Test for Determining Conditions Precedent (CP)

This test helps you identify whether a condition should be classified as a Condition Precedent (CP) in a Share Subscription Agreement (SSA). Conditions Precedent must be fulfilled before the transaction can close or shares can be issued.

Step 1: Does this condition need to be fulfilled before the transaction can proceed or be completed?

• If Yes: It is a Condition Precedent (CP).
  Why? CPs are conditions that must be satisfied before the deal can close. If they are not met, the transaction cannot proceed.

Example: Obtaining regulatory approval for the transaction before the subscription can happen.

• If No: Move to Step 2.

Step 2: Does failing to fulfil this condition prevent the transaction or deal from going forward?

• If Yes: It is a Condition Precedent (CP).
  Why? A CP addresses risks or requirements that are essential for the completion of the transaction. If not met, the deal cannot proceed.

Example: Shareholder approval must be obtained before closing, or the deal cannot proceed.

• If No: Move to Step 3.

Step 3: Is this condition required to ensure the legality or validity of the transaction?

• If Yes: It is a Condition Precedent (CP).
  Why? CPs are typically required to meet legal or regulatory requirements before the transaction can close.

Example: Completing required filings with regulatory authorities to ensure the transaction is legally valid.

• If No: Move to Step 4.

Step 4: Does this condition relate to obtaining necessary approvals, consents, or clearances before the deal can close?

• If Yes: It is a Condition Precedent (CP).
  Why? A CP typically involves obtaining any approvals or consents that must be in place before the deal proceeds.

Example: Regulatory or third-party consents required before closing.

• If No: Move to Step 5.

Step 5: Is this condition necessary to mitigate risks or resolve issues that could affect the deal before it closes?

• If Yes: It is a Condition Precedent (CP).
  Why? A CP helps mitigate risks or issues that would affect the value or integrity of the deal.

Example: Satisfactory completion of due diligence before the deal can proceed.

• If No: Reevaluate the condition, as it may not be a CP.

Key Guidelines for Conditions Precedent (CP):

• Timing: Must be fulfilled before the remittance of funds can be made by the investor.
• Impact: If not fulfilled, the deal cannot proceed.
• Risk Mitigation: CPs address issues that would affect the deal’s completion or integrity.
• Examples: Regulatory approvals, due diligence completion, shareholder consents.

Example Walkthrough:

1. Condition: The company must receive regulatory approval form Competition Commission of India before the subscription can proceed.
   • Step 1: Does this condition need to be fulfilled before the transaction can close?
     Answer: Yes, the deal cannot proceed without regulatory approval.
     Conclusion: This is a Condition Precedent (CP).
2. Condition: After executing the agreement, the investor must pay the subscription amount before shares are issued.
   • Step 1: Does this condition need to be fulfilled before closing?
     Answer: No, this happens at closing.
     Conclusion: This is not a Condition Precedent (CP) but part of the closing action.
3. Condition: The company must complete due diligence and resolve any issues identified before the deal can proceed.
   • Step 1: Will failing to complete due diligence stop the deal?
     Answer: Yes, the deal cannot proceed without satisfactory due diligence.
     Conclusion: This is a Condition Precedent (CP).

Note:

This test provides a general framework to determine whether a condition is a Condition Precedent (CP). For more complex transactions or unique conditions, it is always recommended to consult with a legal professional to ensure that conditions are properly classified and compliant with applicable laws.

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Treelife

Treelife Team | support@treelife.in

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Reviewed By

Garima Mitra

Co-founder

Spearheads Transactions, Contracts, and Compliance verticals at Treelife, combining expertise in business law with a focus on startup legal and governance.

Pooja Savla

Principal Associate | Transactions

Specialises in transaction advisory, mergers and acquisitions, investment structuring, and corporate legal matters for startups and growth-stage companies.