Some transactions result in a sale of a majority of a business but not the entirety. When that is the case, some special issues arise.

First, if shareholders are selling different percentages in the transaction, be aware that there is a greater risk of the stockholders not being in full alignment on all issues than is the case when the entire company is sold. For instance, if the company has excess cash and has the choice to either pay a dividend shortly before closing or have that cash result in an increase in a purchase price adjustment, then economic differences will result. A dividend would presumably be paid to all shareholders based on the number of shares held pre-closing (ignoring for these purposes the impact of any preferences or similar terms). In contrast, when the cash is retained, there is a resulting increase in a purchase price adjustment that would be paid based on the number of shares sold in the transaction rather than the number of shares held pre-closing.

Second, to the extent that there are any post-closing payments contemplated, such as future earnouts, make sure it is clear how those payments will be made. There could be a material difference between those payments being funded by the buyer making another payment itself versus those payments coming from the company that the pre-closing shareholders continue to own in part. For example, if $1 million is to be paid in an earnout and the selling stockholders continue to own 25% of the business after closing, then that earnout payment from the company rather than from the buyer reduces the value of the business by $1 million. The actual economic benefit of the earnout payment to those stockholders is $750,000 rather than $1 million. The merger parties should be clear on the intent of how any of those payments will be made. This is in contrast to a sale of the entire business where the shareholders likely do not care how the buyer funds those obligations.

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