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Summary M&A unit 3 Price and Payment engage task 1 answer
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Mergers and acquisitions unit 3 price and payment - notes to help answer questions and engage task 1 question and answer.
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M&A Price and PaymentAgreement of terms of share acquisition:
1. Parties and date
Buyer and seller. More than one seller will be set out in schedule.
Sellers give warranties to buyer.
Seller may be required to provide a guarantor to its liability.
2. Operative provisions
Basis on which buyer agrees to purchase and which seller agrees to sell.
Definitions and interpretations clause.
Conditions precedent, eg date on which condition must be fulfilled, time frame when
acquisition complete.
Agreement to purchase.
Consideration – price, form it will take, timing of payment.
Completion accounts – purchase price adjusted to reflect the valuation of target on
completion. Provisions for completion accounts – drawn up 30 days after completion, buyer
and its accountants have the right to review completion accounts, limited period in which
parties will attempt to resolve any disputes, in continued dispute matter referred to
independent firm of accountants.
‘Fixed price’ or ‘locked box’ transactions – parties agree price for target fixed before sale,
buyer seek warranty such as balance sheet prepared with reasonable care. Protect against
‘leakage’ – seller extracting value from target eg payment of dividends, transfer of assets.
Locked box – party agree a fixed price after due diligence done by buyer and cannot be
negotiated afterwards. Problem – seller knows what they are getting on exchange so may not
care about how target performs between contract and completion could be a loss of value
‘leakage’.
Earn outs: part of consideration determined by future prospects of target. Accounts
prepared for relevant period. Sellers continue to manage the target after completion.
Payment terms/deferred consideration. If deferred seller may seek security by –
(a) by taking a charge over some or all of the assets transferred to the buyer;
(b) by requiring a guarantee of the buyer’s obligation to pay the balance of the price from,
for example, individual shareholders, directors or the parent company of a corporate buyer;
(c) by providing in the agreement that title to specified assets is to remain with the seller
until the purchase price is paid in full;
(d) by obliging the buyer to place a specified sum in a joint deposit account (or escrow
account) on completion and defining the circumstances in which this (and accrued interest)
can be released to the parties (though this will not be appropriate if the seller is simply
allowing the buyer time to finance the acquisition).
Seller may accept consideration in cash, shares, debt securities.
3. Schedules
Terms of transaction and whether it is an asset or share acquisition.
Details of assets/shareholdings transferred.
Price adjustment mechanisms eg completion accounts.
Warranty statements about the condition.
Limitations on seller’s liability in relation to warranty claims.
Indemnities agreed between parties.
Forms of documentation.
Restrictions on running of target business.
Details of completion procedure.
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