Conditions Precedent, Regulatory and Third-Party Approvals

A condition to completion is something that must happen between signing and completion before either side is obliged to complete. Three sit on this purchase: two counterparties whose contracts change hands must consent, the target must not have suffered a material adverse change, and an approval must be obtained. The three differ in who holds them, and the one nobody in the room holds sets the pace.

Underneath that answer sits one distinction that everything below turns on. A signed agreement and a completed transaction are two different things, and the stretch of calendar between them is not empty. The gap is occupied by a short list of named events, written into the agreement itself, and completion is the moment after the last of them has happened. Everything below takes this purchase's list of three, one at a time, and asks the only question that changes what an execution team can actually do about any of them: who holds it.

What does a condition to completion actually do to a signed agreement?

Start with what it does not do. A condition does not make the agreement provisional. Both sides are bound from the moment of signature, and neither of them can treat the paperwork as a draft because something on the list is still open. A condition suspends the obligation to complete, not the agreement, and those are two different things. One is about whether a contract exists. The other is about when performance falls due.

Here is what signing did. Signature fixed the terms and tied both sides to them. Here is what it did not do. Not a share moved and not a rupee moved. The shares of Sundarban Polymers Private Limited stayed exactly where they had been the day before, and the money stayed in the buyer's accounts. Harivansh Packaging Limited had bought nothing yet. The buyer had promised to buy, on stated terms, once a stated list of things had happened.

A binding agreement whose performance waits is familiar from ordinary life, even to somebody who has never read one. A flat is agreed at a price, the papers are drawn and both sides sign. Nobody moves in that afternoon. The handover waits for the housing society to clear the transfer and for the bank to release the loan. Neither side thinks the sale has fallen through while that runs, and neither side thinks it is free to sell to somebody else. Both sides are committed, and the day of the handover has not arrived. The flat sale has exactly the structure of a conditional completion, and the whole of the difference is that a transaction of this size writes the list down and names who has to produce each item.

What are the three conditions on this purchase, and what would satisfy each?

Harivansh Packaging Limited is buying the whole of Sundarban Polymers Private Limited, an unlistedA company whose shares are not traded on an exchange, so no market price exists for them and none of the reporting a listed company files is published. maker of flexible packaging films. Start from the Rs 132 crore the target earned before interest, tax and the two non cash charges. Ten times that figure is the enterprise value of Rs 1,320 crore. Off it comes the Rs 180 crore of net debt sitting inside Sundarban Polymers, the figure the bridge subtracts, and Rs 1,140 crore is the equity valueWhat the buyer actually hands to the people holding the shares, once the debt sitting inside the business has been taken off the enterprise figure. that reaches the sellers. The three conditions sit on top of that arithmetic. The multiple of 10.0 times and the considerationThe money, or whatever else of value, that moves from the buyer to the seller in exchange for what is being bought. were settled long before signing, and no condition on the list touches either.

Three items stood between the signature and the money. Consents from two counterparties whose contracts move across with the company. A material adverse change in the target's business not having occurred. And an approval from a decision maker outside the room. All three were outstanding on the day of signing. Three open conditions on that day are the ordinary state of affairs rather than a sign of anything having gone wrong.

The three items are this transaction's own commercial terms, negotiated into the agreement by the parties, and a different purchase would carry a different list. The plural noun invites a reader to imagine a standard set that applies everywhere. There is no standard set. A buyer with no borrowing to arrange has no funding condition. A buyer taking a minority stake may not need any consent at all. The list is the outcome of a negotiation about which risks the buyer refuses to carry between signing and completion, and each item on it is a risk the buyer declined to accept blind.

Notice what each one would take to satisfy. The approval is satisfied by a decision, and the evidence is the decision itself sitting on the file. The absence of a material adverse change is satisfied by nothing happening. No document arrives to prove that nothing occurred, and evidencing it is the strangest of the three. The consents are satisfied by two signatures, one from each counterparty, and there is nothing else that will do instead.

What does the regulatory approval condition do to the transaction?

