Clinton Lee’s Post

I sold my company shares but forgot my obligations – here's what I learned… When selling shares in a company, the Vendor has important responsibilities to ensure the deal is fair and smooth. Here’s a quick breakdown of what Vendors need to do: Before the Sale is Finalized (Pre-Completion): 1.  Keep Business Running Smoothly: Don’t make any major changes that disrupt the company. 2.  Avoid Selling Assets: No selling or giving away company property unless it’s normal business activity. 3.  No New Shares: Don’t create or issue new shares or let others claim rights to them. 4.  Stick to Routine Decisions: Get the buyer’s approval before borrowing money or signing unusual contracts. 5.  Maintain Records & Insurance: Ensure all documents and policies remain valid. On Completion Day: 1.  Handover Documents: Provide all key company documents like certificates, accounting books, and shareholder registers. 2.  Ensure No Issues: Make sure there are no claims, debts, or problems left unresolved. These obligations protect the buyer and ensure the company remains stable during the sale. Think of it like buying a car – you wouldn’t want it to break down right after the purchase! Simple example: Ali is selling his shares in a logistics company to Sarah. Before the sale: - Ali keeps the company running as usual. - He doesn’t take out new loans or sell the company’s trucks. - On completion day, Ali hands over all the necessary documents to Sarah. If Ali fails to do these, Sarah could lose trust or back out of the deal. Takeaway: A clear agreement and proper handover ensure a smooth transition. If you’re selling or buying shares, always consult a lawyer for guidance. What do you think? Have you faced challenges in a share transaction? Let’s discuss! #BusinessLaw #LegalTips #SaleOfShares #VendorObligations #MalaysiaLaw

In today’s inflationary economy buyers and sellers in M&A transactions often disagree on the value of an acquired business, so how do we bridge the valuation gap? Business & Finance Associate Ana Calves discusses how earnout provisions can be a great option when negotiating sale agreements in her latest blog post.

Have you ever wondered what happens to the profit of a business between the time of agreeing a deal with a buyer and actually completing (which could be several months later)? That's where the completion mechanism comes in. As part of the Heads of Terms, one of the things your advisory firm will be agreeing with the buyer is whether to use a Locked Box or Completion Accounts mechanism. Under a Locked Box (LB) system, the price and other terms remain fixed between agreeing Heads of Terms (HoT) and through the weeks (usually months) that follow in due diligence (DD). When the deal closes, the buyer takes over everything in the limited company including any additional value / additional net assets accumulated during that interim period. It's called a locked box because during this period the vendor can't remove any assets, pay himself a dividend or otherwise diminish the value of the business - the box is "locked". If the parties are using Completion Accounts (CA), the vendor can indeed withdraw assets etc., during the DD period but he doesn't get paid the full price on the day the contracts are signed / when he hands the business over. Some of the funds are retained by the buyer pending new accounts being drawn up to reflect the position of the company on the day of the sale. If the value of the company has decreased (perhaps because the vendor withdrew some assets or the business made a loss), the total price is adjusted accordingly. LB is simpler and favours the vendor. Price is fixed and unambiguous and there is limited scope for post transaction disputes. CA is a bit more expensive and complicated, but buyers often prefer it to protect against, for example, a dip in the business after agreeing HoT. Have you already done a deal? Which option did you go for, and why? 

Please go read more about the most recent Earnout case from the Court of Chancery that Rob and I wrote about!

