Managing M&A Risks Between Signing and Closing

What exactly is meant by signing and closing?

Before we address the risks of the interim period, it is necessary to understand the basic difference. Signing is the moment when both parties sign a legally binding sale or merger agreement (Share Purchase Agreement, SPA). At this point, the parties’ intentions are aligned, but the actual transfer of assets, change of ownership and transfer of control do not yet take place.

Closing is the actual moment when the transaction is physically/legally completed. The buyer transfers the money, the seller hands over the shares or assets, and the relevant changes are registered with the public registers (e.g., the Commercial Register). Once closing is completed, the buyer becomes the owner and all risks and benefits transfer to the buyer.

In practice, there is therefore a waiting period between these two moments. This can last from several weeks to many months, especially if the transaction requires regulatory approval, obtaining consents from third parties (e.g., key customers) or finalising financing.

Interim period: Why is it the most critical time?

Once the agreement is signed, the seller still owns and manages the company. However, in this period their options become increasingly limited – yet not all of their practical conduct is immediately visible. The buyer, on the other hand, does not yet have control, and must therefore rely on the seller complying with its obligations and, in essence, not trying to “strip” the company before closing.

The legal reality is far more complex than it may seem. In the interim period, virtually anything can happen – which is precisely why this period is referred to in financial circles as “the most dangerous time of the deal”.

The seller has a strong incentive to maximise the cash it will receive from the deal. If the interim period is long or uncertain, the seller may decide to take:

• A dividend (distribution of profit to shareholders),
• Intra-group payments outside the ordinary course (e.g., back to the parent company),
• Assets without consideration (sale of assets to a third party),
• Or, conversely, reduce investments and maintenance so that money is not “locked up” in operations but remains available for extraction.

The buyer faces different risks. If the business environment changes significantly between signing and closing (recession, loss of a key customer, financing failure), the buyer may try to:

• Negotiate a lower price (renegotiation),
• Find an “exit route” via a MAC clause,
• Or even walk away from the deal, if the conditions allow it.

All of this creates asymmetry and potential conflict. That is why our Czech legal team at ARROWS, a Prague-based law firm, knows that a properly drafted agreement and monitoring of the interim period are the absolute minimum.

First line of defence: What obligations and restrictions for the seller?

Interim operating covenants – A chain for the seller

Virtually every modern purchase agreement contains so-called interim operating covenants – a list of the seller’s obligations in the period between signing and closing. Typically, the seller undertakes that it will:

Conduct the business in the ordinary course – i.e., without major experiments, without dramatic changes to the product range, without dismissing key employees without cause, and the like. This is a relative standard, because the “ordinary course” differs across industries and situations.

Maintain operational health – i.e., for example, not dismiss key employees, not fundamentally change business models, not enter into long-term contracts below cost, and similarly.

Not incur major capital expenditures without the buyer’s consent (capex restrictions) – so that money is not “locked up” in new investments that would not subsequently bring benefits.

Not increase debt (debt restrictions) – the seller does not incur debt without consent, because that would increase the debt that the buyer would have to bear after closing.

Not change the tax and accounting approach – so that the accounting and tax position are not unexpectedly altered.

The problem is that these rules are often drafted too generally. What exactly does “ordinary course” mean? If the seller is losing its largest customer, can it afford to replace them at a lower price? What if the financial situation is tight? That is why our Czech legal team at ARROWS, a Prague-based law firm, pays increased attention to ensuring that interim covenants are specific, measurable and tied to particular scenarios.

No-leakage clause – Prohibition on value extraction

Even more important is the so-called no-leakage or anti-leakage clause. It specifically focuses on protection against extracting value from the company. It defines what qualifies as “leakage” (loss of value) and prevents the seller from:

Paying dividends to owners without the buyer’s consent, transferring money within the group (intra-group transactions outside the standard volume), selling assets or intangible assets, waiving receivables or entering into clearly disadvantageous transactions, or providing financial benefits to members of management or persons close to the owners.

