Smart Contracts in M&A

Smart contracts are self-executing agreements that automatically enforce the terms of specific arrangements between parties, such as buyers and sellers. These contracts are already being implemented across various commercial sectors, particularly in FinTech, through high-frequency trading, or in retail via online purchases with dynamic pricing. 

In the context of mergers and acquisitions (M&A), so-called “precedent conditions” are contractual stipulations that must be fulfilled for a transaction to be valid and effective. Their drafting requires precision and clarity to ensure unambiguous and straightforward verification. In this regard, smart contracts offer a highly effective tool for their execution, reducing human error, optimizing timelines, and minimizing potential disputes between parties. 

The automation of certain aspects of traditional contracts used in M&A transactions—such as share purchase agreements, investment agreements, and others—could enable the programming of condition verifications that, once met, trigger automatic execution without human intervention. Some of these verifiable conditions may include: (i) confirmation of fund transfers; (ii) receipt of regulatory approvals; and (iii) compliance with various contractual obligations. 

The use of self-executing contracts for verifying precedent conditions presents several advantages. First, it generates an immutable blockchain record of all actions and verifications performed, reducing the risk of disputes while enhancing transparency and security. Additionally, the need to translate legal language into programming code could foster greater clarity and simplicity in contract law—an improvement that clients have long demanded. Finally, smart contracts can accelerate and streamline the resolution and execution of precedent conditions, potentially reducing the number of intermediaries involved in the process (e.g., trustees, escrow agents, etc.), thereby decreasing both costs and execution times. 

Nevertheless, automation also presents challenges, such as the complexity of translating legal provisions into binary code, especially for more sophisticated contractual conditions. However, this challenge could drive legal professionals to simplify contract drafting and legal language, ultimately resulting in clearer and more accessible agreements. Furthermore, while integration with financial, legal, and other systems may pose a significant technical challenge, interoperability is not an insurmountable obstacle. In fact, it has already been successfully achieved in sectors like FinTech, which, in certain respects, presents even greater challenges than the legal field. 

In conclusion, smart contracts have the potential to revolutionize M&A transactions, particularly in verifying precedent conditions and incorporating self-executing provisions into agreements. Automating and verifying both simple and complex requirements—while ensuring traceability, transparency, and trust in code—could significantly reduce transaction times and costs. However, successful implementation will require overcoming substantial technical and legal challenges. As technology continues to advance, the adoption of smart contracts in M&A is likely to expand, enhancing efficiency, reducing intermediaries, and strengthening legal certainty in these transactions.