Uncertainty about conditions precedent in acquisitions
Conditions precedent are very common in acquisition practice. Including a condition precedent means that the acquisition (of shares or assets) can only take place if the pre-agreed condition(s) are met. An example of a condition precedent for the selling party is the repurchase of 49% of the shares before the date on which the shares or assets are transferred, also known as the “closing date”. – 49% of the shares. If the condition precedent is not met before the agreed date, the transaction cannot take place. In this article, you can read more about conditions precedent in acquisitions.
Disagreement about termination
So far, nothing unusual, as the principle of freedom of contract applies in the Netherlands. In principle, parties are free to agree with each other on whatever they want. However, problems arise when parties disagree on how the agreed terms should be interpreted afterwards. This was the case in the ruling of the Court of Appeal in The Hague, 4 April 2023, ECLI:NL:GHDHA:2023:962.
The question at issue between the parties is as follows: can the buyer immediately terminate the purchase agreement if a condition precedent has not been met? The parties agreed in advance on the right to terminate in the purchase agreement. The buyer refers to the wording of the purchase agreement. The seller, on the other hand, points to the circumstances, which would indicate a different reality that does not allow for termination without prior notice. According to the seller, the buyer should have given the seller notice of default and set a reasonable period for performance. The court agreed with the buyer, but what is the court of appeal’s ruling?
The essence of the dispute
This case concerns two companies that entered into a purchase agreement for the acquisition of shares with a term during which all conditions precedent had to be met. One of the conditions precedent was that the seller had to repurchase 49% of the outstanding shares from another shareholder before the Closing Date. When this condition precedent had not been met by this date, the buyer proceeded to terminate the agreement. The seller, who had not yet fulfilled the condition precedent, believes that this is unfounded. According to the seller, the Closing Date was not agreed as a strict deadline, but as a target date.
Judgment of the court
The court considers that this case involves two professional parties and that the agreements made in the purchase agreement are therefore decisive. The purchase agreement included a period within which the conditions precedent had to be met. If this was not the case, either party had the option to terminate the purchase agreement. This is what happened. The seller argued that the intentions of the parties took precedence, as in the well-known Haviltex judgment. In the Haviltex judgment, the intentions of the parties outweighed what had been agreed on paper.
However, the circumstances in the current case do not indicate this. On the contrary, the circumstances indicate that the takeover should be completed as soon as possible. It was clear to both parties that failure to complete the repurchase of the shares before the Closing Date would lead to the transaction being called into question. The court therefore ruled that the termination was lawful.
The lesson from this judgment
In disputes about a (purchase) agreement between professional parties, the pre-agreed arrangements are leading. There is no obligation for the terminating party to agree on a new Closing Date or an extension of the term for fulfilling a condition precedent. As long as no obligation to this effect has been agreed between the parties and no postponement can be inferred from the circumstances, termination can be invoked. However, this must be included in the purchase agreement in advance. Otherwise, the regular termination rules under the law apply, including Section 6:265 of the Civil Code. This stipulates that any failure to perform may result in termination if this is proportionate.
What you can do differently from the seller in this case, who lost out on an acquisition worth €8 million as a result, is the following:
Include the obligation in the purchase agreement to extend the deadline for the final takeover. Do this when one or more of the conditions precedent have not yet been met. In this way, you oblige both parties to at least perform the (legal) acts once more in order for the takeover to succeed.
Questions?
Do you have questions about conditions precedent in acquisitions or about acquisitions in general? Please contact one of our lawyers by email, telephone or fill in the contact form for a no-obligation initial consultation. We are happy to assist you.