However, all of these prohibitions must include so-called “Permitted Leakage” – a list of items that are allowed because they are foreseeable or customary. For example, ordinary employee wages are not leakage, nor are ordinary operating costs or planned dividends that were already approved in the purchase agreement.

At this point, our Czech legal team at ARROWS, a Prague-based law firm, can advise you on what should fall under Permitted Leakage so that the agreement is not unnecessarily rigid, while still protecting the buyer’s genuine interests.

Material adverse change (MAC) and material adverse effect (MAE) – the buyer’s right to walk away

One of the buyer’s strongest tools during the interim period is the so-called Material Adverse Change or Material Adverse Effect (MAC/MAE) clause. It is essentially a “safety valve” – if something materially changes for the worse during the interim period, the buyer has the right to withdraw from the agreement without having to close the deal.

It sounds simple, but the reality is much more complex. The issue is what exactly qualifies as a MAC/MAE. In legal practice, this is one of the most frequently disputed points.

How is MAC/MAE traditionally defined?

A typical MAC/MAE clause reads roughly as follows: “The buyer has the right to withdraw from the deal if there is such a change in the condition or operations of the target company that could have a material adverse effect on its financial condition, operations, or prospects.”

The problem is that words like “material” or “adverse effect” are not objective. If the parties disagree, it often ends up in court. And courts – whether in the Czech Republic or abroad – are generally very skeptical of a buyer’s MAC arguments. Judges typically require the buyer to prove that there has been a long-term, fundamental impairment of the company’s earnings capacity, not merely a temporary difficulty.

Typical carve-outs (exceptions)

For the agreement to be workable at all, MAC clauses include a list of matters that are not considered a MAC, even if they would otherwise meet the criteria. For example:

• Changes in the general economic situation (recession),
• Changes in industry conditions,
• Natural disasters,
• War, terrorism,
• New regulation applied generally to the industry,
• Changes in the market price of shares,
• The company failing to meet public forecasts or expectations.

These matters are typically not accepted as a MAC even if they have a negative impact, because both buyers and sellers could otherwise use them to their advantage.

But be careful – if one of these “general” events affects the target company disproportionately more than the rest of the market (e.g., everyone in the sector sees revenues drop by 5%, but this company by 50%), then it may still be a MAC. It is a question of relative impact.

The attorneys at ARROWS advokátní kancelář focus on ensuring that the MAC definition is precise for the specific deal and reflects the real risks that matter to you. A definition that is too broad leads to disputes; one that is too strict creates a false sense of security.

Change of control clauses – the risk of third-party termination

Entrepreneurs often forget another critical point: change of control clauses in third-party contracts (customers, suppliers, lenders, lessors). Many key contracts include provisions that if the ownership of the target company changes without the other party’s consent, that party has the right to terminate the contract or amend it to less favorable terms.

In practice, this means that if you are buying a company with an attractive contract with a strategic customer, it may happen that once closing takes place, that customer says: “Nice. Change of control without our consent. We’re done.” Or, conversely, they pull out a new, much more expensive version of the contract and say: “If you want the contract to continue, we will need new terms.”

This risk must be addressed before signing. Specifically, you need to:

Map all relevant contracts and identify which ones contain a change of control clause and how it is worded.

Obtain the third party’s consent in advance (ideally before signing, or at least seek it during the interim period).

Negotiate what happens if you do not obtain consent. Will it be a condition to closing? Will the buyer accept the risk?

In the Czech Republic, this risk is not always addressed sufficiently, and the attorneys at ARROWS advokátní kancelář see this often in practice – which is precisely why, during the interim period and when preparing the deal, they pay significant attention to third parties.

Working capital adjustments and completion accounts – how to set the price

In many deals, the company’s price is not set once and for all at signing. Instead, one of two mechanisms is used: completion accounts or a locked-box.

