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LPC Law Notes Private Acquisitions Notes

Closing Accounts Earn Outs Closed Box Notes

Updated Closing Accounts Earn Outs Closed Box Notes

Private Acquisitions Notes

Private Acquisitions

Approximately 339 pages

A collection of the best Mergers and Acquisitions* notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor".

In short, these are what we believe to be the strongest set of Mergers and Acquisitions notes available in the UK this year. This collection is f...

The following is a more accessible plain text extract of the PDF sample above, taken from our Private Acquisitions Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

1. Adjusting the Purchase Price (PP)

What Matters is what the Parties have agreed.

1.Representations and warranties made by the seller: the purpose of this to:

  • encourage disclosure by the seller;

  • allow the buyer to walk away if any are discovered to be untrue to a material extent before closing (subject to negotiation); and

  • provide retrospective price adjustment if any are found to be untrue after closing, through claims for breach of warranty by the buyer.

2.Closing accounts: Do not make PP fixed, instead make it subject to adjustment by reference to closing accounts (which includes, a full profit and loss account ad balance sheet or, a valuation of assets such as stock or, a determination base on financial matters such as the level of cash and debt.

3. Earn-outs: Make PP dependant on earn-outs (earn outs are security against breaches of warranty or adjustments to the PP based on the deferral of the PP by reference to future performance of the target Co.

4. Negotiate the Purchase Price and “Lock-Box” it(i.e. fix it beforehand) Most commonly used in Share Acquisitions. It is attractive for the sellers but riskier for the buyer as there will not be a chance for adjustment after completion (except by using a warranty claim).

2. Adjusting the Payment

- Deferred Consideration: The buyer could ask the Seller to agree to receive a deferred consideration. This is in line with a potential PP adjustment as a result of an agreed Earn-Out. Similarly, due to the potential IP Rights claim the Buyer will be in a good position to ask for retention of part of the purchase price as security in case the IP Rights claim arises.

3.Points to clarify with client + identify further instructions to amend the price and payment provisions in the SPA.

  • This is an Acquisition in Brazil, contact local counsel.

  • The position regarding the Earn-Out will depend on whether the sellers will manage the Co. after completion + if so, for how long + timetable to review the accounts

  • The accounts of the seller

  • The IP Rights claim

  • Stock Valuation + Debtor Valuation + Fix Asset Valuation

  • Pre-completion considerations in relation to changes to the accounts

Workshop Task 1

Completion/Closing accounts Earn-outs Locked box
¿ when?

Price is determined at completion of the transaction and it is subject to the values contained in the Closing Accounts.

¿Who?S’s accountant usually drafts first set, as they are familiar with the Co, but the B may prefer to have its own accountants do it as it allows greater financial scrutiny (improve their negotiation position)

Part of the consideration is giving at completion and other depending on the success of the Co. (S’s Ds manage the Co. for a while after completion )

¿Who?B’s accountant usually prepares the accounts for each period; payments are calculated by thresholds achieved or by a multiplier. Need to have accurate definitions e.g. “net profit” or “closing assets.

  • A fixed price has been agreed before completion

  • May be paid in installments

  • there might be a retention of the PP (perhaps because there is a threatened liability and B knows of it)

S controls after completion No Yes, the seller maintains control during the earn-out period. No
¿ Why use it?

Buyer’s view:

  • B isconcerned over accuracy of S’s accounts (stock, assets, debts valuation) thus B wants to know it is paying for what it is getting “tune up the PP”.

  • B wants an up-to-date picture of the value of the Co. at completion (S’s accounts may be old)

  • Bringing a claim under a warranty (e.g. because stock not in condition as warranted by S) is a lot more cumbersome and expensive than sorting this out in advance via balancing payment/refund

Seller’s view:

  • S may get a better price e.g. if the assets/shares were originally undervalued.

  • Protects S from having to defend a warranty claim in the future. Completion = quicker.

  • S may have a say how the assets/shares are valued

Buyer’s view:

  • the Co. may be a new venture and B wants to make sure it is successful

  • Prevents B overpaying for a Co. that does not live up to B’s expectations

  • Motivates S/managers to help the Co. perform highly (also if Co.’s managers are paid in shares in Holding Co.)

  • Private equity B’s or Private Co.’s often use this method

Seller’s view:

  • S’s want to prevent B from reducing value of Co. during the earn-out,

  • S wants to protect profit. S wants to stay in Co. to enable profit targets to be met and prevent B from undermining short-term profit e.g. by investing in R&D, substantial asset disposal/purchase

  • The deferred payment will affect S’s tax liability (see tax note “your lpc”)

  • Secure Co.’s outstanding payments

  • Restrictions on intra-group transfers

  • Restrict material change of business after completion = prevent devaluation

  • it is the simplest, quickest way to valuate a Co.

  • commonly usedin share acquisitions before SPA is signed.

  • attractive for S but riskier for B whose only opportunity for priceadjustment after completion is by bringing a valid warranty claim.

  • B is wise to include provisions in the SPA toprotect against ‘leakage’ –i.e. seller extracting value from the target between signing & completion.

  • Leakage’ examples: payment of a dividend, unsanctioned transfer of assets to target SHs, or inappropriate payment of expenses by the target.

  • S will usually be obliged to undertake to repay such ‘leakage’ to B on a pound for poundbasis.

  • Expensive (because of hiring the accountants),

  • Delay (waiting for the accountants to do their job and agreeing terms),

  • Getting the accounts ready (the seller may be slow or not have consolidated accounts),

  • agreeing on all the above (B may want X and S may want Y)

  • uncertainty,

  • Delay (agreeing the terms)

  • Only suitable when S is involved in the business after post-completion.

  • S will want to manage the Co and have some control during the Earn-out period.

  • S & B may want different things. Thus there will...

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