Regulatory Approval or Third-Party Consent: Which Is Which

A regulatory approval is granted by a public authority applying a test it published in advance, and it protects an interest that belongs to nobody in the transaction. A third-party consent is granted by a counterparty exercising a right inside its own contract, and it protects that counterparty. The first is satisfied and the second is negotiated, and every other difference between them follows from that one.

What is a regulatory approval, and what is a third-party consent?

Start with two errands that look identical from the outside and are not remotely alike underneath.

The first errand is at a municipal counter. A street vendor wants a licence to run a snack cart on a particular stretch of pavement. There is a written test for that: the cart must be a certain size, the pitch must be a certain distance from a junction, the papers must be in a certain order. The officer behind the counter did not invent that test and cannot bend it. She has nothing to gain from the cart and nothing to lose from it. If the vendor turns up with everything in order, the licence comes. If something is missing, it does not, and no amount of charm changes that, because charm is not one of the things the test asks about.

The second errand is next door. The vendor wants to knock a serving hatch through a shared wall, and the shop on the other side of that wall has a right to say no. There is no published test here. There is a neighbour, with a view about noise, a view about smells, and a view about what a serving hatch might be worth to him. He might say yes for nothing. He might say yes for a share of the takings. He might say yes and then, having realised over a week of thinking about it that the vendor has already bought the fittings, say yes for rather more.

The two errands are the two conditions, and every difference between them comes out of one fact: the officer at the counter has no interest of her own in the outcome and the neighbour has nothing but an interest of his own.

Now put it in transaction language. A regulatory approvalA permission granted by a public authority, which applies a test it has set out in advance and does not itself take a side in the transaction. is a permission from a public body, given because a transaction meets a test that body has already published. The body is not a party to the deal. The body gains nothing if the deal happens and loses nothing if it does not. Its job is to protect something that sits outside the transaction altogether: an interest held by people who are not in the room and are not signing anything.

A third-party consentA permission from a party outside the transaction whose own contract gives it the right to object when the other side changes hands. is a permission from a commercial party outside the deal whose own contract gives it a right to object. The right usually sits in a change of control clauseA term inside a contract that lets one side react when the other side changes hands, most often by requiring its permission before the change happens.: a term saying, in effect, that this contract was signed with these people, and if these people are replaced by different people, the counterparty gets to have a say. The party granting it is not protecting the public and is not protecting the transaction. The counterparty is protecting itself, and a commercial party exists to do exactly that.

Both of these are conditions to completionThings that must happen after the agreement is signed and before the transaction actually completes. Until every one of them is settled, nothing has changed hands., which means the transaction has been signed and is waiting on them. Neither is in the buyer's gift. Harivansh Packaging Limited, an invented packaging maker, can sign the documentation from end to end and still not hold Sundarban Polymers Private Limited, an invented maker of polymer film. The two of them together do not have the power to grant either of these permissions to themselves. The two conditions share that much. Almost nothing else about them is shared at all.

Who grants each one, and what is each of them protecting?

With both definitions in place, the comparison can begin. Taking the grantors one at a time, the only question that matters about either of them is this: what does this grantor get if it says yes?

The public authority gets nothing. Its officers are not paid more if Harivansh Packaging Limited completes its purchase and are not paid less if the transaction falls over. The authority holds no stake in the outcome. The authority holds a responsibility for something the transaction touches on its way past: the way a market behaves, the protection of people who hold shares and did not choose this transaction, the integrity of what gets told to a public market. Whose interests those are varies by the approval, and the ones that apply in India are set by the Securities and Exchange Board of India (SEBI) at sebi.gov.in and by company law administered by the Ministry of Corporate Affairs at mca.gov.in. One structural fact holds in any market: the authority is protecting an interest that belongs to nobody sitting at the table.

The counterparty gets a great deal. Suppose one of Sundarban Polymers Private Limited's two consent-holding counterpartiesThe other side of a contract. In a transaction it means a party outside the deal who has signed something with the business being bought. is a customer that buys film under a long supply contract. If it says yes, it carries on being supplied, but now by a business that belongs to a larger group with a different balance sheet, different priorities and possibly a different appetite for the product it buys. It might like that. It might not. Either way it has a view, and its view is about itself. Nobody has appointed it to think about anybody else.