An approval condition puts a decision belonging to somebody outside the transaction directly onto the path to completion. The transaction then moves at a pace nobody in the room sets. The mechanism is the whole of it, and the mechanism explains every behaviour that follows. The buyer cannot decide it. The seller cannot decide it. The two of them together cannot decide it, however much they agree.

The approval regime itself sits elsewhere. Which approvals attach to a purchase of this kind, who grants them, what a filing has to contain, how a decision is reached and what any of it takes are questions with published answers, and those answers move. The jurisdiction block below names the two bodies that keep the current text.

The commercial consequence holds without touching the regime at all, and it is sharper than most teams expect. Preparation is the only lever the parties hold on an approval condition. A filing can be made early instead of late. A filing made well instead of thinly draws a decision as the first response, rather than a request for what should already have been there. After that, the transaction waits. The party being pushed is not a party at all, so pushing harder shortens nothing.

Think of it the way a household thinks about a passport before a wedding abroad. Every document can be gathered, the form filled correctly, and the application made in the first week rather than the fifth. Nothing makes the passport office decide faster because the ceremony is in March. The date that can be moved is the date of the application. The date that cannot be moved is the date of the answer, and building a plan that depends on the second is how people end up rebooking flights.

What does the no material adverse change condition do while it sits open?

The second condition works on a different axis from the first. An approval is a thing that has to arrive. A material adverse change condition is a thing that has to not happen. A material adverse change condition keeps the buyer's obligation contingent on the business not deteriorating during the gap, so the buyer is not paying at completion for a business that has stopped being the one it priced at signing.

Look at what that protects against. The price was struck on a business earning Rs 132 crore before interest, tax and the two non cash charges. Nine weeks later the buyer is asked to hand over Rs 1,140 crore. In between, the seller runs the business and the buyer watches. If something happened in those nine weeks that genuinely changed what the buyer was getting, the buyer would be completing on a valuation that describes a company that no longer exists. The condition exists so that the buyer is not locked into that outcome by the calendar.

Two things about it are worth holding. The first is that this condition, unlike the other two, has no evidence trail while it is being satisfied. Nothing arrives. The file grows no thicker. Time passing without a qualifying event is what satisfies the condition. The only way anyone knows it is satisfied is that nobody has said otherwise.

The second is that the trigger is drafted to be hard to reach. An execution team calls this one the walk away condition. Releasing the buyer from the duty to complete is the only thing it does. Every business has bad quarters, so a clause that let a buyer walk over an ordinary one would make every signed transaction meaningless. So the wording is built to catch something much larger and much rarer than disappointment. The condition's effect while it sits open is one question. Its trigger, the test that trigger applies and how such wording has been read are separate ones. Both questions belong to drafting and to law, and the boundary below names where they are taken apart.

Why is the consent condition the awkward one?

Two of the target's contracts move across when the company changes hands, and each of those contracts is with somebody who has to agree to that happening, ordinarily because a change of controlWording inside a contract that makes something happen when the counterparty passes into different hands. What such wording can require is covered with the material on transaction documents. provision inside the contract says so. Nothing in the record describes either counterparty. No name, no sector, no size and no value: they are two parties whose agreement is needed, and that is the whole of what is known about them. The mechanism does not need either counterparty to be big to work, so the absence is worth naming rather than filling.

Now the asymmetry that makes this condition behave differently from the other two. The counterparty has no stake in the transaction completing. If the purchase collapses tomorrow, nothing about that counterparty's position changes: it keeps the same contract with the same company it has always dealt with. The counterparty carries none of the buyer's cost, none of the seller's cost and none of the advisory cost. And it is being asked for something at the precise moment its agreement is worth the most it will ever be worth. The money on the other side of that signature is Rs 1,140 crore and the calendar is finite.

An ordinary commercial position is not bad faith. A position like that is predictable, and therefore plannable. Teams who treat a slow consent as somebody behaving badly waste the weeks they have arguing about motive. A counterparty asked to sign something it gains nothing from will take a look at what it might gain from signing. A counterparty asked in week seven of nine will take a rather longer look than one asked in week one.

