Pre-Closing
Benefits
Retained
by Sellers
WHAT SHOULD HAPPEN
WHEN A SELLER RETAINS THE BENEFIT
OF A PRE-CLOSING ASSET
SUMMARY
Parties may negotiate for a seller to retain the benefit of certain pre-closing assets relating a target business.
This frequently arises where cash flow relating to the pre-closing period is expected to materialize after closing.
Provisions around how a seller should retain the benefit of pre-closing assets should be carefully negotiated to avoid windfalls in either direction.
ILLUSTRATIVE EXAMPLE
A buyer is negotiating the purchase of the equity of a target company from a seller. The target is a plaintiff in ongoing litigation. The trial is expected to conclude before closing, and the seller believes the target will prevail. Damages are $1 million. The seller wants the benefit of the claim.
The parties could determine to: (i) increase the purchase price by $1 million, on the belief that the target will prevail; or (ii) provide that the seller will receive any proceeds from the lawsuit, so long as the seller indemnifies the target for any losses relating to it (like those that might be incurred in an appeal overturning the award).
The second option is preferable.
PURCHASE PRICE INCREASES
Though they may be appropriate for speed in some instances, straight-line purchase price increases for contingent benefits are often inelegant solutions. Where outcomes are not certain, provisions acknowledging uncertainty—such as mandatory reimbursement and indemnification obligations—are typically more fair.
Jonathan Conigliari is a mergers and acquisitions attorney and the founder of Conigliari PC. He advises a variety of clients on strategic transactions, significant investments, and general counsel matters involving corporate law, special situations, and contracts. You can contact him via email or at +1 310-708-4881.
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This insight is not, and is not meant to serve as, legal advice. It is only for general information. Reviewing or sharing this insight will not establish an attorney-client relationship with Conigliari PC unless we are or have been formally engaged to provide legal services.