One difference, whether the grantor has an interest of its own, is the root from which every other difference grows, and it is the one line worth carrying away above all the others. An authority with no interest cannot be bargained with, because there is nothing to trade. A counterparty with an interest can be bargained with, and being a commercial party, it would rather like to be.

The counterparty is not an obstacle, is not being difficult, and is not behaving badly by having a view. A supplier that reads its own contract and notices a clause is doing exactly what any careful party does. The transaction team's irritation with a slow counterparty is almost always misplaced, and it is a good early sign that the team has filed the consent in the wrong mental drawer.

Which of the two can be negotiated, and which one cannot?

Ask a transaction team whether a condition is negotiableCapable of being settled by bargaining, because the party on the other side has something it wants and can trade for it. and the real question is whether the party on the other side has something it wants. On that test the answer is immediate and it splits cleanly.

An approval is not negotiable. Not because officials are rigid, but because there is no currency in which the negotiation could be conducted. Offer the authority what, exactly? The authority is not short of anything the buyer holds. The authority applies a test, and the only variable in the whole exercise is whether the transaction as presented meets that test. So the work sits entirely on the buyer's side of the line: understanding what is being asked, assembling it properly, presenting it accurately, answering questions quickly and completely. The workload is real and it can be done well or badly, but none of it is bargaining. Doing it well makes a submission complete. An authority has no favourites to be won, so nothing about a submission can make one favourable.

A consent is negotiable, and in practice it is negotiated almost every time. The counterparty holds a right. Rights held by commercial parties are traded, that being roughly what commerce consists of. So the conversation is a real conversation with two sides: what the counterparty wants, what the buyer can live with, what yes costs. Sometimes the answer is nothing, because the counterparty is content and the relationship is good. Sometimes the answer is a longer commitment, a firmer price, an assurance about supply, or simply money.

With an authority the move is to satisfy a test, and with a counterparty the move is to make a deal, and the reliable way to fail at both is to do each one in the other's manner. A team that tries to bargain with an authority has not made a poor bargain, it has made a category error, and depending on what was offered and to whom, it may have made a far more serious one than that; what may and may not be said or offered in connection with an approval in India is set by SEBI at sebi.gov.in and by company law at mca.gov.in. A team that sends a counterparty a polite fortnightly status note and calls that engagement has not held a negotiation at all. The team has simply told a commercial party, twice a month, that its permission is still outstanding and still needed.

What does each one cost, and in what currency is the bill?

Both cost something. People notice only one of the two bills, and it is the smaller surprise of the two.

An approval is paid for in time and in work. There are weeks of elapsed calendar that cannot be compressed by wanting them compressed. There is the labour of assembling whatever is asked for, which on a transaction of this size is not trivial and pulls senior people away from running the business. There is time from the buyer's advisers and time from the seller's advisers. The approval costs are real, and everybody can see them coming. The costs sit inside the timetable. When Devyani Kulkarni, chief financial officer of Harivansh Packaging Limited, looks at a plan showing a nine week conditions period, the approval workload is visible in that plan as a line with people's names against it.

A consent is paid for in a currency nobody wrote down. A consent can cost money. A consent can cost a longer contract at terms that suit the other side. A consent can cost a better price, a firmer supply commitment, a service level the business would not otherwise have offered, or the quiet abandonment of a claim that was in dispute. And here is the part that catches teams out: almost none of that cost appears anywhere in the transaction's own arithmetic, which is precisely why nobody budgets for it.

How the transaction was priced and funded shows the problem plainly. Enterprise value of Rs 1,320 crore less the target's net debt of Rs 180 crore gives an equity value of Rs 1,140 crore, which is what actually goes to the sellers, and that Rs 1,140 crore is funded by Rs 140 crore of Harivansh Packaging's own cash and Rs 1,000 crore of new borrowing at a contracted 9.0 per cent. Every rupee in that build is a rupee somebody argued about. No line in it carries the cost of persuading a supplier to say yes. A concession made to a counterparty in the conditions period does not show up as a payment to the sellers, does not change the multiple, and does not appear in the funding table. The concession shows up later, quietly, in the terms the acquired business is operating under, and by then it is somebody else's problem to explain.