Completion accounts (post-closing adjustment)

With completion accounts, the buyer and seller agree on a preliminary price at closing, but then wait until a special balance sheet (completion balance sheet) is prepared as of the closing date. The price is then adjusted based on that statement.

Typically: The seller submits a draft completion balance sheet within a few days after closing. The buyer then has time to review it and raise comments. If they cannot agree, an independent accountant is appointed (expert determination) to decide.

Problem: All of this takes time. It is sometimes overlooked that the seller has to deal with not knowing the final figure long after closing. In the Czech Republic, this often leads to disputes because parties forget to define precisely which accounting principles apply.

Locked-box mechanism

Under a locked-box, the price is determined as of a specific date in the past (the locked-box date), usually based on the last available audited balance sheet. From that date until closing, so-called “no-leakage” protection is effectively applied—the seller undertakes not to extract value from the company (dividends, extraordinary transactions).

Advantage: The price is clear already at signing, without subsequent disputes over the balance sheet.

Disadvantage: The buyer bears the risk of changes between the locked-box date and closing (e.g., inventory deterioration, increased receivables, etc.). Therefore, the buyer must carry out more thorough pre-closing due diligence and put in place robust no-leakage protections.

Attorneys from ARROWS, a Prague-based law firm, can help you choose the right mechanism. Locked-box is usually preferred by the seller (clear price), while completion accounts are more often preferred by the buyer (flexibility for adjustments). The choice depends on negotiating power, the quality of the financials, and the complexity of the business.

Practical issues during the interim period

New Czech call-in mechanism – Risk of blocking a sub-threshold deal

In the Czech Republic, there has been a major change in merger control regulation. As of 1 January 2024, the Czech Office for the Protection of Competition (ÚOHS) has a new tool: a call-in mechanism for sub-threshold deals.

What does this mean in practice? Even if your deal does not meet the standard thresholds for mandatory notification (combined turnover in the Czech Republic below CZK 2.5 billion), ÚOHS may “call in” the deal and require notification if it sees a risk (in particular so-called “killer acquisitions”—acquisitions of start-ups or early-stage competitors without their own revenues).

This risk has very practical implications:

• Post-closing review window – ÚOHS has 6 months from closing to call in the deal. This means that even after the transaction is completed, you remain in uncertainty.
• Conditions for the target company – Although the target company may not meet the standard turnover thresholds for mandatory notification, for the call-in mechanism to apply its turnover in the Czech Republic must reach at least CZK 10 million, and at the same time the aggregate turnover in the Czech Republic of all undertakings concerned must exceed CZK 350 million.
• No simplified procedure – if the deal is called in, an accelerated review cannot be used and the deal will be delayed.

In the Czech Republic, this means increased scrutiny particularly for technology, digital, and healthcare deals. Attorneys from ARROWS, a Prague-based law firm, are already monitoring developments in this legislation and advising clients on how to prepare.

Financing and debt covenants – Securing funding

Finally, one of the critical points of the interim period is the buyer’s financing. Especially in a private equity deal financed by a combination of equity and debt, it is important to remember that a commitment letter from lenders is NOT a final promise. A lot can still change between signing and closing.

Typically: Lenders reserve the right to conduct post-closing diligence—they may request new financial data, references, and legal documentation.

Terms may tighten—if market conditions deteriorate, the lender may require a higher interest rate and higher reserve requirements (debt covenants).

Financing can be terminated if key assumptions have changed (a MAC in the target company, a change in market conditions, insufficient collateral).

For the seller, this means the risk that the deal ultimately will not go through. That is why the following are typically agreed:

• Specific Performance – the seller ensures that the buyer cannot simply walk away due to financing; the buyer must be put under pressure to proceed,
• Reverse Termination Fee (RTF) – if the buyer does not close without a serious reason (including financing issues), it pays the seller a penalty.

Our attorneys in Prague at ARROWS can help you set these provisions correctly so that the interim period is not one long stretch of anxiety.

