Tag: drafting for business

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Learning to draft a termination clause? Start with the events of termination.

Drafting_for_Business_Deepa_Mookerjee.jpgAfter our discussions on condition precedent clauses, restrictions placed on transfer of shares, and the meaning of ‘call’ and ‘put’ options, let us now turn our attention to the termination clause, one of the last clauses we usually see in a shareholders agreement but no less significant. It is in fact a vital clause that contains the mechanism by which an agreement can be terminated and the shareholders can exit the company.

A termination clause typically contains two main elements: (1) the events of termination; and (2) the consequences of such an event occurring. In this post, let us look closely at some common events of termination:

– Material default by one party: Take the case of A Limited and K Limited, two parties to a shareholder agreement. K Limited commits a material default and is unable to cure that default within a specified period of time. A Limited should then have the right to terminate the agreement.

While drafting this clause, clearly define the term ‘material default’. This ensures that the agreement cannot be terminated for minor ingressions and that only serious defaults will trigger the clause. Also, it reduces the scope for parties to dispute whether a ‘material default’ has in fact occurred.

Next, the defaulting party should always be provided a specified time period (known as the ‘cure period’) to rectify the situation, and only the non-defaulting party should be given the right to terminate the agreement. Specify that to invoke this clause, the non-defaulting party must always send a written notice to the defaulting party.

– Deadlock: A deadlock typically occurs when parties are unable to agree on a vital issue necessary for running the business of the company. While drafting, always define a ‘deadlock situation’. An example could be a company’s inability to hold a board meeting on three consecutive times for want of quorum.

For example, if K Limited would like the company to take a loan and A Limited disagrees and whenever K Limited tries to organise a board meeting to discuss this issue, the directors representing A Limited do not show up and so since no proper quorum is constituted for a board meeting, it can be considered a ‘deadlock situation’.

Often, the occurrence of a deadlock situation can act as a termination event. Parties may feel that it is impossible to run the business in such a situation and they would rather terminate the agreement. Discuss with your clients whether they would like a deadlock to be a termination event or whether they would prefer to resolve the situation through other means (such as arbitration).

Further, if a deadlock situation is considered an event of termination, always specify a mechanism by which one party can send a written notice to the other party specifying that this is a deadlock and it would like to terminate the agreement.

– Insolvency of the company – A Limited and K Limited are shareholders in One Limited, a corporation that is bankrupt and going through insolvency proceedings. Obviously the shareholders will then wish to terminate the agreement since it is not possible to continue running the business. While drafting this clause, it is best to specify that the agreement will terminate automatically on the occurrence of this event. This will eliminate procedural steps such as a notice being sent by one party to another.

– Cancellation of the license required to carry on business: The shareholders agreement concerns a banking company. A bank requires a license from the Reserve Bank of India to carry on business. If this license is cancelled, the bank ceases to function. Therefore, cancellation of the license (in a regulated entity) should be drafted as an automatic termination event.

– Change in law (resulting in the business of the company becoming illegal): Currently, the law permits private entities to operate airlines (subject to the necessary approvals). Assume that over a period of time, the government changes the law and nationalises all airlines. This means that private entities can no longer operate airlines. Consequently, any shareholders agreement to operate a particular airline must automatically terminate.

There is one important distinction among termination events that comes to mind when we study these clauses – some do not result in automatic termination and require parties to send written notices to each other (for instance, in case of material default or deadlock situations) and in other cases, there is an automatic termination (in case of a change in law, insolvency, or cancellation of a license). Always keep this distinction in mind while drafting. Ask your clients whether they are comfortable with certain events leading to automatic termination. After all, the thumb rule while drafting is always to reflect the interests of your client.

Finally, remember that a termination clause usually comes into play when the parties are disputing or have an issue they cannot resolve. In such a scenario, it is necessary that the termination clause is clearly drafted and sets out in a very precise manner, the events of termination and their consequences. If the clause is open-ended or vague, it is unlikely the parties will be able to follow the clause since they will end up arguing over the very intent of the clause itself. As a lawyer, your role is to try to amicably resolve the dispute or at the very least provide the most efficient way to exit from a situation that cannot be resolved!

