What is the definition of purchase price in M&A?
The definition of “purchase price” (or its equivalent) in acquisitions with contingent consideration often leaves open the possibility of dispute. Agreements commonly define the purchase price as the total dollar amount expected to be received by shareholders—for example, in a merger with a $100 million purchase price and 10% escrow, the merger agreement may define “purchase price” as $100 million, of which $10 million is in escrow. Instead, the merger agreement should consider defining the purchase price as $90 million plus the ultimate amount released from escrow to shareholders (or language to that effect).
Merger consideration should be defined as the amount paid at closing plus whatever balance remains at the end point of the escrow process.
While the Court of Chancery of Delaware held in Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc. that escrows were enforceable against shareholders, it is possible that another court could come to a different conclusion.1 Therefore, out of an abundance of caution, the merger parties may want to define the purchase price as the closing payment plus any remaining balance in the escrow to try to ensure that no shareholder can argue that they are entitled to the full $100 million without being subject to the escrow. Because shareholders rarely sign the merger or escrow agreements, it is possible that a shareholder could try to argue that escrow terms are not enforceable against them. The potential issue with the purchase price, if it is defined as $100 million with $10 million in escrow, is that shareholders could try to argue that an escrow agreement is not binding on them for lack of privity of contract, and that they are therefore entitled to their portion of the full purchase price. This risk is especially acute if a shareholder exercises dissenter’s rights and points to the term of the merger agreement specifying the full price per share as evidence of the fair market value to be received. This potentially provides an avenue for a dissenting shareholder to receive the full purchase price free of escrow obligations.
While the risk may be low, defining the purchase price as the amount paid at closing plus the ultimate balance released from escrow should mitigate this concern.
- 107 A.3d 1082, 1091 (Del. Ch. 2014).
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Paul is the chief executive officer and co-founder of SRS Acquiom.
Before co-founding SRS Acquiom, Paul was one of the founding partners of Koenig & Oelsner, a Denver-based corporate and business law firm with a strong practice in mergers and acquisitions, securities, and financing transactions. Prior to that, he was an attorney in the Chicago office of Latham & Watkins, and in the Colorado office of Cooley LLP.
Paul has authored numerous articles and is a frequent speaker at industry events. He received his BBA in finance from the University of Iowa and graduated from Northwestern University School of Law.