Marijuana M&A: Common closing conditions
Most of the commercial purchases we see in the cannabis field have a “closed” concept, which I have described before hereIn essence, this means that both parties sign, they have some time to deal with certain things, and then sell the business.
Today, I want to study the things that need to be processed in order to complete the transaction. This is usually called the completion condition. The parties will specify their completion conditions in the purchase agreement. If the facts prove that one of them did not happen, then the parties can choose to waive the conditions and continue to close, or walk away.
Many times, all parties will implement what we call a “cut-off date.” These are deadlines, and if the closure does not occur for any reason, one or both parties can terminate. This puts pressure on both parties to act quickly to resolve their closing conditions as soon as possible. In my experience, if the parties are doing their best to shut down and certain conditions beyond their control prevent it from happening, these dates will usually end up being delayed several times, such as the regulator taking time to issue approvals. I want to emphasize that although it is common to move deadlines during the pre-close period, it is never guaranteed. Smart parties will only assume that the date is inflexible and negotiate a date as much as possible.
To keep things simple, I will list many of the common pre-closing conditions that you will see in a typical cannabis M&A transaction.Please note that while many such incidents may be handled during the pre-closure period, there are still some (such as paying the purchase price) that may eventually happen exist Closing time. This is the list, in no particular order:
Third party approval
In order to complete a cannabis business purchase transaction, it is usually necessary to seek at least a few different third-party approvals.First, if the business is a leased property, the lessor will almost certainly require the lessor to approve the change of ownership of the lessee in advance (see here). For California cannabis companies, obtaining approval from the local jurisdiction in which the business operates before closing is usually a prerequisite for closing. In more complex transactions, there may be many other third parties and government agencies that need to approve all aspects of the transaction before the transaction is completed.
No restrictions when closed
If there is a government order that prohibits all parties from shutting down, no one wants to shut down. Therefore, the two parties usually add language to the purchase agreement, stating that the absence of such orders or restrictions is a condition for closure.
No major changes
When someone buys a cannabis company, they want to make sure that the company and its assets are basically the same when they are closed as they were when they were signed. As this may take several months, buyers may insist on closing conditions that do not occur that would have a material adverse effect on the business or its assets. These are usually highly negotiated-buyers want these conditions to be as broad as possible, while sellers want them to be narrower. The conditions that the seller wants to define do not include changes in market conditions that may make transactions less than ideal (such as underperforming economies), but only include truly unforeseen events that change the business.
Cannabis companies often urgently need to clean up their corporate governance documents or other third-party or internal contracts. Some buyers are willing to continue buying even if they know that the business is not excellent in terms of internal governance, but may purchase on the condition that the company cleans up some or all of these documents (and usually hope how they were drafted) before the end Or as part of the end.
Believe it or not, many buyers actually signed purchase agreements to buy cannabis companies with huge debts (including tax debts). Buyers usually purchase on the condition that part or all of the debt is paid off before the end of the transaction or from the proceeds of the transaction.
Due diligence completed
In almost all transactions, buyers will at least make some effort before signing a contract. Sometimes, they will have the right to continue due diligence during the partial or full pre-closure period. As a condition of the closure, they will want to ensure that they are satisfied with the results of the due diligence. For example, if they find that a company is not paying taxes during their due diligence, they will want to withdraw.
Inventory/working capital target verification
When buying an operating business, buyers usually want the company to have a certain amount of inventory and working capital when it closes so that the business can continue to operate seamlessly without injecting additional buyer funds or purchasing new inventory (I wrote an article about Inventory and working capital adjustments, you can read here).
Usually, both parties will set target amounts or values ??of inventory and working capital, and make some adjustments to the purchase price at the end of the transaction or after the final distance from the target. But in some cases, buyers may actually condition inventory/working capital as a specific value. Think about it this way-if a buyer wants $100,000 of inventory at the time of the transaction, but only $1,000, then the buyer may just want to walk away instead of adjusting the purchase price, because getting a replacement inventory worth $99,000 may not not easy.
Execution of the contract
At the time of the transaction, at least a few contracts are usually drafted. For example, a sales order in an asset purchase or a transfer in a stock purchase may reflect the end of the transaction and the sale of the asset or stock. Sometimes, the target company may need to sign an employment agreement with the buyer’s key employees, or perform a separate intellectual property transfer to the buyer’s intellectual property holding company. In addition, it is almost guaranteed that the lease allocation will be performed, and possibly even a brand new lease. All of these will be at least a condition for the buyer to make a deal, but usually both parties.
Receive legal opinion
Sometimes, especially for more complex transactions or transactions involving listed companies, large companies, or foreign companies, one or both parties may wish to obtain legal or tax advice on certain parts of the transaction before the transaction is completed. These opinions are used to assess the risk of entering the transaction, and the party seeking an opinion usually notices that the condition for termination is to express a favorable opinion on the transaction or the transaction for which the opinion is sought.
Just like buying a house, some buyers may not have paid all the cash required for the purchase price in advance, so they may be conditional on receiving financing for all or part of the purchase price.
Comply with the terms of the purchase agreement
This sounds simple, and it is true. If the other party violates certain obligations under the purchase contract or related transaction documents, both parties want to ensure that they are not obliged to close.
Accuracy of representations and warranties
The purchase agreement requires the parties to make a large number of mutual commitments, which are called representations and warranties. Sellers always earn more than buyers—for example, they promise that the company has no debts and has already paid taxes. Since there will be an increment between signing and closing, buyers will want to ensure that all representations made at the time of signing and guarantees are still accurate at the time of closing.
In connection with representation and guarantees, the purchase agreement may be accompanied by a number of disclosure schedules. These will do some things, such as listing the company’s tangible assets, real estate, intellectual property rights, material contracts, suppliers, employees, etc. Other disclosure schedules will be related to representatives and guarantees and the potential divestiture of them. For example, you might see a representative and warranty statement “Unless disclosed in Schedule X, the company has paid all taxes.” Schedule X lists unpaid taxes. As with representatives and warranties, buyers will want to ensure that this information is updated at the end of the transaction.
Delivery purchase price / escrow funds
For sellers, the most important thing is to get paid. Therefore, they always want to have a condition that the purchase price has been paid, and if the escrow is to be used for any purpose (such as preventing compensation) after the transaction ends, the escrow account will receive the funds at the end of the transaction.
This is a very comprehensive list, but it is far from everything. Some transactions may have very narrow closing conditions, while other transactions may have page after page of conditions. The number of conditions depends on the complexity and value of the transaction. For more information about cannabis mergers and acquisitions, please stay tuned. You can also read some of our other posts below: