Conditions Precedent CPs

Conditions precedent are the events that must occur before the parties to a signed agreement have to complete it. The agreement is binding from signing. The duty to pay the price and transfer the shares is suspended until every condition is satisfied or waived. Civil-law systems often call them suspensive conditions.

They differ from the other promises in the agreement. A warranty is a statement of fact. A covenant is an undertaking to do something or to refrain from it. A condition is neither. If it is not met, the usual result is that the deal does not complete, not that someone pays damages. The agreement normally adds a duty on one or both parties to work towards satisfaction, and a breach of that duty can lead to a claim.

Each condition should state three things: what exactly must happen, which party is responsible for it, and for whose benefit it exists. The last point decides who may waive it. The precise legal effect of a condition is a matter for the national law that governs the agreement.

Typical conditions precedent fall into a few groups: approvals from authorities, consents from third parties, the buyer's financing and internal corporate approvals. The table shows what each kind waits for and how it is usually proved.

Regulatory conditions need the most care. Some transactions may not be completed before a competition authority has cleared them. Which approvals a deal needs depends on the parties' size, sector and countries, and has to be analysed deal by deal.

A long-stop date is the last day by which the conditions precedent must be satisfied. If a condition is still open on that date, the agreement usually gives one or both parties the right to terminate, and the deal ends without closing. Some agreements end automatically instead.

The date protects both sides from being bound indefinitely to a deal that may never complete. It is set by estimating the slowest condition, normally a regulatory review, and adding a margin. Agreements often allow an extension, by mutual consent or automatically when only an approval is still pending.

What follows termination is also a matter of drafting. Confidentiality and cost clauses normally survive. Some agreements provide for a fee if the condition failed for a reason within one party's control. A party that caused the failure by neglecting its duty to pursue the condition is commonly barred from relying on the long-stop date.

Satisfaction of a condition precedent is evidenced by a document for each condition and recorded in a written confirmation between the parties. The responsible party sends the other a notice with the evidence attached, such as the authority's decision or the signed consent. When the last condition is met, the parties commonly sign a short confirmation that all conditions are satisfied or waived. That document fixes the day from which the closing date is counted.

The date therefore carries weight. A confirmation signed electronically can carry a qualified electronic time stamp, which enjoys a legal presumption that the date and time it shows are accurate (Article 41(2) of the eIDAS Regulation). The notices clause of the agreement should be read first, because it may prescribe how a valid notice is given and to whom.

Advisers usually track progress on a conditions checklist that names each condition, the responsible party, the evidence received and the date. The checklist, the evidence and the confirmations belong in the transaction file. They are what a party will rely on if the other later disputes that closing was due.

A person with authority to bind the party signs: a director or other statutory representative, or an attorney acting under a power of attorney. A confirmation or a waiver changes the party's legal position. The recipient is therefore entitled to the same proof of authority as at signing, and a power of attorney has to cover notices and waivers under the agreement.

Lawyers often send these notices for their clients. Whether they may do so depends on the agreement and on their mandate. A firm should hold a written instruction before it confirms or waives anything on a client's behalf.

Under the eIDAS Regulation an electronic signature is in principle enough for a confirmation or a waiver, unless national law or the agreement requires a particular form. A regulated adviser has a duty of its own as well. From 10 July 2027, Article 20(1)(i) of the EU Anti-Money Laundering Regulation requires it to verify that a person purporting to act on behalf of its client is so authorised.