With this, we come to the end of this post. In my next post I will write about the consequences of termination.

Deepa Mookerjee is part of the faculty on myLaw.net.

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Corporate

Learn to draft a share purchase (or subscription) agreement for a private equity transaction

PrivateEquityLawyer_AngiraSinghviOnce due diligence has been conducted on the target of a private equity investment and the investor, satisfied with the outcome of due diligence, is ready to invest, the stage is set for drafting the documents needed to complete the transaction. Drafts of these documents are usually prepared while the due diligence proceeds simultaneously.

The key documents

The documents that are fundamental to a private equity investment are (1) the share purchase agreement (“SPA”) or the share subscription agreement (“SSA”) depending on how the investor acquires shares in the target; (2) the shareholders’ agreement (“SHA”); and (3) the disclosure schedule. Since a private equity investor invests in the company for a fixed amount of time rather than in the assets owned by the company, asset transfers are quite rare.

An SPA provides for the transfer of shares to the investor. It is executed when the shareholders of the target company agree to transfer their shares to the investor. Under such an agreement, the investor purchases shares that are already in existence. An SSA on the other hand, provides for a new issue of shares. Such an agreement is preferred when parties decide that instead of the current shareholders transferring their shares to the new investor, the company would issue new shares to the investor. The investor subscribes to these new shares and hence the name, “share subscription agreement”.

An SHA provides for the rights and obligations of the parties inter se, that is, in relation to each other. It includes provisions for the manner in which the target company will be governed and run after the closing. Common items covered in an SHA are the appointment of directors, the conduct of board and shareholders’ meetings, shareholding, the raising of finance, and the transfer of shares.

A disclosure schedule sets out the documents and information that the target has provided or given access to the investor during the due diligence process or at any time before the execution of documents.

Let us now discuss these documents in greater detail. I will cover SPAs and SSAs in this article and SHAs and disclosure schedules in the next one.

As we have seen, an SPA or an SSA (as the case may be) provides the framework for the investor to become a shareholder in the target company. Let us now see some of the major issues that this document will cover.

Transfer or issue of shares

The agreement will state whether the shares are being issued or transferred to the investor. It will also set out the price at which the shares are being issued or transferred, the mode of transfer or issue, and the manner in which the consideration is transferred. While the transfer is stipulated in the agreement, it actually takes place during the board meeting that is conducted at the time of closing the deal. I will discuss the details of how this should be conducted in a later article on closing.

While drafting this clause, it is also useful to keep in mind certain specific aspects that may affect a transfer.

– Documents in escrow: The parties may, for example, only want the transfer to take effect from a later date. Until that date, they may want the executed documents to be deposited in an escrow account. While drafting such conditions, you should be able to identify any procedural and secretarial issues such as those in relation to the validity of resolutions for a particular period or the validity of share transfer certificates. An escrow arrangement for instance, will not work unless those documents are valid for the entire period of escrow.

– Sale to a foreign party: Similarly, a sale to a foreign party must adhere to the pricing norms contained in the FDI Policy.

– Encumbrances: In the case of a transfer of securities, lawyers advising on the transaction should ensure that the transfer is free from all encumbrances. For example, the shares may be pledged to third parties against loans and advances or there may be a charge on the assets of the company. Due diligence should be thorough so that any such possibilities can be crossed out. Further, documentation should mention that all transfers are without any encumbrance. Charges can be searched on the Ministry of Corporate Affairs’ website and a lawyer can draft the ‘transfer’ clause accordingly.

– Authorised share capital: In case of a new issue of shares, a lawyer should also ensure that the company will continue to comply with the ceiling of authorised share capital after such issue. Under law, a company cannot raise more capital than the authorised share capital provided in its memorandum of association. In case the capital after the raise is likely to exceed this amount, the memorandum should be amended to reflect that.

