Post completion refunds on your last company acquisition

It is astute to recognise at outset that as a purchaser your valuation of a target company can vastly differ from that of the sellers’ accountants.  With this in mind, it is important that you amplify the deal value for yourself, as the seller will do also. This conundrum needs to be met head-on; Naushad Rahman, Partner in our Company Commercial team, and Torion Bowles, Partner in our Commercial Litigation team, explain more here about the importance of a proper valuation of the company you are planning to purchase and how we can assist with the supporting contracts or resulting disputes. 

Valuation options for a company purchase

A “locked-box” valuation is a sale with a fixed sale price that is not adjusted. In this situation, the parties agree to “lock” the price, and criteria used to calculate the price, at an agreed valuation date. This definite price is backed by an indemnity which is enforceable if the lock is broken before the completion date. The parties will usually agree on a small amount of fixed minimum working capital to remain in the target at completion, since the buyers will often inject capital into the target immediately post-completion. In order to preserve the target company’s value and prevent erosion, the sale and purchase agreement will contain legal provisions setting out what a seller is and is not permitted to do between exchange and completion fortified by a well drafted indemnity. Should such clauses not exist possible claims against a seller could include (in addition to an indemnity claim) breach of seller conduct undertakings.

Appropriate agreement clauses when purchasing a company

A Net Working Capital Adjustment clause is designed to cater for changes in the target’s working capital from the time of valuation up to completion.  The buyer’s accountant usually prepares the purchase price completion accounts within a reasonable time after completion. If the buyer disagrees with the valuation, it has to raise a dispute notice after it prepares the completion accounts. If the seller does not raise a dispute notice, the buyer will pay the seller for any excess above the estimated consideration paid at completion, or, the seller will reimburse the buyer for any excess consideration overpaid by the buyer at completion. Only if a dispute cannot be resolved would the parties then engage and submit the dispute to an accounting expert. (This is not the usual court or arbitral dispute process because it centres around valuation metrics only.) Therefore, an accounting expert is chosen as an arbiter for efficiency and cost-effectiveness.

A carefully crafted sale and purchase agreement by a reputable corporate lawyer will ensure that fluctuations in the target company’s value from the time of valuation through to completion will be ring-fenced, clarified and free from disputes at outset, which can be embarrassing, expensive and a drain on time and resources. These sorts of clauses aim to encourage reasonableness, resolve de Minimis amounts and focus exclusively on large issues capable of resolution with access to information. Our Company Commercial department is specialised in dealing with such acquisitions and Naushad has unrivalled experience of assisting both corporate and private clients in this field.

Of course, occasionally the amount in dispute upon completion can be significant and arguments can arise. With the intervention of a commercial litigator, most disputes are resolved within a relatively short period of time without the need to incur the costs of formal legal proceedings. Our Commercial Litigation and Dispute Resolution Team can advise clients as to the law, strategy, legal costs and look to resolve matters. Torion has extensive experience of advising upon and conducting high value claims in the High Court and the County Court.

To discuss your company purchase or dispute with Naushad, Torion or a member of the team, contact us today on 023 8071 7717 or email naushadrahman@warnergoodman.co.uk / torionbowles@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.