LEGAL ANALYSIS: Why it's important to get condition precedents right
The terms of a condition precedent have been the subject of judicial analysis in a recent Court of Appeal decision
The terms of a condition precedent have been the subject of judicial analysis in a recent court of appeal decision in Astor Management AG (formerly MRI Holdings AG) v Atalaya Mining Plc (formerly Emed Mining Public Ltd) November 2018.
The buyer purchased the seller’s interests in a copper mine in Spain. There was a deferred element to the consideration to be paid to the seller in the amount of just under €60 million over a six year period, but subject to the prior satisfaction of two conditions.
One condition concerned the buyer receiving local authority authorisation, and the second, which was the subject of the appeal, was the obtaining of enough senior debt financing for them to restart mining operations at the site. However, the finance obtained was not by way of senior debt financing, but rather by obtaining an intra-group loan. The question was, did the obtaining of the intra-group loan trigger the obligation to commence payment of the deferred consideration?
What is a condition precedent?
Before considering the court’s decision further it is worth noting what conditions precedent are and why they may be required in the context of an acquisition.
A condition precedent is a contractual provision which, once met, means that some or all terms of the contract will come into force.
Acquisition agreements usually contain conditions precedent because some form of consent or approval is required. Typically their need facilitates a separate exchange and completion of the transaction, but conditions may exist in completed transactions and relate to payment obligations, such as the meeting of targets by the seller before triggering an entitlement to receive some or all of the consideration.
In a corporate transaction, there are numerous situations in which conditions precedent may be required as it may be the case that the target businesses cannot be carried on without some form of approval, licence or permit. For example, in the sale of a company regulated by the Financial Conduct Authority, the FCA’s approval may be required; a sale of a gambling company will require an operating licence to the change of control from the Gambling Commission; a sale of a hotel will require premises and personal licences for the sale of alcohol. Furthermore, depending on the target company or assets being acquired, shareholder approval or consents from lenders or other parties to commercial contracts may be needed – which facilitates the need for conditions precedent in the acquisition agreement.
In the present case, the court had to apply the test as to whether the subsequent event (being the obtaining of the intra-group loan by the buyer) was neither intended nor contemplated by the parties; and that the court needed to be clear what the parties would have intended.
In application of the first part of that test, the court said that the parties had known that senior debt finance was not the only way in which the project in question could have been funded. If it had been the parties’ intention that the deferred consideration would become payable once any kind of finance had been secured in a sufficient amount to restart the mining, then the agreement would have said so. However, in this case the agreement was specific and payment of the deferred consideration was conditional upon the obtaining of a senior debt facility.
In application of the second part of the test, the court could not be confident as to what the parties would have intended if they had envisaged what actually occurred. In reaching this view the court noted the different consequences for each of the parties in obtaining different forms of financing. The court also rejected the argument that the intra group loan could be considered the same as a senior debt facility. In doing so the court agreed with the lower court when it noted that the requirement in the agreement was for the debt to be senior, meaning it would rank ahead of other borrowing of the buyer and therefore an unsecured intra-group loan did not meet the requirement of being a senior debt.
On the face of it, the fact that the buyer had restarted mining operations following receipt of an intra-group loan rather than from obtaining a senior debt facility may seem a harsh decision for the seller. This case highlights the court’s reluctance to interfere with the literal terms of an agreement particularly where the parties appear to have been aware of alternative ways in which the condition precedent could have been triggered. The language in this case was very specific as to what was required to satisfy the condition precedent and, if satisfied, triggering commencement of the payment of the deferred consideration, and the court honoured the wording of the agreement.
When it comes to drafting conditions precedent in an acquisition agreement, the following should be noted:
- the use of the words “condition precedent” are not required in order to ensure the relevant wording is treated as a condition precedent, but clear words are required in order for a term to be construed as such;
- the condition precedent may lack contractual force if it is vague, so ensure that the wording is sufficiently certain;
- the parties should seek to specify a deadline for when the condition precedent is to be satisfied and consider what should happen if the deadline is not reached;
- consider whether the condition precedent has to be satisfied absolutely or will be qualified by an obligation on the party in question to use best or reasonable endeavours to satisfy it;
- establish whether or not a party to the agreement is able to specify if the condition precedent has been met;
- consider whether the party who is to satisfy the condition precedent needs to produce to the other party evidence of the steps it is taking to satisfy it;
- if the condition precedent is not satisfied by the specified time consider whether the party who has the benefit of the condition should be able to extend the period for it to be satisfied or waive the requirement for it to be satisfied; and
- if the condition precedent is not satisfied, should the agreement terminate and if so should any parts of the agreement survive the termination? Also consider whether any of the parties are to bear the costs of the others in the event of termination.
Conditions precedent are fertile ground for disputes. In the context of acquisitions, they typically appear when there is a split exchange and completion, or on the triggering of payment obligations. Both of these are fundamental aspects of an acquisition agreement. In the former, the satisfaction of the condition precedent will result in completion of the transaction and, in the latter, it will trigger the obligation to pay some or all of the consideration to the seller. Given their importance they are not something which the parties can afford to get wrong.
Michael Budd is a Principal Associate at national law firm Weightmans