Think of it the way a household thinks about a wedding hall. The hall has a price and everybody knows the price, argues about the price and budgets for it. Nobody budgets for the caterer who has to be moved, the neighbour whose parking has to be borrowed or the cousin whose booking has to be transferred. None of those are on the invoice. All of them cost something, and all of them cost more the closer the date comes.

What happens if either one is refused?

Refusal is where the two conditions stop merely differing and start behaving like different species altogether.

If the approval is refused, the transaction as proposed is over. Not paused, not repriced: over in the form it was in. The reason is contained in the nature of the thing. A test was applied and the transaction did not meet it. A test already failed cannot be met by asking again in the same terms, and there is no counterparty to go back to with an improved offer. Occasionally a different transaction can be constructed, one that meets the test where this one did not, but that is a new transaction with a new shape, new economics and a new negotiation with the sellers, and it is honest to call it that rather than to describe it as the same deal proceeding. Whether any particular refusal admits of any particular remedy is a question for the authority concerned and for the law that sits behind it.

If a consent is refused, the transaction usually survives, and this is the asymmetry worth carrying away. There are routes. The list of what actually transfers can be restructured, leaving the contract that needs consent where it is rather than moving it. The transaction can proceed without that contract, accepting that the business being bought is a slightly smaller and slightly less valuable business than the one that was priced. Unlike an authority, the counterparty is still there and still trading, so the buyer can go back and pay more for the yes. None of these routes is free.

Only one of the two refusals leaves a route open, and every route it leaves is a route that costs money. Leaving a contract behind means the acquired business has one fewer revenue line than the one that was valued. Restructuring what transfers means legal work, more time, and often a fresh conversation with the sellers about price. Paying more for the yes means paying more. The consent side is survivable, then, but nobody should mistake survivable for cheap.

There is an everyday version of this too. If the licensing office refuses the snack cart's pitch, the pitch is gone and no amount of returning to the counter with the same papers changes it. If the neighbour refuses the serving hatch, the vendor can move the hatch to the other wall, pay the neighbour, or serve from the front and sell a bit less. Three routes, all of them with a price, and every one of them still better than no route at all.

Which of the two behaves more predictably on a timetable?

Here is the reversal that surprises almost everyone the first time, and it matters more than anything else to anybody building a plan.

The approval proceeds at its own pace. Speed cannot be bought, no amount of escalation moves a file to the front, and the elapsed weeks are what they are. The approval sounds like the worse of the two positions, and in one narrow sense it is: the buyer's influence over the calendar is zero. But zero influence is not the same as zero information. A process with a published shape behaves like a process with a published shape. The process has stages that can be named, questions that can be anticipated and a rhythm the buyer's advisers have watched before. The process cannot be made faster, and where matters stand within it is usually visible.

The consent proceeds at a counterparty's pace, and a counterparty's pace is not a process at all. A counterparty's pace is a person's diary, a committee that meets when it meets, a commercial view that has not been formed yet, and above all a party that is steadily learning something. The condition that cannot be influenced is very often the more predictable of the two, and the one that can be influenced is the one that will wreck the plan.

The counterparty is learning, and the learning is what makes the consent side uncomfortable. In week one it has been handed a request it has not thought about. By week four it has read its own contract properly, possibly for the first time in years. By week seven it has noticed that a transaction is waiting, that it is one of a small number of parties whose signature is missing, and that the buyer would very much like this settled. Nothing improper has happened. The counterparty has simply worked out what it holds. And a party that knows what it holds moves slower. Moving slower is now worth something to it.

The neighbour and the serving hatch have the same shape. In the first conversation the neighbour is being asked a favour about a wall. Three weeks later, having watched the fittings arrive, he is being asked a favour about a wall by somebody who has clearly already committed. The request is identical and the negotiation is not. The vendor changed the negotiation by waiting, and paid for the change without ever deciding to.

