Finocchio & Ustra Sociedade de Advogados | View firm profile
Andrea Tincani, partner
Camila de Godoy Ferreira, lawyer
Júlia Cristina Arruda Savioli, lawyer
Giovana Silva, trainee
In M&A transactions, it is common for risks and irregularities identified during the due diligence phase to require remediation before the transaction can be finalized. Additionally, certain critical steps — such as third-party approvals and structural adjustments — may be essential for implementing the transaction. These must typically be completed prior to the effective transfer of ownership.
In these scenarios, the operation is divided into two distinct moments: (i) signing, when the agreement setting out the terms of the deal is executed; and (ii) closing, when the actual transfer of ownership occurs, along with the payment of the purchase price.
The interim period between signing and closing allows the parties — already contractually bound — to take the necessary steps and obtain required approvals without transferring assets prematurely or incurring unnecessary risk.
Conditions precedent refers to all obligations – arising from the law or by agreement between the parties – that must be fulfilled before the completion of the transaction. These are typically subject to a deadline, which varies depending on the complexity and nature of the required measures and the involvement of third parties.
If a condition precedent involves a legal requirement (e.g., government or regulatory approval) and such authorization is not obtained, commitment between the parties may be rendered void, and the deal cannot proceed. Conversely, if a condition precedent is not fulfilled due to the inaction of one party, the agreement usually anticipates two options: (i) waiver of the condition by the other party, thereby allowing the transaction to close despite the breach; or (ii) termination of the agreement, often with the imposition of a contractual penalty in favor of the non-breaching party. Such penalty clauses are crucial in ensuring transactional security and risk mitigation.
Conditions precedent fall into two categories: those that depend on the parties themselves and those that depend on third parties. Examples of conditions that usually depend on the parties are: modification of the target company’s corporate structure, updating of the corporate structure to include or change the partners of the target company, adjustments to the target company’s fiscal/tax policies, hiring of the target company’s service providers as employees, obtaining authorization from the controllers of the companies involved in the purchase and sale, among others.
Regarding the conditions precedent that depend on third parties, examples include: (i) approval by the Administrative Council for Economic Defense (CADE) of transactions that involve relevant players in their field of activity and/or that may impact market competition; (ii) obtention of consent from third parties who, by virtue of an agreement with the Target company, must approve changes in their corporate structure; (iii) replacement of personal or real guarantees offered by the Target company’s partners; or (iv) trading of bank securities with early maturity in the event of a change in the Target company’s control.
Conditions precedent are not merely bureaucratic hurdles; they are vital tools in organizing M&A transactions. They ensure that all required steps and permissions are completed before the buyer takes on any risks associated with ownership. Moreover, they provide an opportunity to remedy red-flagged issues identified during due diligence.
Meticulous planning, aligned with the specific needs of both parties and the target company, promotes deal certainty and reduces exposure to legal and operational risks.