This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.
Welcome to Reed Smith's viewpoints — timely commentary from our lawyers on topics relevant to your business and wider industry. Browse to see the latest news and subscribe to receive updates on topics that matter to you, directly to your mailbox.
| less than a minute read

Between locked box and closing accounts– hybrid purchase price formats

The Price Mechanism is the heart of the Purchase Agreement and the hinge between lawyers and M&A advisors and Private Equity Funds. 

In theory, M&A and Private Equity practitioners have the choice to determine the purchase price either via closing accounts or via a locked box mechanism. Whereas both mechanisms have pros and cons, in practice often a "one size fits all" solution does not meet all needs. 

This leads to innovative formats which address the practical challenge resulting from distant effective dates and the need to bridge the uncertainties of longer periods not covered by financial statements. 

These solutions can be supported by Warranty & Indemnity Insurance structures.

Aspects of these new hybrid purchase price formats are until now rarely discussed in the relevant literature. The article in the link sheds light on the mechanics and application of these new hybrid formats.

A key aspect of the share purchase agreement in private equity and M&A transactions is the purchase price mechanism. Two standards are common when determining the purchase price: (i) closing accounts and (ii) locked box. [...] Certain hybrid formats have evolved in recent years. [...] A particular challenge arises when the effective date under locked box is distant. [...] This can occur, for example, where the deal is signed later in a year with the envisaged closing date to be (1) at the year-end or (2) in the beginning of the new year. This is even more relevant when (3) a signing is to occur early in the new year, with the preceding year’s accounts not yet drawn up. [...] In these scenarios, there are two different approaches one could take.


private equity, mergers and acquisitions, m&a, spa, purchase price mechanism, locked box, closing accounts, completion accounts, pemacom