– Nature of security: In case the issue involves a party resident outside India and the automatic route is intended for the investment, a lawyer advising on the transaction should also ensure that the nature of security is such that it is a plain vanilla equity or that is compulsorily convertible into equity and advise the client accordingly.

Conditions precedent to closing the transaction

On completing the due diligence, lawyers advising the investor will be able to identify some key items that the target entity should fulfil before closing the transaction. For instance, the target company may not have complied with some laws.

Some common conditions precedent include:

(1) that target entity should obtain some prescribed licenses;

(2) that it should issue appointment letters to its employees in a prescribed format;

(3) that it should complete the statutory books and pending filings;

(4) that it should obtain necessary corporate approvals and resolutions for entry into the transaction; and

(5) that it should obtain a valuation of shares.

The SPA or the SSA will contain these conditions. A condition precedent has to be fulfilled by the seller after the agreement is executed but prior to closing the transaction. The buyer usually has the option to provide an extension of this period or even to cancel any such compliance as a condition precedent if it is not fundamental to the investment. Common examples of such conditions are the obtaining or renewal of ancillary licenses, such as, the license to operate a lift. However, fundamental conditions such as the license to operate the business or any corporate approvals necessary to undertake the transaction, cannot be dispensed with.

The SSA or SPA will also provide a date by when each of the conditions precedent should be complied with. This is usually called the “long stop” date. The agreement will stipulate that unless the conditions are complied with by that date, the agreement, despite execution, will terminate and there will not be any closing of the agreement.

Closing

The “closing” is the point at which the transaction is completed. Shares are transferred, money is paid, the board undergoes changes, and the necessary corporate actions are undertaken to formally make the investor a part of the target entity. Closing is usually undertaken 30 to 60 days after the execution of transaction documents. During this time, the target entity fulfils the stipulated conditions precedent or seeks from the investor, a waiver from fulfilling them.

On the closing date, a board meeting is organised. The main actions undertaken at such meetings include the issue or transfer of shares (as the case may be); the appointment of directors nominated by the investor; and the approval of the amended form of the target’s articles of association and then placing them before the shareholders for final approval. We will discuss the need for such appointments and amendments in a later post on SHAs. The process of closing will also be discussed in detail in subsequent posts.

Following the board meeting, a shareholders’ meeting is also organised. Some matters that are passed by the board, such as an amendment to the company’s articles of association, require shareholders’ meeting for final approval.

Once the closing has been successfully completed, an investor formally becomes a part of the target company. All these aspects are stipulated in the SPA or the SSA usually after the clause on conditions precedent. This clause provides the time and date of closing and also lists out the actions that will be undertaken on the closing date. Since there are numerous actions to be completed, usually, it is provided that upon one last action being completed, all closing items will be deemed to have been completed. This clause also provides the manner in which consideration will flow from the buyer to the seller unless a separate clause on consideration is provided for. There are several ways in which a transfer of shares may take place. For example, it may be in dematerialised form or through the endorsement of share certificates. Consideration may be paid through cash, cheque, or wire transfer. All these aspects are provided for in the clause providing for transfer or issue of shares. Where the investor is a foreign entity, Form FC-GPR in the case of an issue of shares or Form FC-TRS in case of a transfer of shares, need to be filed with the Reserve Bank of India. After all these actions are completed, share certificates are finally issued to the buyer and then the closing is deemed to have been undertaken.

This clause has a large bearing on the completeness of a transaction from a procedural point of view. All items should be carefully listed and completed in accordance with company law and the applicable secretarial standards.

Representations and warranties backed by indemnity

You will remember from studying the law of contracts and sale of goods that representations and warranties are usually made by a seller to a buyer regarding the product that is up for sale. To understand this clause in the SSA or the SPA, you can consider the target company as a ‘product’ that is being sold by its current shareholders. Extensive representations and warranties are made to ensure there will not be any liabilities or adverse consequences for the investor.

