Virtually any time there is any transaction related to a cannabis company merger, cannabis company acquisition or sale of cannabis real estate, and in many cases the sale of assets of a cannabis company, the parties are likely to encounter a concept known as “entering into” purchase agreements . The conclusion is not necessarily only possible in buying and selling situations and can also take place with other types of contract. For the purposes of this post, however, I will focus on cannabis mergers and acquisitions (M&A) as well as real estate transactions.
“Closing” a contract is essentially the process by which the main purpose of the contract is carried out. For most M&A and real estate transactions, the contract is executed before it is closed – and in some cases long before it. For example, parties to a corporate acquisition can sign the papers on June 1st, but the actual transfer of shares and purchase price cannot occur until September 1st.
You may be asking yourself, “Why not just sign the contract the same day the asset is purchased?” The answer is that if there is a future deal, the parties will have time to meet certain conditions before it closes. For example, in the case of an acquisition of a cannabis business, if the local jurisdiction in which the business is licensed requires pre-approval from new owners (the purchaser), the deal must be completed for the parties to obtain that approval before the transfer occurs. and both parties will be obliged to work together to achieve this. Other common conditions before closing are:
- The buyer receives financing for the purchase price of the transaction
- The seller takes care of existing liabilities – for example, the repayment of tax debts or the settlement of legal disputes
- Obtaining Landlord Approval When a Business Is Sold – Most commercial leases require the renter to obtain approval from the landlord before changing ownership. So this usually has to be done before graduation
- Executing any agreements with third parties that may be required for completion
- The required internal company approvals for the transaction are obtained immediately
- Buyer’s permission for due diligence
You might be wondering now, “Why not just do all of these things before you sign?” There are many reasons for this too. By signing a contract, the parties are bound to a specific performance history. The sellers usually cannot continue buying the business or property, and the buyer generally will not feel the need to look for other options. It can take a lot of work (and money) to take care of the conditions before graduation. The motivation to do so when the deal isn’t closed is usually a huge risk that discerning business people simply don’t take.
Well, you may be wondering, “If there is a long delay between signing and closing, isn’t the buyer taking a great risk that the property or business might change during that time?” The answer is yes and no and depends on how good the sales contract is. The buyer usually insists on all types of seller agreements for the pre-contract period and includes them in the sales contract. Some common ones are:
- Maintain specific amounts or ranges of inventory and working capital so that sellers don’t just take money or assets out of business before the deal. Both concepts often have very complicated calculations that vary significantly from business to business
- The absence of any material adverse changes to the business or property – often a very specifically defined term
- Seller keeping all licenses in good condition
- All representations and warranties made by the seller at the time of signing are also valid at the time of conclusion
Sales contracts set out the circumstances under which a party can terminate the contract and not conclude it, if certain conditions are not met to the satisfaction of the respective parties prior to the conclusion or certain agreements are not fulfilled before the conclusion.
Given that the transaction may not work out in the long run, it’s no surprise that the parties don’t want to exchange much of anything when they sign it. Many parties will employ a trust company during the pre-signing period to hold certain assets that are being exchanged. For example, the buyer can deposit the purchase price with a trust company and the seller can deposit ownership of the property. This also helps the parties to feel confident that the other side will not simply bail out unless the agreement is terminated for valid reasons.
Sales contracts usually do not define when exactly they will be concluded. Instead, the conclusion usually depends on the occurrence of a pre-contract condition and / or on the waiver of conditions the party who does not have to execute them (i.e. although the buyer can achieve satisfactory care results as a closing condition) can waive this condition if it does not exercise due care want to take action, although this poses a great risk). It’s usually impossible to tell when the closing conditions will be met and to set a deadline – no one knows when regulators will approve a change of ownership, for example. The best that parties can usually do is to say that the deal will occur on a set date after the parties have agreed that the conditions are met.
Another option we see is a “drop dead date”. This is a date on a later date on which the contract will be terminated if the closing conditions have not been met. The parties don’t want to be tied to a deal that will drag on forever (which is unfortunately common in the cannabis context). A set deadline is an incentive for the parties to get things done and work towards a closure. And in the event that the parties still can’t get things done despite their best efforts, they will sometimes agree to extend that deadline.
Once all of the conditions for closing are met, the parties will complete the transaction and meet any obligations that must be met at closing, such as: B. the exchange of money or share certificates. In many cases, certain documents can be executed at closing to confirm the sale has been closed. And usually there are also some post-graduation obligations for each party, such as: B. Removing previous owners from a California state cannabis license and tying other open ends.
After all post-deal obligations have been met, the parties are usually dealt with together. M&A agreements often limit the time in which representations and warranties in a sales contract survive the closing period, which means that the parties have no further obligations after these agreements expire.
We plan to write more about the intricacies of M&A and real estate transactions. So stay tuned with the law Law Blog.