The everyday version is the landlord's clause. A shop is being sold as a going concern, the buyer wants the premises, and the lease says the landlord's written agreement is needed before the lease can pass to anybody else. The landlord loses nothing if the shop sale falls apart. The landlord gains a rent revision, or a fresh deposit, or a shorter term, by being the last signature nobody can proceed without. There is nothing improper in any of that. The landlord's position is what happens when a person who is not in a transaction turns out to be necessary to it.

How do the three conditions differ in who holds them?

Everything above resolves into one sort, and the sort is what makes the rest of an execution plan usable. Conditions fall into three tiers of control, and the tiers are not degrees of difficulty but different kinds of thing. Tier one sits inside the transaction: a party can simply go and do it, and no outside agreement is needed for it to close. Tier two sits outside the transaction with a decision maker who has no stake in the answer. Tier three sits outside the transaction with somebody who gains from being needed.

The distinction that matters most is the one between the second tier and the third, and it is easy to state wrongly. Calling the third tier harder is tempting. The third tier is not necessarily harder at all. A consent can be signed in an afternoon and an approval can take the whole period. The third tier is different in kind because only there does delay itself carry a price to the person causing it. A disinterested decision maker gains nothing from being slow. An interested counterparty gains something from every week that passes. Waiting is thereby converted from a nuisance into a strategy available to somebody on the other side of the table.

The shape of the point shows in where the empty space is. Nobody who is party to a transaction profits from delaying it. The parties carry the cost of the gap, so the combination of being inside the transaction and better off waiting does not occur. The moment the holder is outside the transaction, the question opens up, and the answer depends entirely on whether that outsider has anything to gain.

Once the sort is done, what a team can actually do about each condition falls out of it without further thought. The sort by holder decides what effort even does, so the sort comes before the effort. A condition the parties hold is done, and done early, because there is nothing to wait for. A condition a disinterested outsider holds is prepared for and then waited on, and the only decisions left are about quality and timing. A condition an interested outsider holds is started first, precisely because every week of waiting adds to what the eventual answer costs.

Move the first control one step at a time and watch what does not happen. At two conditions closed the gate is shut. At one outstanding the gate is shut. The picture only changes at the last step, and that is the honest shape of a conditions period: completion reads the whole set, so progress on the set is not progress towards the date until the final item closes. An execution team that reports itself two thirds of the way there has described its own effort accurately and the transaction's position not at all.

Now move the second control, and a different thing becomes visible. Three of the four settings reach a shut gate by a different route. The fourth never reaches it at all, and the reason is that the parties are trying to release something that was never theirs to release. Who may give a condition up, and who may not, is settled below.

What does a failed condition leave behind?

Suppose one of the three simply never closes. The first thing to be clear about is what does not follow. Nobody has breached anything. The obligation to complete never arose, so there is nothing for either side to have failed to do. That is the direct consequence of the distinction between a signed agreement and a completed transaction: an unmet condition does not create a broken promise, it prevents a promise from falling due.

Whatever happens next is not a matter of arithmetic and never was. Three routes exist, and the agreement chose between them before the condition failed. The transaction can end, with each side walking away and bearing its own costs. The period can be extended by agreement, giving the same three conditions more time. Or completion can proceed anyway, once somebody with the right to give the condition up has given it up. The document decides which of the three happens, and no model, no valuation and no amount of recalculation answers a question the drafting already answered.

Instinct sends a reader somewhere else entirely. A finance reader meeting a failed condition reaches for the numbers: what was it worth, what does the buyer lose, how much of the Rs 1,140 crore was at stake. Every one of those questions has an answer and none of them settles what happens on Monday. The answer to that is in a clause, and reading it takes a minute.

Who may give a condition up, and who may not?

A condition can be given up, and the rule about who may do it is simpler than it sounds. A condition inserted for one side's benefit may be released by that side. Protection is the protected party's to stop relying on. The walk away condition was put there for the buyer alone, since it protects the buyer against getting a different business from the one it priced. The consents sit with the buyer too. Without them the buyer ends up holding contracts with unresolved positions. Either can be dropped by the buyer alone, and neither needs the seller's agreement to be dropped.