“Knowing Something” M&A in a Minute ⏰ — The Mysterious M&A “Locked Box” 🗃️ The most common way to determine the final purchase price in an M&A transactions is to use a post-closing adjustment that essentially “trues up” all of the negotiated adjustments as of the closing date. But things are changing fast and the “locked box” alternative (common in European deals) started to make a strong push before the recent M&A nosedive. As deal flow picks back up (as it always does!), I predict we’ll see more “locked box” deals as result of— ✅ a strengthening market for in-demand targets ✅ an increased demand for greater speed and less disputes in M&A transactions ✅ a desire for clean exits, particularly with PE buyers Understanding both approaches will help you navigate between the two in your next M&A deal. Let’s start with the basics— In most private company deals in the US, the purchase price is based on a “cash-free, debt-free” structure with an up or down working capital adjustment thrown in for good measure. 💡 The idea is that the final purchase price will reflect the value of the business on the closing date—not necessarily when the deal is signed. 📍Also implicit in this approach is that the seller is operating the business for its benefit and risk during the pre-closing period. For example, if there’s more cash or working capital at closing than expected, the seller receives that benefit. But if working capital declines or debt increases, seller is responsible for the shortfall. In order to make this happen, acquisition agreements set up a detailed process in which the buyer makes an estimated payment at closing and that amount is then “trued up” after closing to account for actual closing date levels of cash, debt, working capital, etc. ⚠️ The downside is that all of this has to be reflected in the agreement and then the numbers finalized after closing. This injects a level of uncertainty into what the final purchase price is and when it will ultimately be determined. The “locked box” approach flips the script ⬇️ 💡 The final purchase price is locked down at signing (i.e. “locks the box”) and then obligates the seller to operate the business for the buyer’s benefit and risk during the pre-closing period. Sounds a little crazy, right? 🎯 Well, if you think about it, virtually all deals with a public company target are essentially “locked box” structures with a fixed equity price at signing and no adjustments for changes in working capital during the pre-closing period. Tune in tomorrow for Part 2 and let’s uncover how the “locked box” actually works…. ______________ If you like “Knowing Something” M&A in a Minute ⏰, please click the 🔔 at the top of my profile so you don’t miss any new posts! #mergersandacquisitions #mergersacquisitionsdivestitures #klgates #leakage #lockbox

In many #smallcap #MandA and #companysuccession transactions, seller and buyer agree on an #earnout. 𝑩𝒖𝒕 𝒘𝒉𝒂𝒕 𝒊𝒔 𝒕𝒉𝒂𝒕 𝒂𝒄𝒕𝒖𝒂𝒍𝒍𝒚?   The parties achieve two main things with an earn-out:   1️⃣  They overcome the fact that they could not agree on the #valuation. This is usually because the seller obviously has a more positive view of the target company's future. 🏒 He wants future developments that are already planned (e.g. conclusion of a contract with a new major customer, granting of a subsidy, award of a patent) to be taken into account in the determination of the purchase price. The buyer is skeptical as to whether the milestones predicted by the seller will actually be reached. 🤔 He does not want to take on the risk by pricing them in. With an earn-out, the parties ensure that part of the purchase price must only be paid if the milestone actually are reached. 2️⃣ With an earn-out, part of the purchase price does not have to be paid at closing. Payment is only made after the end of the earn-out period, which is usually between one and three years. This means that the buyer does not need to have part of the purchase price available at the time of completion. An important tool in the current period of more difficult and more expensive #acquisitionfinancing! #VendorFinancing 😈 So far, so good - and so simple at first glance! But the earn-out devil is often in the detail: 💡 Inadequate earn-out provisions in the SPA often lead to disappointment for the seller. At the end of the earn-out period, the seller must realize that the buyer has torpedoed the developments and successes that were previously established in order to avoid having to pay the earn-out. Manipulation by the buyer must therefore be prevented from the outset! 💡 On the other hand, it is important not to restrict the buyer too much. He often acquires the company because he has ideas for optimization or for leveraging synergies with other companies in his portfolio. If the strings in the earn-out clause are so tight that the buyer can only leverage synergies after the earn-out period, he could cut back on the purchase price. ❗ 𝑨 𝒃𝒂𝒍𝒂𝒏𝒄𝒆𝒅 𝒆𝒂𝒓𝒏-𝒐𝒖𝒕 𝒑𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 𝒊𝒔 𝒕𝒉𝒆𝒓𝒆𝒇𝒐𝒓𝒆 𝒗𝒆𝒓𝒚 𝒊𝒎𝒑𝒐𝒓𝒕𝒂𝒏𝒕 𝒇𝒐𝒓 𝒃𝒐𝒕𝒉 𝒑𝒂𝒓𝒕𝒊𝒆𝒔. 𝑰 𝒉𝒂𝒗𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒊𝒛𝒆𝒅 𝒘𝒉𝒊𝒄𝒉 𝒂𝒓𝒓𝒂𝒏𝒈𝒆𝒎𝒆𝒏𝒕𝒔 𝒄𝒂𝒏 𝒃𝒆 𝒎𝒂𝒅𝒆 𝒊𝒏 𝒕𝒉𝒆 𝒂𝒕𝒕𝒂𝒄𝒉𝒆𝒅 𝒅𝒐𝒄𝒖𝒎𝒆𝒏𝒕.

