A knockout agreement is a provision in a contract that eliminates certain conditions and requirements when they become unattainable or impossible. It is a popular feature in mergers and acquisitions (M&A) transactions, where parties require the completion of certain conditions before closing the deal.
In essence, a knockout agreement is a mechanism that removes a contingency clause in a contract when it is deemed unachievable. This provision is included to address uncertainties that may arise during an M&A transaction.
For example, when a company buys another firm, there may be certain conditions that must be met before the acquisition is completed. These conditions could be regulatory approvals, third-party consents, or completion of certain tasks or milestones. If any of these requirements are not met, the acquisition may fall through.
In such cases, a knockout agreement comes into play. It eliminates the condition that cannot be met, thereby allowing the transaction to move forward. This way, the parties do not have to abandon the entire deal due to a single unattainable requirement.
A knockout agreement is usually negotiated between the parties before the transaction is completed. It is included in the contract as a contingency clause, outlining the conditions that must be met for the provision to be triggered. The agreement specifies a threshold level of impossibility, above which the provision becomes operational.
For instance, if a required regulatory approval cannot be obtained within a reasonable time period, the knockout provision may kick in. The provision could remove the requirement entirely, or it could modify the condition to alleviate the threshold of impossibility.
Knockout agreements offer several benefits to parties involved in M&A transactions. They provide a safety net for unforeseen events that could jeopardize the deal, and they allow parties to proceed with the transaction even if certain conditions cannot be met.
However, knockout agreements are complex provisions that require careful drafting and negotiation. They must be clearly defined and unambiguous, and they must comply with legal and regulatory requirements. Therefore, it is recommended that parties seek the advice of experienced legal counsel in drafting and negotiating knockout agreements.
In conclusion, a knockout agreement is a contingency clause in a contract that removes unattainable or impossible conditions in an M&A transaction. It offers parties a safety net for unforeseen events and allows them to proceed with the transaction even if certain conditions cannot be met. However, drafting and negotiating knockout agreements can be complex, so it is important to seek the advice of experienced legal counsel.