Consolidation – Workshop 3 (Price and Payment)
Outcomes:
1. Navigate the main terms of a SPA and apply principles of good drafting to amendments of
contractual provisions governing price and payment.
2. Advise the client of how completion accounts can be used to allocate the risk of the buyer
paying too much or the seller receiving too little for the target company.
3. Outline alternative mechanisms for fixing the price of the target, including the use of the
Locked Box mechanism and adjustments based on future profits , known as earn-out
provisions.
3 options when you want to buy company in how target receives money:
1. Locked box (fixed price) – it is called locked box because the price is fixed as
opposed to negotiating the price or adjusting the price after money has been paid.
2. Earn-out – the idea of instead of giving the full £100,000 for the company now,
buyer gives 50% of the money, assuming the company does well, the buyer will pay
more later on and what they pay later will depend on how successful the company is
going to be
3. Completion accounts – where you’re not sure the exact value of this company and
seller is saying the company is worth £100,000. To protect themselves, the buyer
will reach agreement where they will take control of the company and having now
had an in-depth insight into company (after taking control of the company), the
buyer take the view whether the £100,000 paid for the company was a true
reflection of the value of the company. The point is, rather than get someone to
revalue the company for buyer, the buyer will take a particular aspect of the value of
the company as a snapshot of the whole. A snapshot of the company will be Net
Current Assets of the company. Net Current Assets is taking as a good indicator of
the overall current financial health of the company. Net Current Assets is also
known as Working Capital. Net Current Assets = Current Assets - Current Liabilities.
So could be your cash minus short term loans falling within a year period. The
current asset would also be stock, debtors that owe us money in short term. So
you’re saying to the buyer this is a good representation of the health of the
company, as I’ve got all these people that owe me money in short term and I have X
amount of stock. Once the buyer takes a hold of the company, they’ll be in a better
position to see if the number said before looking at the net current assets is right or
not and to the extent that’s it’s not, there’s going to be an adjustment in price. So
completion accounts is the idea you’re looking at figures (accounts) post-completion
and seeing if what you paid at completion is the right amount and using the net
current assets figure to determine. And if that’s different to figure at date at
completion, seller will either pay more or less money. If you went to independent
valuer, will take too much time and money + will be difficult to reach agreement on
true value of company such as IP and goodwill in comparison to Net Current Assets.
However there may be disputes with Net Current Assets as for example the stock is
only as good as it is to sell (how liquid it is) + there might be a dispute as to who is a
good debtor + bad debtor.
1
,Prep task 1
SPA – points to note
Key element we’re looking in SPA at is schedule 6 (working capital)
Adjustment Date: the fifth Business Day following the date on which the Working Capital
Statement is agreed or determined in accordance with Schedule 6. – (might be the date of
the adjustment of price paid for company at completion after looking at net current assets)
Draft Working Capital Statement: showing at draft stage this amount of Working Capital the
company (seller) has and this will either be drafted before or after sale to verify if the WC
figure was the correct basis to use to ascertain the price of the company
Estimated Working Capital: means £953,000 – what the sellers are estimating to be their net
current assets. Once buyer takes this company, this will be the figure they are checking
against
Reporting Accountants: Accountants that will be doing the verification if there’s a dispute
Sale and purchase (Operative bit – “you will sell and we will buy”)
On the terms of this Agreement, the Sellers shall sell and the Buyer shall buy, with effect from
Completion, the Sale Shares with full title guarantee, free from all Encumbrances and together with
all rights that attach (or may in the future attach) to the Sale Shares including, in particular, the right
to receive all dividends and distributions declared, made or paid on or after the Completion Date.
Purchase price
The Purchase Price is an amount in cash equal to the sum of:
(a) £10.3 million (the “Completion Payment”);
(b) plus the amount by which the Working Capital exceeds the Estimated Working
Capital or minus the amount by which the Working Capital is less than the
Estimated Working Capital.
The estimated working capital in our case is £953,000 and we’re using that as a representation of the
bigger number of £10.3 million because it’ll take us too long and will be too difficult and too open to
dispute to value £10.3 million so more easier to use the net current assets figure to decide whether
we’ve overpaid or underpaid.
Completion – once bank has transferred money, is when completion takes place and the buyer gets
shares in the target company in return of the money (i.e. will get stock transfer forms, share
certificates, register of members, statutory docs – all the things that symbolise you’ve got ownership
of the company which are the shareholders of the target which will hand over these)
(N.B. Remember it’s the shareholders in the company that are sellers rather than company itself in
share sale and in an asset sale its going to be the company that’s selling off asset so the buyer is
dealing with the company as a person)
2
, 1. In what section of the SPA will you find the identity of the Sellers and the number of
shares being sold by each of them?
Column 1 of Error: Reference source not found
2. Where reference is made to a ‘person’ in the Agreement, what is meant by a
‘person’?
Clause 1.8 - A person includes a natural person, corporate or unincorporated body
(whether or not having separate legal personality) and that person's personal
representatives, successors and permitted assigns - (reference to sellers + can
include partnerships too)
3. Who is entitled to the right to receive any dividend or distribution declared,
made or paid on or after Completion?
Buyers under clause 2.1
Clause 2.1 - On the terms of this Agreement, the Sellers shall sell and the Buyer shall buy,
with effect from Completion, the Sale Shares with full title guarantee, free from all
Encumbrances and together with all rights that attach (or may in the future attach) to the
Sale Shares including, in particular, the right to receive all dividends and distributions
declared, made or paid on or after the Completion Date .
The reason for stating that is although you have taking over the stock transfer forms and
share certs but not yet the legal owner, its when your name is out on register members
which may take a number of days to do it. What this clause is protecting against is in time
between you having been passed these share certs + stock transfer forms and you getting it
stamped having it on the register of members which you can only do once the forms have
been stamped. In that interim period, if there are any distributions paid then you are
entitled to them as if you were the legal owner already. So you’re entitled to them
beneficially.
4. What is meant by Completion and what happens at Completion?
“Closing ” means the completion of the sale of the Shares pursuant to Clauses 4.1
and 4.2 of this Agreement
On Completion:
(c) the Sellers shall:
(i) deliver or cause to be delivered to the Buyer the documents and evidence
set out in Part 1 of Schedule 5;
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