Drop-Dead Date

What is a drop-dead date?

Drop-Dead Date (latest closing date) is the date fixed in the company purchase agreement by which all closing conditions must have been met. In German contracts, it is usually called the long stop date, and in the US market also the outside date or end date. Closing conditions are prerequisites such as merger control clearances or consents on which completion depends, that is, the handover of the shares against payment of the purchase price. If closing is not possible by the cut-off date, either party that is not responsible for the failure, meaning has not itself caused it, may withdraw from the contract. Taken literally, the English expression means something like “the very last date”.

All these terms mean the same cut-off date. It limits the period between signing (Signing) and closing in which both sides are bound without shares and purchase price being exchanged. It matters above all for transactions that need clearance from the Federal Cartel Office (Bundeskartellamt), the European Commission or the Federal Ministry for Economic Affairs in the context of the investment screening. Participation agreements in funding rounds also often provide for such a date where the payment is subject to conditions.

Function of the drop-dead date in the purchase agreement

After signing, the seller is bound to the buyer and cannot sell the company elsewhere. The buyer holds equity and credit commitments ready for the transaction. Without a cut-off date, this state could last as long as an authority is reviewing or a consent is outstanding. The date creates a fixed limit for both sides at which they can decide whether to stay with the transaction.

Technically, most German purchase agreements give both parties a contractual right of withdrawal if the closing conditions have not been met by the cut-off date. More rarely, the contract ends automatically. Because nothing has usually been exchanged by then, withdrawal essentially extinguishes the mutual obligations. Certain clauses continue to apply, for example on confidentiality, costs and jurisdiction. The right of withdrawal does not belong to the party that is responsible for the failure. This corresponds to the principle of good faith (Treu und Glauben): whoever frustrates the occurrence of a condition cannot rely on its non-occurrence.

Setting the cut-off date

What matters is the longest expected regulatory review. For the preliminary review (first phase), the Federal Cartel Office has one month, counted from receipt of the complete notification (Section 40(1) of the German Act against Restraints of Competition (GWB)). A main review procedure, that is, the in-depth review, in principle ends five months after that point (Section 40(2) GWB); the period can, however, be extended. In addition come the preparation of the notification and, in EU merger control, often longer preliminary talks with the Commission. Harder to predict is an investment screening under foreign trade law: the Federal Ministry for Economic Affairs first decides whether to carry out an in-depth review, and the deadlines can be suspended while commitments are being negotiated. Where several states are involved, the slowest procedure determines the timetable.

The interests are not clearly distributed. A short date limits the seller's commitment but gives the buyer an exit as soon as an authority reviews for longer than planned. A long date protects the transaction against delays but may bind the seller for many months. In practice, the parties therefore set the date at the end of the realistic timetable for all clearances and add a buffer of a few weeks.

Extension and consequences of expiry

Extension

Rules under which the date extends automatically if only regulatory clearances remain outstanding or a main review procedure is opened are widespread. There are also unilateral extension options for one party. If the buyer is obliged under a hell or high water clause (an obligation to accept regulatory conditions) to challenge a prohibition, the date must also cover the duration of such a procedure. Because a purchase agreement for GmbH (German limited liability company) shares must be notarised (Section 15(4) of the German Limited Liability Companies Act (GmbHG)), its later amendment may also require notarisation. The extension options are therefore usually built into the contract itself.

Costs and compensation payments

If the transaction fails at the cut-off date, each side bears its own costs unless otherwise agreed. If it fails because of a refused clearance, the buyer may owe an agreed compensation payment (Reverse Break-Up Fee). Conversely, a payment by the seller may be agreed for certain cases (Break-up Fee), for example if the seller frustrates closing. For the period of an extension, sellers in the fixed-price procedure (Locked Box) often demand interest on the purchase price.

Worked example: deriving the long stop date from the clearance timetable

A purchase agreement for a technology company for EUR 40 million is signed on 15 January. A merger control clearance and a clearance under foreign trade law are required. The parties derive the cut-off date as follows:

• Preparation of the notification in four weeks: receipt of the complete notification by the Federal Cartel Office on 12 February.
• End of the preliminary review one month later: 12 March.
• End of a possible main review procedure five months after receipt of the notification: 12 July.
• For the investment screening, the parties cautiously allow six months from notification on 12 February: 12 August.
• Preparation of closing in two weeks: 26 August.
• Buffer of about five weeks: long stop date on 30 September.
• Automatic extension by three months to 31 December if only one regulatory clearance remains outstanding. For this period, the purchase price bears interest at 5% per year; if fully used, EUR 40 million × 5% × 3/12 = EUR 500,000.

In fact, the ministry demands commitments from the buyer on the handling of customer data. During the negotiations the deadline is suspended, and the investment screening only ends on 20 October. The extension applies, and closing takes place on 3 November. Because the contract calculates the interest pro rata temporis, it accrues only for the 34 days from 30 September to 3 November: EUR 40 million × 5% × 34/365 = about EUR 186,000. The cut-off date has thus served its purpose: the transaction does not fail because of the longer review, and the seller receives compensation for the waiting time.

Distinctions: drop-dead date, closing conditions and exclusivity period

• Closing conditions: determine what must occur by closing. The cut-off date determines by when.
• Exclusivity Period: limits the exclusive negotiations before signing. The cut-off date concerns the period afterwards.
• Withdrawal for breach of duty: requires misconduct by the other side. The right of withdrawal at the cut-off date is tied solely to the passage of time.

Common mistakes

• Main review procedure not planned for. A date that covers only the preliminary review gives the buyer an exit as soon as the authority reviews in depth.
• No extension rule. Without an extension built into the contract, renegotiation under time pressure, and possibly renewed notarisation, is needed.
• Withdrawal for the party at fault. If the exclusion for the party responsible for the failure is missing, a delay can be brought about deliberately.
• Time-limited financing commitments. If the buyer's credit commitments expire before the cut-off date, a gap arises in which the financing is not secured.
• Unclear consequences of withdrawal. The contract should specify which rules continue to apply and whether compensation payments fall due.

Frequently asked questions

Are drop-dead date and long stop date the same?

Yes. Both terms denote the latest date for closing. Which expression appears in the contract depends mainly on the origin of the contract template; the legal consequences follow solely from the clause concerned.

Does the contract end automatically on the cut-off date?

As a rule, no. Usually a right of withdrawal arises that must be exercised. As long as neither side withdraws, the contract remains in place, and the parties can still bring about closing.

How long is the period to the cut-off date usually?

That depends on the clearances required. Without regulatory procedures, a few weeks often suffice. If an in-depth review is expected, 6 to 12 months from signing are common in practice, and more in procedures in several states.

What does drop-dead date mean outside company purchases?

In general, a final deadline that can no longer be moved, for example in project management for a submission date or in logistics for the latest delivery date. In a company purchase, the meaning is narrower: after the date has passed, the parties may withdraw from the contract.

Must compensation be paid on withdrawal at the cut-off date?

Only if the contract provides for it. Without a rule, each side bears its own costs. Compensation payments are often agreed for the case that a regulatory clearance is refused.

The Roemer Capital view

Roemer Capital derives the cut-off date before signing from a timetable for all clearances, which it coordinates with the client's law firm. In bidding processes, the expected time to closing is part of Roemer Capital's assessment of offers, as is the question of whether a bidder's financing commitments extend to the cut-off date.

Between signing and closing, Roemer Capital follows the status of the procedures and prepares decisions on an extension with the client in good time. A cut-off date that only comes into view shortly before it expires shifts the negotiating position in favour of the side that depends less on closing.