Third party approvals: Overview, definition, and example
What are third party approvals?
Third party approvals refer to the consent or authorization required from a third party, who is not directly involved in a contract or transaction, but whose approval is essential for the transaction to proceed. These approvals are often needed in cases where the actions or decisions of the parties involved in the agreement may impact or be subject to the oversight of another entity. Third party approvals can be required for various reasons, such as compliance with regulations, legal requirements, or to satisfy contractual obligations with other stakeholders.
For example, a business may need third party approval from a regulatory body to finalize a merger, or a lender may require approval from a third party before a borrower can sell a property that is used as collateral.
Why are third party approvals important?
Third party approvals are important because they help ensure that certain conditions, obligations, or legal requirements are met before a contract or transaction becomes effective. These approvals often serve as a safeguard to protect the interests of the third party, whether they are a regulatory authority, business partner, or any other external entity whose involvement is crucial to the completion of the transaction.
By requiring third party approvals, the parties involved in the agreement can ensure that they are not in violation of any laws, regulations, or contractual terms, and that the transaction is valid and enforceable under applicable guidelines.
Understanding third party approvals through an example
Imagine a company that is acquiring another company and the purchase is subject to regulatory approval by a government agency, such as the Federal Trade Commission (FTC). Even though the two companies have agreed on the terms of the sale, they cannot proceed with the transaction until they obtain the necessary third party approval from the regulatory body to ensure the acquisition complies with antitrust laws.
In another example, a property owner who wishes to sell their property may have an agreement with a lender that requires third party approval before the sale can go through. The lender needs to approve the sale of the property to ensure that it is consistent with the loan terms and that the property’s value is not impacted by the transaction. Without this third party approval, the sale cannot be finalized.
An example of a third party approvals clause
Here’s how a clause about third party approvals might appear in a contract or agreement:
“The Parties agree that the completion of this Agreement is contingent upon receiving the necessary third party approvals, including approval from [specified third party] within [specified time frame]. If the third party approval is not obtained, this Agreement shall be considered void, and neither Party shall have any further obligations.”
Conclusion
Third party approvals are critical in many transactions, as they ensure that external entities whose interests are affected by the deal have the opportunity to review and approve the transaction. These approvals can safeguard compliance with legal requirements, regulatory standards, or contractual obligations. By incorporating third party approval clauses into contracts, parties can minimize risks and ensure that the transaction can proceed smoothly, with all necessary consents in place.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.