For parties who, despite the coronavirus, wish to continue negotiations about a share transaction, the virus may nevertheless have implications for the next steps and the terms under which a transaction will come to fruition.
Aandachtspunten: vóór ondertekening van de koopovereenkomst
For purchase agreements that are currently being concluded, it applies that the coronavirus is known and that the parties, taking that circumstance into account, make agreements. They will have to examine and make arrangements for how to deal with the consequences of the virus. As for the question of whether a party can break off negotiations, I refer to my earlier blog
digital
The process of a stock transaction is already largely digital (think of virtual data rooms, conference calls), so that the current developments in the process itself do not have much influence. One point of attention is the identification of the parties by a notary when the parties are not yet known, but I will leave this aside for this contribution.
Due diligence
Depending on the sector to which the target belongs, the coronavirus can have a positive or negative effect. Given the reporting, the vast majority of enterprises will have to contend with a negative effect. Transparency about the measures that have been taken as a result of the coronavirus is advisable; after all, both parties stand to benefit from the continuation of the target's business operations, for better or for worse (whether or not with the use of government support and/or support from other parties). In addition, it is advisable to determine whether and to what extent the government measures affect the target's operations.
purchase price mechanism
There are several purchase price mechanisms that can be applied; the most widely used are the locked-box method and the closing-account method. A purchase price mechanism provides clarity about the amount that the buyer ultimately must pay as the purchase price.
Locked-box method
This method assumes a fixed purchase price based on a certain point in the past (effective date). In the purchase agreement it is then determined that economically the business, the shares are not yet transferred, as of the effective date they pass to the buyer. The enterprise (box) is, so to speak, closed off (locked) and economically transferred. It will have to be determined to what extent capital may flow out of the target (leakage) and which outflow of capital should be compensated by the seller through an adjustment of the purchase price. The coronavirus will lead to even more discussion about the question of what leakage is allowed and what is not. In other words, to whose account does the leakage fall?
Closing account method
For the time being less popular in the Netherlands, but perhaps the coronavirus will bring about a change there. The closing accounts method assumes a purchase price based on assumptions about various financial positions. The purchase price may then be adjusted at closing based on a balance sheet that is based on actual figures. The closing may take place after the date of legal delivery. Until now, this method was less popular because there was a lot of discussion (in hindsight) between the parties about the various financial positions and the corresponding purchase price. Now that the closing accounts method is based on actual figures, this could indeed be a reason to use this method in the COVID-19 era.
earn-out arrangement
In many share transactions, an earn-out arrangement is used. The purchase price, or a portion of the purchase price, is then dependent on the future performance of the target. To the extent that an earn-out arrangement would not already be based on normalized financial figures, it is, at least for the seller, advisable to do so. This means that the annual figures are adjusted for incidental and exceptional costs. In this way, the financial consequences of the coronavirus can be kept outside the regulation.
Representations and warranties
Carefully consider whether certain statements and guarantees can actually be given, or whether the proper, specific agreements within this framework should be made about the consequences of the coronavirus.
For now, points of attention regarding the purchase agreement; in the next blog I will discuss points to consider for the case that the purchase agreement has already been signed, but the shares have not yet been delivered.
