INTRODUCTION Contributed by: Markus Paul, Freshfields
the UK, Austria, Switzerland, Sweden and Spain, favours locked-box consideration mechanisms. By contrast, in a completion accounts mechanism, the purchase price is not calculated and trued up until after completion. The purchase price is based on a completion date balance sheet of the target business and calculation rules set out in the sale and purchase agreement. This gives the buyer the comfort that the purchase price is determined concurrently with it taking control of the target, with no interim (locked- box) period. There are situations where completion accounts are the only appropriate approach, such as in complex carve-outs or other circumstances where there are no historic accounts for the target business that a locked box could be based on. Also, longer regulatory clearance periods may lead to comple - tion accounts becoming more popular with buyers to reduce the risk of changes in the target business until completion. Completion accounts mechanisms are common in the USA, China, Canada, Japan, Brazil Like any other buyer, a private equity investor will aim to use conditionality as a risk mitigant if possible and where advisable. However, market practice and the level of competition in the specific deal environment generally dictate which conditions are acceptable to sellers. In all jurisdictions, market practice allows regula - tory conditions, particularly in respect of suspensory antitrust, foreign investment and foreign subsidies regimes. and Singapore. Conditionality However, financing conditions are uncommon in most jurisdictions, where instead sellers typically expect buyers to provide proof of “certain funds” at signing – regarding both equity and debt financing. Financ - ing conditions are seen in the US market and are not wholly unusual in China. US M&A transactions will often include the repetition of representations and warranties and the absence of litigation as conditions. Third-party consents and “no material adverse effect/change” (MAE or MAC) condi - tions are often included in US deals as well. MAE or
MAC conditions have been uncommon in Europe in the last decade. In the USA, a buyer is often required to pay a reverse break fee if it exercises a termination right, particularly if a debt financing condition was included and not satisfied. In Europe, however, (reverse) break fees are not a common feature, even where transactions face material concerns that conditions may not be satisfied Notwithstanding the thorough due diligence that they typically conduct, private equity buyers usually seek contractual protection against identified risk items. This often includes pre-closing tax and other risks that buyers are aware of at signing and that can be covered by indemnities (rather than price reductions, which tend to be seen unfavourably in competitive situations). In all markets, private equity buyers try to ensure robust warranty protection in respect of fundamen - tal risks, such as ensuring title to shares. In more seller-friendly markets, such as in Europe, warranties covering business risks are sometimes not offered or significantly limited. In these situations, private equity buyers, in addition to relying on their due diligence, often consider bridging the gap between the seller’s and their respective positions by taking out warranty and indemnity (W&I) insurance. Often this can be done for a modest additional cost. W&I insurance is, how - ever, still unusual in some markets, such as China, Japan, the Philippines and Brazil. Private Equity Sellers Exit certainty and control Firstly, an important prerequisite for selling, and a common feature in all private equity deals, is that the private equity investor seeks to retain full flexibility and freedom to trigger and successfully drive an exit on its own terms, without restrictions from, for exam - ple, management shareholders or co-investors. Cor - responding rights of the private equity investor are typically included in the shareholders’ agreement. It is also important to a private equity seller to be able to deliver the entire target business to the chosen by the agreed longstop dates. Warranties and indemnities
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