Which one gets managed, and which one gets waited for?

Everything so far collapses into a single practical instruction about where effort goes, and it is an instruction most transaction teams get backwards.

Consents are managed. There is a party with interests, so there is something to manage: a relationship, a conversation, a sequence of asks, a sense of what the other side wants and what it will settle for. Managing means engaging early, before the counterparty has any particular reason to think about its own position. Managing means one named person carrying each consent rather than a shared inbox. Managing means a real conversation rather than a form, and a view formed in advance about what this yes might be worth paying for and what it would not be worth paying.

Approvals are prepared for and then waited on. Preparation is real work and it is where all of the influence lives: get the submission complete, get the facts right, answer follow-up questions the same week rather than the next month. After that, waiting is the correct activity. Waiting is not laziness and it is not passivity. There is genuinely nothing else that ought to be done, and a team that keeps finding things to do about an approval is usually doing things that range from useless to unwise.

The failure is a straight swap: the team chases the authority it cannot influence, and sends courteous updates to the counterparty it ought to be negotiating with. The swap happens for a reason that is almost sympathetic. The approval feels like the big one. The approval has the weight of officialdom about it, it is the condition the board asks about, and chasing it feels like doing something important. The consents look like paperwork, because what physically moves is a form. So attention flows to the impressive-looking condition where attention changes nothing, and drains away from the modest-looking one where attention changes everything.

Ashwin Rege, who leads the transaction team at Harivansh Packaging Limited, has the practical fix, and it is unglamorous. Every consent gets a named consent ownerThe single person made answerable for one particular consent: for the relationship, the conversation and the outcome, rather than for chasing a form.: one person answerable for that relationship and that outcome, not for chasing a signature. The approval gets a preparation plan and a named person too, and after the submission goes in, that person's job becomes answering questions quickly and reporting where things stand. Two conditions, two entirely different job descriptions, and the failure to write two different job descriptions is what produces most of the trouble in a conditions period.

The household version of this is visible at any passport or licence counter in the country. Standing in the queue and asking the clerk to go faster does not move the queue, and everybody knows it. Meanwhile the landlord whose signature is needed on the same application is at home, entirely reachable, and nobody has called him. The effort goes where the effort feels most urgent rather than where it works.

How are the approvals and the consents found in the first place?

Before either can be managed, both have to be known about, and the two are discovered in completely different ways.

Approvals are visible from the shape of the transaction. Who is buying, what is being bought, in what market, at what size, and whether either party is listed. All of those facts are known from the day the transaction is conceived. The approvals that attach to it can therefore be listed in the first week, long before diligence has turned up anything. Nobody discovers an approval late through carelessness. People discover late exactly what a given approval requires, and that is a question for the authority: for a transaction in India it is SEBI at sebi.gov.in and the Ministry of Corporate Affairs at mca.gov.in that publish what applies.

Consents hide. Consents live inside contracts, in change of control clauses that were negotiated years ago by people who have since left, and they are invisible from the shape of the deal because they have nothing to do with the shape of the deal. A consent has to do with what Sundarban Polymers Private Limited happened to sign in the ordinary course of running its business. A supply contract might carry one. A long lease might. A licence for a piece of technology very often does. And the only way to know is for somebody to read the contracts, one at a time, looking for that clause specifically.

Finding the consents is a diligence task with a named owner and a deadline, and a consent discovered after signing is a consent discovered by the counterparty at the same moment. The last clause is the sting. If the buyer finds a change of control clause in week three of confirmatory diligence, the buyer has time, quiet and options. If the buyer finds it after signing, the transaction is already announced or about to be, and the counterparty finds out at the same time that its consent is needed and that a signed deal is waiting on it. The buyer has handed over both the information and the leverage in one movement.

The consent search is therefore a specific instruction to whoever runs the contract review, rather than a general hope that anything important will surface. Reading a contract for commercial terms and reading a contract for change of control clauses are two different reading tasks, and a reviewer who has only been asked to do the first will honestly and competently do the first.