Closing conditions – Without them, nothing happens

At the end of the interim period, the so-called closing conditions must be satisfied. These are effectively the final “checkpoints” that must be in order for the deal to actually close.

Typically, these include:

• Representations and warranties remain true – key statements by the seller (for example, that it owns 100% of the shares, that the company is not insolvent, that it has no hidden liabilities) must still be correct at closing. This is typically verified by a so-called “bring-down” certificate – the lawyers issue confirmation that all reps and warranties are still in order.
• Regulatory approvals are obtained – if the deal was subject to regulation (merger control, foreign investment, etc.), this must be completed.
• Third parties have consented – all required change of control consents must be obtained.
• Financing is in place – the buyer must provide proof of funds or a lender commitment ready to draw.
• Final due diligence issues are resolved – if issues arose during the interim period (e.g., tax audits, litigation), they must be resolved or an appropriate reserve must be booked for them.

If any of these conditions is not met, the buyer cannot be forced to proceed to closing. This gives you an idea why the interim period requires such careful monitoring and communication.

Our attorneys in Prague at ARROWS will monitor matters on an ongoing basis so that you know how the conditions are being met and whether any surprises are emerging.

Representations and warranties (reps and warranties) – Their survival beyond closing

The interim period also addresses how long the seller’s warranties will remain in effect. In other words: what time period does the buyer have to discover an issue and then enforce it against the seller?

The usual structure is:

• General representations and warranties – typically remain in effect for 18–36 months after closing,
• “Fundamental” representations and warranties (e.g., ownership of shares, due authority to enter into the deal) – typically 5–6 years or even without a time limit,
• Tax reps – often 5–6 years due to tax audits.

During the interim period, it is critical that:

With the seller’s knowledge, the buyer carries out so-called “sandbagging” – i.e., if during the interim period it discovers that a representation is not correct, it may keep quiet and only after closing seek indemnification. (There are “anti-sandbagging” clauses that prohibit this.)

If the purchase agreement includes Representations & Warranties Insurance (RWI), that policy must be bound at the exact moment the SPA is signed. If the reps are later updated, the insurance may not cover it.

Our attorneys in Prague at ARROWS will help you structure the reps so that they are realistic, enforceable, and protect you for the necessary period of time.

Final summary

The interim period between signing and closing is far more than just “formal waiting”. It is a time full of legal, financial, and operational risks that can materially affect whether the deal ends the way you envisioned.

On the seller’s side, the main risks are: that the buyer will try to negotiate a lower price through a false MAC claim, that financing will collapse, or that regulation will block or complicate the deal.

On the buyer’s side, the main risks are: that the seller extracts value from the company (leakage), that ownership of key contracts changes and leads to disruptions, or that financing cannot be finalized.

A well-drafted SPA with clearly defined interim covenants, no-leakage clauses, a MAC definition, and closing conditions is your best protection. Monitoring the interim period, active communication with third parties (especially key customers and lenders), and proactive problem-solving can prevent a catastrophe.

Our attorneys in Prague at ARROWS have been working with M&A transactions and interim periods for many years. We know what pitfalls may await you and how to protect yourself effectively. If you are preparing to sell or buy a company, or you are currently in the interim period and feel that things are not in order, contact us. We will advise you on how to set up the right protections, how to monitor the interim period, and how to proceed if issues arise.

Contact us at consultation@arws.cz – our attorneys will help ensure that the interim period is as smooth as possible and that your deal closes exactly as you planned.

Read also:

• Managing Seller Risks Between Signing and Closing in Company Sales
• Pre-Closing Covenants in Share Deals: Seller Obligations and Key Risks
• How is the final price determined when selling a business: Closing accounts vs. locked box
• Pre-Closing Dividends and Working Capital Adjustments in M&A Deals
• Czech Foreign Investment Screening: New Rules from August 2024 for Non-EU Deals