They include representations and warranties about the authority and capacity of the parties in entering into the transaction; corporate matters, filings, resolutions and approvals; licenses and approvals for the transaction and business; business of the company; taxation, accounts and records; borrowings; intellectual property; related party transactions; assets; and litigation.

As lawyer advising the investor, you should ensure that your list of representations and warranties should be extensive and cover every aspect in relation to the target company. A lawyer advising the target company will attempt to narrow down the list. For example, if the target company has already provided the investor with some information during the due diligence, you may refrain from providing any representation or warranty on that very aspect as the investor is expected to know the correct state of affairs. Also, if the investor has clearly come to know of any shortfall in the company’s affairs, you may not want to provide a representation or warranty to that item.

These representations and warranties are backed by indemnity. While agreeing to indemnify the investor, the company and its current shareholders promise to save the investor from any loss caused to the investor for any breach, falsity, or shortfall of the representations and warranties. It is important to draft the clause on indemnity carefully to ensure that liability is predictable. A company will want to cap its liability as much as possible while an investor will want to do the opposite.

This brings our discussion on drafting SPAs and SSAs to a close. I will discuss SHAs and disclosure letters in my next post.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.

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Corporate

All you need to know about drafting put and call option clauses

Drafting_for_Business_Deepa_Mookerjee.jpg“Call options” and “put options” are used frequently in shareholders agreements. As you know very well by now, a shareholders agreement specifies the rights and obligations of shareholders and sets out the manner in which the company will be governed. We have already seen some vital clauses used in these agreements such as condition precedent clauses and restrictions placed on the transfer of shares. Let us now look at “call” and “put” options.

Simply, a call option is a right but not an obligation to purchase shares at a specified price, on the happening of a specified event. If A and B are two investors in a joint venture company, A may have a call option over twenty-six per cent of the shares held by B, which he can exercise once the limit on foreign direct investment (“FDI”) is raised. This means that once the FDI cap is raised, A has a right to purchase twenty-six per cent of the shares held by B. If A exercises this right, B cannot decline to sell the shares to A.

A put option on the other hand, is a right but not an obligation to sell shares upon the occurrence of a specified event at a specified price. If A has a put option over twenty-six per cent of his own shares in the company that he can exercise once the company is insolvent, it means that if the company declares insolvency, A can sell his shares to B. Once A exercises his put option, B cannot decline to purchase A’s shares.

Junior lawyers should understand these mechanisms well because they can be used in a shareholders agreement in various scenarios. To think that call and put options are only useful in an FDI limit scenario or an insolvency situation (as discussed above), would be incorrect. Let us first go through some scenarios to understand how they may be useful.

Versatile options

Assume that there are two shareholders in a joint venture company – A and B. You are representing ‘A’. A comes to you with a simple question – what if B commits a material default of the provisions of the shareholders agreement and is unable to cure the defect or default? What are the options available to A?

PutAndCallOptions_ShareholderAgreementsYou can tell A that he can either ask for a mechanism by which he can sell his shares and exit the company (a put option) or a mechanism by which he can insist that B exits (a call option), when the material default occurs. The latter mechanism means he can continue in the company and ask B to exit. If you know these mechanisms well, you can give your client two options – either continue in the company and buy the other party’s shares (by exercising the call option) or sell his shares and exit the company (by exercising the put option).

Take another scenario. Suppose your client would like to continue as a shareholder in the company only if the company generates a certain amount of revenue after a specified period (say five years). If not, your client would like to exit. If you know what a put option is, you can simply suggest that your client include a put option over his own shares.

These two mechanisms can therefore be used throughout shareholders agreements to address different scenarios and the various needs of your client. There are some points that you should keep in mind while drafting them.

1. Be precise about whether your client has a right to sell shares or is under an obligation to purchase shares. Use words such as ‘right’ and ‘obligation’ wisely to ensure that the burden is being placed on the correct party.