Notice what dropping actually costs. The word "waiver" sounds administrative and is not. A buyer who releases the consent requirement completes on time and then holds a business with two contracts whose position with their counterparties has not been settled. Nothing about that problem has been solved. The problem has been moved from before completion to after it, and moved from a condition the buyer could have insisted on to a matter the buyer now has to manage as a shareholder. Giving a condition up is a choice with a price, not a shortcut round an obstacle.

And then the one that cannot be dropped by anybody in the room. An approval that belongs to somebody outside the transaction is not the parties' to release, however much both of them want to complete. The buyer did not put it there for its own protection and neither did the seller. The approval is on the list because the decision has to exist, and two people agreeing that they would rather it did not exist changes nothing at all. The tier structure shows nowhere more cleanly: the first two conditions are the parties' property and the third is not, and no amount of goodwill between buyer and seller converts one into the other.

How long did the conditions period run, and what fixed its end?

Nine weeks. The nine weeks sit inside a twenty two week stretch from the term sheet to completion, making the conditions period 40.9 per cent of the elapsed time and everything before signing the other 59.1 per cent. Read the twenty two weeks as this purchase's own diary and as nothing else. The weeks were invented for teaching alongside the two businesses either side of them, and a transaction next door could run half that or three times it without either being remarkable.

The structural point matters far more than the number, and it is the one most often got wrong on a first plan. The three conditions ran alongside each other rather than in turn, so the period was set by the slowest of them and never by adding them together. Work on all three starts at signing. Nothing about the approval has to finish before a consent can be asked for, and nothing about a consent has to finish before the filing goes in. A team that schedules them in sequence has invented a delay that the agreement never required.

One more thing about the period, and it is an absence rather than a fact. The record of this transaction carries no outer date. There is no stated day on which the agreement expires if the conditions have not closed. Where an agreement sets one, it is a term the parties negotiated and it sits in the document.

What does a lender, an analyst or a seller actually do with the list?

Three different people read the same conditions schedule and take three different things off it, and none of them is reading it for the reason a student might expect.

The lender funding the purchase reads it as a drawdown question. Harivansh Packaging Limited is putting Rs 140 crore of its own cash in and borrowing Rs 1,000 crore at a contracted 9.0 per cent to fund the rest. Borrowed money does not sit around waiting: interest starts when it is drawn, and it is drawn to pay at completion. So the lender wants to know when completion is, and that means knowing which conditions are open and who holds them. A condition held by a disinterested outsider tells the lender to prepare for an uncertain date. A condition held by an interested counterparty tells the lender the date could move for reasons nobody has priced. Devyani Kulkarni, the chief financial officer of Harivansh Packaging Limited, is answering that question every week of the period, and the schedule is what she answers it from.

The analyst covering the buyer reads it as a question about what the announcement did and did not settle. A signed transaction has been announced. Nothing has moved. The analyst who models the combined business from the announcement date has assumed away an entire list of named events, at least one of which nobody in the transaction controls. The conditions list is the difference between a transaction that has been agreed and a transaction that has happened, and the whole of an analyst's caution about a signed deal lives in that gap. The right output is not a probability. The right output is a statement of what is still open and who holds it. A statement like that is information; a percentage is a guess wearing a decimal point.

The seller reads it as an exposure. Every day the conditions period runs, the seller is running a business it has agreed to hand over, under an agreement that lets the buyer walk if something large enough goes wrong. Its capital is tied up, its people know, its customers may know, and it cannot go and find another buyer. Exposure of that kind is why sellers push for short periods and for conditions that are few and tightly drawn, and why the composition of the list is negotiated rather than assumed. A household version: an offer on a flat has been accepted, the flat is off the market, and the wait runs on somebody else's loan approval while the maintenance still has to be paid.

Ashwin Rege, who leads the transaction team, uses the list for something narrower and more useful than any of the three. He uses it to decide the order of the work. Everything above resolves into one instruction that costs nothing to follow and saves the weeks that matter: the conditions are sorted by who holds them before they are sorted by anything else at all.