Closing memorandum definition
/What is a Closing Memorandum?
A closing memorandum summarizes the key details of a completed transaction, such as an acquisition or financing arrangement. It typically outlines the parties involved, the transaction structure, and the principal terms of the deal. The memorandum also lists the documents executed at closing and the conditions that were satisfied before completion. Legal and accounting teams often use it as a reference document when reviewing the transaction in the future. By consolidating essential information in one place, the closing memorandum provides a clear record of how the transaction was finalized.
Who Writes a Closing Memorandum?
The closing memorandum is usually written by the attorneys working for the acquirer, since the acquirer usually controls updates to the purchase agreement. Thus, the memorandum is written from the perspective of the acquirer, not the seller. This viewpoint may exclude additional information that might have put a different slant on the statements made in the closing memorandum.
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Example of a Closing Memorandum
Following are sample notes that might be included in a closing memorandum, and which give some idea of the type of narrative to include in it:
Stock compensation provisions: The three owners of Armadillo Security Armor (“Armadillo”) were concerned about the variability of High Noon’s stock price, since changes in the price over the past three months could have altered the stock consideration paid to them by as much as 30%. The parties included the following features in the purchase agreement to allay these concerns:
The number of shares issued on the purchase date was based on the weighted-average price of the stock during the 20 preceding business days.
A true up provision was included, under which the number of shares would be adjusted upward as of six months after the effective date of the agreement, but only if the weighted average stock price for the five business days prior to the adjustment date was at least 10% lower than the price used for the initial issuance of stock. Thus, any change in the stock price of less than 10% would not trigger the true up provision.
The owners of Armadillo were granted a put provision for 10% of their shares in High Noon, which they could exercise at any time after one year from the effective date of the agreement, which High Noon would have to purchase in cash, based on the weighted average share price for the five business days preceding the put date.
Warrants: Armadillo had issued a large number of warrants to its suppliers, which it considered necessary in order to secure capacity during peak demand periods. The parties agreed to convert these warrants into High Noon warrants, using an exchange ratio of 3:1 (Armadillo warrants to High Noon warrants). The exercise price for each warrant was set at the weighted average market price of High Noon stock for the five business days immediately prior to the purchase date, which was $11.80.
Representations and warranties: The owners of Armadillo refused to indemnify High Noon for the outcome of any legal proceedings, on the grounds that the three legal actions currently in progress were so recent that it was impossible to quantify their results. High Noon elected to proceed with the purchase agreement despite this issue.
FAQs
How does a closing memorandum differ from a closing checklist?
A closing checklist is a task-oriented document that itemizes all actions, documents, and approvals needed to complete a transaction, often used to track progress. In contrast, a closing memorandum is a narrative summary that confirms and documents the final terms and completion of those tasks at the close of the deal. While the checklist is procedural and forward-looking, the memorandum is formal and retrospective.