subject to the Company settling outstanding copyright litigation,” or “Subject to Company liquidating its foreign subsidiaries.” We generally don’t get too concerned about this provision, because any of these “outs” are very easy to trigger should the buyer decide that they don’t want to do the deal.

Instead of worrying about whether or not the provision is part of the LOI, we tend to focus on the details of the conditions to close, as this is another data point about the attitude of the buyer. If the list of conditions is long and complex, you likely have a suitor with very particular tastes. In this case, it’s worth pushing back early on a few of these conditions to close, especially the more constraining ones, to learn about what your negotiation process is going to be like.

As the seller, you should expect that once you’ve agreed to specific conditions to close, you’ll be held to them. It’s worth aggressively addressing them early in the due diligence process so you don’t get hung up by something unexpected when you try to “liquidate a foreign subsidiary”, especially if you’ve never done this before.