2. Specify the amount or percentage of shares that are subject to the call or put option. At the time of enforcement, there should be no confusion on the amount of shares that can be sold or bought.

3. Remember, contractual arrangements can work in many permutations and combinations. For instance, if you are drafting a put option clause, it is not necessary that the shares always need to be sold to the other parties in the shareholder agreement. You can also have a right to sell your shares to a third party of your choice. Similarly, it is up to the parties to decide whether the option should apply to a part of the shares or all the shares that a party holds. As a lawyer, you should advise your client about the most appropriate form of the clause depending upon his or her intentions.

4. As always, the letter of the law plays an important role. For instance, the Reserve Bank of India has made it clear that a non-resident investor should not be guaranteed any assured exit price at the time of making an investment. The exit price must be a fair price calculated according to the prescribed guidelines and at the time of exit. Keep this in mind when you draft a put option for a foreign investor and always know the correct legal position before drafting.

5. Always flesh out the manner in which the clause will work. For instance, if your client has a call option on the shares held by the other party, you should specify the manner in which your client should send a notice to the other party indicating his or her intention to exercise the call option (known as a call option notice), the time period within which the other side must respond (the call option period), the price at which shares will be sold (the call option price), and the maximum time period within which the sale must take place. Specifying these details makes it simpler to execute the sale and implement the clause effectively.

Remember these basic points while drafting. Make sure that you are always clear about what a clause is intended to achieve. Take the time to understand the needs of your client and draft accordingly.

(Deepa Mookerjee is part of the faculty on myLaw.net)

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Corporate

Lock ins, ROFRs, tag alongs, drag alongs – understand the four types of transfer restrictions

Drafting_for_Business_Deepa_Mookerjee.jpgShareholders agreements, we all know, list the rights and obligations of the shareholders in a company and contain clauses that are vital for any M&A transaction. We have already discussed one such clause, the conditions precedent clause. Let us now study another set of clauses – commonly grouped under the term, ‘transfer restrictions’.

Consider the case of a foreign investor who intends to purchase 26 per cent of the shares of a company and has all the know-how and expertise to run the business. This investor’s participation is critical to the business and its Indian partner in the business would prefer that it does not exit the company. Even the foreign investor, mindful of its faith in the Indian partner, would not want the Indian partner to exit the company. The shareholders agreement therefore, would contain clauses that restrict the foreign investor and the Indian partner from transferring their shares to a third party.  A ‘transfer restriction’, simply put, restricts shareholders from transferring their shares in the company.

All doubts about the legality of transfer restrictions under the Companies Act, 1956 has been cleared by the proviso to Section 58(2) in the Companies Act, 2013. It clearly states that “any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract”.

While there is no formal clarification from the Ministry of Corporate Affairs regarding this insertion, it appears that that this provision is an attempt to codify the principles laid down in the judgment of the Bombay High Court in the case of Messer Holdings Limited v. Shyam Madanmohan Ruia and Others, [2010] 104 SCL 293 (Bom). The Court held that it is open to shareholders to enter into consensual agreements in relation to the specific shares held by them, provided such agreements are not in conflict with the articles of association of the company, the Companies Act, 1956, and its rules. Such agreements can be enforced like any other agreement and does not impede the free transferability of shares.

The Companies Act, 2013 has also recognised the position that a share is the property of the shareholder. The shareholder is free to transfer his or her property, provided that it is not in conflict with the articles of the company and other provisions of company law.

Let us now focus on a few common transfer restrictions.

Lock-in period

By a specifying a period during which a party is prohibited from transferring or selling its shares in the company, a shareholder is ‘locked in’ to the company. This restriction can apply to one, some, or all the shareholders of in the company.

There is no specified time period applicable to all transactions. Parties determine the time period for the lock-in depending on commercial considerations such as the nature of the business. Sometimes, the time period may differ among shareholders.

