Learn essential drafting considerations for sellers to avoid post-closing issues. Areas of consideration covered in this detailed checklist include purchase agreements, earnouts, capitalization tables, and tips for a successful relationship with the shareholder representative. Other valuable insights are also included in this download, including our working capital checklist and 5th edition book, Tales from the M&A Trenches.
A sampling of the checklist is included below:
- Review for overlap in definitions, circular definitions, or different components between the estimated closing statement and the buyer’s statement to be delivered post-close.
- Be on the lookout for non-accounting issues that would be hard for a neutral accountant to resolve, or that simply don’t belong in a post-closing adjustment (e.g., certain tax items, litigation reserves).
- Review the limit of shareholder liability for post-closing issues. Is it capped? Joint and several?
- Remember that liability caps should be clear and specific. Review Cigna Health & Life Ins. Co. v. Audax Health Solutions, 107 A.3d 1082 (Del. Ch. 2014), and speak with your attorney for guidance.
Baskets and Caps
- Review how baskets are to be satisfied. Does the language require actual damages, or can the buyer simply estimate and assert them?
- Ensure at least a 30-day response period for claims.
- Require the Shareholder Representative’s formal written consent to any third-party settlement. This maintains the ability to track the buyer’s efforts.
- Require that a claim notice be sufficiently specific to identify a claim. This prevents “claim creep” in which the buyer may articulate new theories to sustain an untenable claim.
- Seek to allow the Shareholder Representative to control third-party disputes, ideally without being required to concede to full indemnification at the outset.
- Determine if a cap on specifically indemnified matters is appropriate.
- Be on the lookout for damages calculations that include diminution in value. “Diminution in value” provisions often lead to damages claims based on the multiplier used to value the deal, creating significant disputes.
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