From Signing to Closing: Structuring the Closing Process in Canadian Private M&A
Once negotiations are complete and the purchase agreement is finalized, the focus shifts to the final stage of the transaction: closing. Signing the purchase agreement is a significant milestone, but in many cases, it does not mean the deal is complete. Signing creates a binding legal commitment, while the actual transfer of ownership and payment of funds may occur days, weeks, or even months later.
This period between signing and closing is known as the interim period. Understanding how this period is structured, and what obligations it imposes on both parties, is essential for anyone involved in a private M&A transaction in Canada.
This article outlines the two primary closing structures used in Canadian private M&A, the role of conditions precedent and interim covenants, and how the closing process works in practice.
The Closing Structures: Sign-and-Close vs. Sign-Then-Close
In private M&A transactions, the closing structure determines whether the deal closes on the same day the agreement is signed or at a later date. The best approach depends on factors such as deal complexity, financing arrangements, required regulatory approvals, and third-party consents.
Choosing the right closing structure directly affects the transaction timeline, risk allocation between the parties during any interim period, and the deal’s overall cost and complexity.
What is a Sign-and-Close?
In a sign-and-close transaction, the purchase agreement is signed and closing is completed on the same day. All ancillary documents are executed simultaneously, and ownership of the business transfers immediately upon signing.
Since signing and closing occur simultaneously, there is no interim period. This eliminates the risks that can arise during the gap between signing and closing, such as changes to the business, shifts in market conditions, or new liabilities emerging before the transaction closes.
What is a Sign-then-Close?
In a sign-then-close transaction, the parties execute a binding purchase agreement that commits them to completing the deal, with closing scheduled for a later date once specified conditions are satisfied or waived.
This structure is typically used when the nature of the transaction requires additional time between signing and closing. During this interim period, the parties must fulfill any outstanding conditions before ownership and payment can formally transfer.
Although a sign-then-close structure provides both parties with certainty and establishes a defined legal commitment at an early stage, it also introduces additional risks and complexities that must be carefully addressed in the purchase agreement, including detailed covenants governing how the business will be operated and the specific obligations each party must satisfy during the interim period.
Conditions Precedent in M&A Transactions
In a sign-then-close transaction, conditions precedent are the specific requirements that must be satisfied or waived before the transaction can proceed to closing. These conditions are negotiated and set out in the purchase agreement.
Common conditions precedent include obtaining required regulatory approvals (such as under the Competition Act or the Investment Canada Act) and third-party consents required under any material contracts, leases, or licenses.
Interim Covenants: Operating the Business Between Signing and Closing
During the interim period in a sign-then-close transaction, interim covenants govern how the target business must be operated until the closing date. These covenants are negotiated and included in the purchase agreement to protect the buyer’s interest in receiving the business in substantially the same condition as it was at the time of signing.
Interim covenants typically take two forms. Positive covenants require the seller to continue operating the business in the ordinary course, including maintaining existing relationships and preserving the assets and goodwill of the business. Negative covenants restrict the seller from taking certain actions without the buyer’s prior consent, such as entering into new contracts, making significant capital expenditures, hiring or terminating employees, declaring dividends, or disposing of material assets.
Both buyers and sellers should work with legal counsel to understand their obligations during the interim period and to ensure the transaction can successfully proceed to closing.
Final Thoughts
Completing a business acquisition or sale in Canada requires more than reaching an agreement on price and key deal terms. The structure of the closing, the conditions that must be satisfied before ownership transfers, and the obligations that govern the business during any interim period are all critical elements of a well-drafted purchase agreement.
Buying or selling a business is one of the most significant transactions you will undertake. Having experienced legal counsel ensures that the transaction is properly structured, the purchase agreement reflects the specific requirements of your deal, and the closing is completed efficiently and in accordance with your interests.
At Kalfa Law our lawyers advise buyers and sellers on private M&A transactions of all sizes across Canada.
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Alexa Wagman, Hons BA, JD, Articling Student
The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