The Indian party in our earlier example may feel that five years is sufficient time to absorb all the foreign investor’s know how and then run the business independently. In such a case, the Indian party would probably be content with a lock-in period of five years applicable to the foreign investor.

Right of first refusal

Sometimes, a shareholder who intends to sell its shares to a third party can only do so after first offering them to the other shareholders and only if they refuse to purchase these shares. The price at which the shares are sold to the third party must be equal to or higher than the price at which they were offered to the other shareholders. This gives the other shareholders in the company a right of first refusal, that is, a right to purchase shares which helps consolidate their own shareholding in the company and also prevent the entry of an undesirable purchaser.

Tag along right

A right is some times granted to a minority shareholder to require the majority shareholder to sell its shares along with those of the majority shareholder, to the same third party. This gives a minority shareholder, the right to exit the company if it does not want to continue in the company with a new majority shareholder.

Drag along right

While a tag along right is granted to a minority shareholder, a drag along right is typically granted to a majority shareholder. A majority shareholder will have the right, while selling its own shares, to require the minority shareholder to sell its shares as well. The majority shareholder can thus drag the minority shareholder along while making a sale.

This right is important from the perspective of a new investor. Consider the case of an investor who is about to purchase 95 per cent of the shares of a company from one party in which another party holds the remaining five per cent shares. Since a new investor would prefer to own all the shares and take full control of the company, the majority shareholder would prefer to exercise a drag along right and force the minority shareholder to sell its five per cent to the same new investor.

The key point to remember while drafting any of these clauses is that your clients (whether a majority or minority shareholder) would like to maximise their investment while exiting the company. Therefore, determining the price at which shares are sold is critical.

Say for instance, your client has a drag along right. While drafting this clause, it may be best to lay down certain principles as to how the share price will be determined to ensure that there is no dispute at a later stage. Generally, the minority shareholder sells his or her shares at the same or higher price than that which is offered by the third party for the shares of the majority shareholder.

Always be very clear while drafting these clauses. You should choose your words and terms carefully and ensure there is no ambiguity while interpreting the nature of the restriction. Remember that these clauses are primarily contractual in nature and will always change depending upon the nature of the transaction. Never cut and paste a clause from another agreement without applying your mind to the facts of your transaction. In short, put in time and effort in understanding the transaction and only then draft a clause to suit the requirements of your client.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

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Corporate

Three points to remember while drafting conditions precedent clauses

Drafting_for_Business_Deepa_Mookerjee.jpgA shareholders’ agreement is a contract that contains the rights and obligations of the shareholders in a company. It typically supplements either a share purchase agreement or a share subscription agreement. You can read more about them in my post on the documents that you will come across during M&A transactions.

Almost every shareholders agreement looks similar. You will see a title, a table of contents, a recital clause, an interpretation clause, and introductory clauses describing the transaction. These clauses have been discussed in detail in myLaw.net’s course on Advanced Commercial Contracts. In this post, I will explain the conditions precedent clause, which is typically seen in all shareholders agreements.

A condition precedent is usually a legal term describing a condition or event that must occur before a contract is considered in effect or any obligations are expected of either party. Here are a few examples.

A is purchasing 100% of the shares in a company whose main business is selling computers to the public. The company does not manufacture computers itself but sells the computers it receives from different distributors. From A’s perspective, the company’s relationship with its distributors is key because if the distributors don’t provide computers to the company, it will have nothing to sell. Many of the distributors’ contracts with the company require their prior approval before a 100% transfer of shares takes place. A would only want his obligation (to purchase shares and pay consideration for them) to be triggered once the company receives these approvals. The receipt of these approvals therefore, is a condition precedent that must be fulfilled by the company before the transaction is effective.

ConditionPrecedentClause

Take another example. B, a non-resident investor who has an investment in an IT company in Mumbai, wants to invest in an IT company in New Delhi. One of the terms of the transaction is that B must sell his interest in the Mumbai-based company before making the investment. So, the sale of those shares in the Mumbai-based company is a condition precedent that B must fulfill before he can invest in the Delhi-based company.