Limiting Seller’s Liability in M&A Transaction. In most M&A transactions, sellers are required to provide extensive representations and warranties about the business. However, sellers may not always have full visibility into all potential risks, especially in larger, more complex deals. To manage this uncertainty, it is common to include a 𝒍𝒊𝒎𝒊𝒕𝒂𝒕𝒊𝒐𝒏 𝒐𝒇 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚 section in the Share Sale Agreement (SSA). This serves as a key risk mitigation tool, offering the seller protection in several ways: 𝐚. 𝐓𝐢𝐦𝐞 𝐋𝐢𝐦𝐢𝐭𝐚𝐭𝐢𝐨𝐧: Buyers are usually given a shorter period to make claims, limiting exposure to a specific window after the transaction. 𝐛. 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐚𝐩: The total amount of liability is often capped, ensuring that the seller’s financial risk is defined and manageable. 𝐜. 𝐃𝐞 𝐌𝐢𝐧𝐢𝐦𝐢𝐬 𝐂𝐥𝐚𝐮𝐬𝐞: This prevents claims for small amounts by establishing a minimum threshold for claims, ensuring that trivial issues don’t result in disputes. 𝐝. 𝐁𝐚𝐬𝐤𝐞𝐭 𝐚𝐧𝐝 𝐓𝐡𝐫𝐞𝐬𝐡𝐨𝐥𝐝 𝐂𝐥𝐚𝐮𝐬𝐞𝐬: A basket clause sets a minimum total amount for claims. Once this threshold is met, the seller may be liable for either the entire amount (tipping basket) or the amount above the threshold (deductible basket). 𝐞. 𝐄𝐱𝐜𝐥𝐮𝐬𝐢𝐨𝐧𝐬 𝐟𝐨𝐫 𝐂𝐞𝐫𝐭𝐚𝐢𝐧 𝐓𝐲𝐩𝐞𝐬 𝐨𝐟 𝐋𝐨𝐬𝐬𝐞𝐬: Sellers can exclude liability for indirect, consequential, or punitive damages, preventing excessive claims for unforeseeable losses. 𝐟. 𝐅𝐫𝐚𝐮𝐝 𝐄𝐱𝐜𝐥𝐮𝐬𝐢𝐨𝐧: No seller protections apply in cases of fraudulent misrepresentation or willful misconduct, keeping the seller accountable for deliberate misstatements. 𝐠. 𝐓𝐚𝐱 𝐈𝐧𝐝𝐞𝐦𝐧𝐢𝐭𝐲: Tax liabilities often have separate provisions and are typically excluded from the general liability cap to cover pre-closing tax risks. 𝐡. 𝐃𝐮𝐭𝐲 𝐭𝐨 𝐌𝐢𝐭𝐢𝐠𝐚𝐭𝐞: The buyer must take reasonable steps to minimize any losses before making a claim. 𝐢. 𝐍𝐨 𝐃𝐨𝐮𝐛𝐥𝐞 𝐂𝐥𝐚𝐢𝐦𝐬: Sellers are protected from multiple claims arising from the same breach or issue. By clearly defining these limitations, both buyers and sellers can better negotiate fair and balanced terms in any M&A deal. #MergersAndAcquisitions #BusinessTransactions #CorporateLaw #RiskManagement #Liability #LawyerInKL

Obviously a critical element of any #mergersandacquisitions transaction is the purchase price. Buyers and sellers of businesses, and their advisers, are well served knowing about #earnoutprovisions as a way to bridge the valuation gap between the parties. In this article, my Aird & Berlis LLP colleagues Liam Tracey-Raymont and Joshua W. and I discuss #crossborder trends in the use of earnout provisions, the elements of typical earnout provisions, different forms of earnouts and key points for buyers and sellers, and their advisers, to be aware of when considering including an earnout provision in a transaction. https://lnkd.in/gCveBdmW