How do this transaction's three conditions actually sort?

Harivansh Packaging Limited's own three conditions put the distinction to work, and the sort needs care because it has a trap in it.

Harivansh Packaging Limited's purchase of Sundarban Polymers Private Limited carries three conditions to completion: a regulatory approval, the absence of a material adverse changeA condition about whether something serious has happened to the business between signing and completion. What counts as serious is fixed by the agreement., and consents from the two counterparties whose contracts change hands. Sort them.

The first is an approval. A public authority applying a test it published in advance, protecting an interest nobody at the table holds, and unable to be influenced by anybody in the transaction. Its requirements, its stages and its length are set out by SEBI at sebi.gov.in and by company law administered through mca.gov.in.

The two consents are consents. Each is a counterparty exercising a right inside its own contract, each with commercial interests of its own, each open to a conversation and each capable of attaching a price to yes.

And the third condition is neither, which is the whole point of running the sort. The absence of a material adverse change is not granted by anybody. There is no authority applying a test to it and no counterparty deciding about it. The condition is about the state of the world between signing and completionThe day the transaction actually happens: money moves, ownership changes and every condition has been settled. Signing came earlier.: either something serious has happened to the business or it has not. The meaning of serious, the way it is measured and who bears the risk of it are settled by the agreement, and are taken up separately.

Noticing that one of the three conditions has no grantor at all is what stops this comparison from turning into a filing system with two drawers. A reader who has just learned a clean distinction will want to file everything under it, and a transaction will happily supply conditions that do not fit. Some conditions are decisions by an authority. Some are decisions by a counterparty. Some are simply facts about the world that nobody decides.

What set the length of the conditions period, and what set its cost?

Now run the asymmetry across this transaction's own span. The two sides of it do different jobs on a calendar.

Twenty two weeks ran from term sheet to completion on this deal, of which the conditions period was nine. The conditions period is 40.9 per cent of the whole span given over to waiting for permissions, against 59.1 per cent for everything else: confirmatory diligence, documentation and getting to signing. The nine weeks are this transaction's own, and they say nothing whatever about how long any other transaction takes. The nine weeks do show where each condition bites.

The approval set the length. A nine week conditions period is nine weeks long because the slowest condition that nobody can influence takes about that long, and there is no version of the plan in which it takes six. Every other date in the back half of this transaction is arranged around that fact. Nobody at Harivansh Packaging Limited negotiated the nine weeks and nobody could have.

The two consents set the cost. The consents also had to land inside those same nine weeks, but effort changed their outcome, and effort was worth most at the beginning. A counterparty approached in week one is negotiating before it has read anything in the market and before it has thought about what it holds. The same counterparty approached in week seven has had six weeks of noticing. Identical request, identical contract, completely different conversation.

The condition nobody can influence sets how long the period has to be, and the conditions somebody can influence decide what that period ends up costing. Which is a compact way of saying that the plan and the price are settled by different conditions, and that a team watching only the long one is watching the wrong end of its own timetable.

What do the two conditions actually have in common?

The two conditions differ in every particular listed so far, and they also share a good deal. The shared part is what puts them on the same list in the first place.

Both are conditions to completion, which means both sit in the same window between signing and completion and both must be settled before anything changes hands. Neither is in the buyer's gift: Harivansh Packaging Limited cannot grant itself either one, however much it wants to. Both were discovered before signing on a well-run transaction, and both belong on the same list in front of the same team. Both, if they never arrive, eventually run into what happens when a transaction simply cannot complete, and that is a separate subject.

And both are, at bottom, the same structural fact about buying a business: that a business is not a thing that can be picked up and carried away. A business is a bundle of relationships, and some of those relationships are with people who get a say. A transaction is not complete when the buyer and the seller agree, and the list of people who are not the buyer and not the seller but still hold a vote is exactly what a conditions period is for.

Where the two part company is on who those people are and what they want, and that single question, asked early and answered honestly, settles everything about how the nine weeks are spent.