If these conditions are not fulfilled, there will be no deal. Common conditions precedent in M&A transactions include those in relation to obtaining approvals from the regulators, firing or hiring particular employees, ensuring that sufficient cash is available in the company, obtaining approvals from third parties, and ensuring that lease agreements are in place.

On whom is the obligation cast?

Let’s take a closer look at the examples above. You will see that the obligation to fulfill the condition precedent in the examples is cast on different parties. In the first example, the obligation to obtain approvals from distributors is cast on the investee company, that is, the company in which the investment is being made. In the second example, it is cast on the foreign investor. Conditions precedent can thus differ on the basis of the party on which the obligation to fulfill it, is cast. Some obligations can be cast on the investee company, some on the investor, and some jointly on the investee company and its shareholders.

For instance, C is a foreign investor who wants to invest in a company operating in a sector where the approval of the Reserve Bank of India is required for any foreign investment. Typically, the burden of obtaining this approval is cast jointly on all parties because each party’s cooperation is required for obtaining this approval.

While drafting a conditions precedent clause, you must take care to identify the party on whom the obligation to fulfill a particular condition is imposed. This is vital as each party is responsible to fulfill its own obligations in relation to the conditions precedent. While casting an obligation on the investee company, you should examine whether it is also useful to cast the obligation on its shareholders (or at least the majority shareholders) if they control the operations of the company.

The right to waive a condition precedent

Another point vital to this discussion is whether conditions precedent can be waived. Look at the first example. Assume that the investee company has only obtained approvals from fifty percent of its distributors. A, the investor, would really want the deal to go through and should be happy with approvals from these distributors if they are the major ones and would want to waive the condition that approvals must be obtained from all the distributors. Once A has waived the fulfillment of this condition, the deal can go through. The right to waive the fulfillment of a condition precedent is very important in all M&A transactions. Always include this right when you are drafting a condition precedent. The important point to keep in mind is that the person who has the right to waive the condition must be different from the person who is obliged to fulfill the condition.

In the first example, the right to waive the fulfillment of the condition in relation to obtaining consents from distributors must be with A and not the investee company. The investee company can never have the right to waive fulfillment of a condition that it is obliged to fulfill. Similarly, in the second example, the right to waive the condition in relation to withdrawal from the Mumbai-based IT company is on the investee company and not B, the investor.

Since these are all contractual rights, it is up to the parties to decide whether they would like to waive the conditions in part or in full. As a lawyer, your duty is to ask these questions from your client before you start drafting so that you can use the words that are appropriate to your client’s interests.

When should the conditions precedent be met?

Finally, always insert a date by which all the conditions precedent must be met. This is typically called the ‘long stop date’ and is important to ensure that there is no undue delay in the performance of the contract or the fulfillment of the conditions. Parties know that they must fulfill the conditions precedent by a specific date. While drafting this clause however, always include the following or similar words:

“The Conditions Precedent must be satisfied by April 20, 2015 or any date as may be mutually agreed between the Parties.”

The words in plain text above give the parties to a contract the right to mutually agree and extend the time for the fulfillment of the conditions. If, for example, regulatory approval — a condition precedent for a particular deal — takes longer than anticipated, the parties should have the right to extend the long stop date if they feel the need to do so. This is also important because if conditions precedent are not satisfied, the transaction is terminated, and parties must have the flexibility to prevent this.

As you start drafting conditions precedent, you will realise that there are many nuances to the manner in which you draft these conditions. For instance, you may use the words ‘use all reasonable efforts’ to dilute the obligation on a party. In such cases, that party only has to show that it has used all reasonable efforts to fulfill the condition and that will be enough (even if the condition has not been fulfilled).

Keep drafting and with practice, you will get better at drafting conditions precedent clauses.

(Deepa Mookerjee is part of the faculty on myLaw.net.)