A simplistic view of an acquisition is that the actual price paid is paramount but experienced practitioners recognise that price is but one aspect of the deal and that there is the potential for significant value leakage in arriving at the actual price and also from claims arising after completion.
The “price” paid may seem a simple concept but, in practice, requires an understanding of how this is derived. Most private acquisitions are based on a “cash-free, debt-free basis” with adjustments for working capital or net assets. Buyers typically develop an enterprise value which is then adjusted to derive an equity value by adjusting for cash, debt and working capital all of which needs to be captured in the Sale & Purchase Agreement (“SPA”). When the consideration is to be paid in a foreign currency, a range of issues can intervene to create problems for both parties.
English law is widely used for many contracts and the recent decision in Arnold v Britton has clarified decisions in earlier judgements and clarified the how the courts and parties will approach this in the future. The course reviews these and the differing approach to this in the USA.
Negotiating and documenting these items is not as straightforward as one might expect; for example, does “cash” include “trapped cash”, what does debt include, what is wrong with using “average” working capital and how can parties minimise subsequent disputes? Additionally, the choice of the completion mechanism (completion accounts or locked box) creates further opportunity for further value transfer. Even after completion the seller may find further value erosion through claims arising under the warranties and indemnities.
There is no right or wrong answer to many of these questions and the ultimate position will be dictated by the negotiating strength of the respective buyer and seller. Despite that, a sound grasp of the key commercial and legal issues can minimise value loss for parties.
This SPA course focuses on transactions involving the purchase of shares but also covers areas of specific relevance to asset purchases. It provides a step by step template to the basics but also covers the critical legal and commercial aspects in the transaction from the perspective of both buyer and seller. Reference is made to recent or relevant leading cases.
Please note that this course covers material that is also covered on the Advanced Negotiation Issues in M&A course.
All courses are part of the deal documentation programmes at Redcliffe Training. Please see a range of alternative courses below.
Deal Documentation Course
BATNA, Best Alternative To A Negotiated Agreement, Heads of Terms
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