𝐌&𝐀 𝐃𝐞𝐚𝐥𝐬: Should You Lock in the Price or Adjust Later? Here’s What You Need to Know! When it comes to Mergers and Acquisitions (M&As), the pricing mechanism you choose can significantly impact the outcome of the deal. Two common approaches are the Locked-Box Mechanism and the Price Adjustment Mechanism—each with its own advantages depending on whether you’re a buyer or a vendor. 1. 𝐋𝐨𝐜𝐤𝐞𝐝-𝐁𝐨𝐱 𝐌𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦 🛡️ (𝐕𝐞𝐧𝐝𝐨𝐫-𝐅𝐫𝐢𝐞𝐧𝐝𝐥𝐲) The locked-box mechanism is often favored by vendors for its simplicity and certainty. Here’s why: 𝐚. 𝐏𝐫𝐢𝐜𝐞 𝐂𝐞𝐫𝐭𝐚𝐢𝐧𝐭𝐲: The purchase price is fixed as of an agreed date before the signing of the sale and purchase agreement (SPA). This means that any profits or losses occurring after that date belong to the buyer. 𝐛. 𝐍𝐨 𝐏𝐨𝐬𝐭-𝐂𝐨𝐦𝐩𝐥𝐞𝐭𝐢𝐨𝐧 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭𝐬: Vendors benefit from a clear, upfront purchase price with no surprises or complex adjustments after the deal closes. 𝐜. 𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐑𝐢𝐬𝐤 𝐨𝐟 𝐃𝐢𝐬𝐩𝐮𝐭𝐞𝐬: With everything agreed upon at the outset, the likelihood of post-completion disputes is minimized. 2. 𝐏𝐫𝐢𝐜𝐞 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭 𝐌𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦 ⚖️ (𝐁𝐮𝐲𝐞𝐫-𝐅𝐫𝐢𝐞𝐧𝐝𝐥𝐲) On the other hand, the price adjustment mechanism is often preferred by buyers who want assurance that they’re paying a fair price based on the company’s actual financial position at closing. 𝐚. 𝐅𝐥𝐞𝐱𝐢𝐛𝐢𝐥𝐢𝐭𝐲: The final purchase price is adjusted post-signing based on the target company’s actual financial position (e.g., working capital, debt, cash levels) at the closing date. 𝐛. 𝐁𝐮𝐲𝐞𝐫 𝐏𝐫𝐨𝐭𝐞𝐜𝐭𝐢𝐨𝐧: This mechanism ensures that the buyer pays a price that reflects the target’s actual value at closing, protecting against any unforeseen financial changes between signing and closing. 𝐜. 𝐏𝐨𝐭𝐞𝐧𝐭𝐢𝐚𝐥 𝐟𝐨𝐫 𝐃𝐢𝐬𝐩𝐮𝐭𝐞𝐬: While it offers flexibility, this approach can lead to disagreements if the parties have different interpretations of the financial adjustments. Which One is Right for Your Deal? The choice between these mechanisms depends on the specific dynamics of the deal and the goals of the parties involved. Vendors seeking price certainty might lean towards a locked-box approach, while buyers looking to mitigate risk might prefer a price adjustment mechanism. Navigating these options requires a deep understanding of both the financial and legal aspects of M&A transactions. If you’re involved in an upcoming deal, please seek guidance on which mechanism suits your interests. #MergersAndAcquisitions #CorporateLaw #LockedBoxMechanism #PriceAdjustment #BusinessGrowth #LegalInsights

➡️Share Purchase Agreements and Warranties!⬅️ ✔️When buying shares in a Limited Company, for additional protection a buyer should always have a share purchase agreement in place containing warranties! ✔️Warranties that are given by the seller in the Share Purchase Agreement provide protection to the buyer against the risk of unknown liabilities. ✔️If the warranties are untrue, the buyer can claim contractual damages to the extent that it can prove loss resulting from the breach of warranty. 💵An award of damages for breach of warranty will aim to restore the buyer to the position that it would have enjoyed if the warranty had been true. ✔️The warranties will usually relate to the any litigation against the company, any debts or any issues with staff members. ✔️If a seller is unable to provide a certain warranty, then they can disclose this in a disclosure letter. A disclosure letter is a sellers ‘get out of jail free card’ as if disclosed to the buyer and evidence is shown then the buyer is unable to claim for the breach of warranty. ✔️As a seller, it is best to go through each warranty with your legal team and with your accountant for any tax warranties and ensure that you can either provide each warranty as stated in the Share purchase agreement or disclose to avoid any issues further down the line! #shares #shareholders #sharepurchase #companylaw