- Sep 9, 2024
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I think the types of protections you would want depend on the side of the side of the deal you are on and the specifics of the commercial agreement, but, in general, we would look at some of the terms you mentioned:
- Locked box vs completion accounts: these terms are used to offer protection during the period between signing and completion. If a lock box structure is chosen, the price of the purchased is fixed depending on the balance sheet of a company at a given date. The seller will agree to ensure there is no 'leakage' of value after this date (ie no dividents or intracompany payments) and warranties and indemnities will be provided in this regard. Completion accounts structures instead stipulate price adjustments depending on the value and financials of the target business on closing. This is considered more buyer-friendly, as it ensures they are getting exactly their money's worth, but it tends to be slower, more unpredictable, and prone to causing disputes - which is why sellers normally prefer using a locked box structure.
- Exchange ratio: this is particularly important in England, as there is no legal concept of a merger. As such, the process a deal goes through many times involves an acquisition of a "target", but where the target's shareholders receive shares in the "buyer's" company instead of cash. The share exchange ratio just refers to the ratio between the number of shares the target company's shareholders get and the number of shares they give up. Here, we can again have either a fixed exchange ratio or a "floating" one, the later being meant to capture fluctuations of the value of the buyer's shares (however, there will normally be a stipulated upside/downside cap). To ensure protections for sellers, there would normally be some anti-dilution terms included in the deal, to limit the buyer's ability to dilute the shareholders' shareholding by issuing new shares without their consent.
- Effective warranties: to make warranties effective a the buyer will want to use the broadest language possible, so as to ensure that they can make the seller pay for damage caused by any issue in the company. The seller, on the other hand, will look to make the language and scope as restrictive and qualified as possible, aiming to limit potential liability.
- Material adverse change clause: this is a particularly important seller protection, as it gives them the right to walk away from the deal if the target company's business undergoes a material adverse change caused by a significant negative incident before closing.
