The challenge of drafting purchase price adjustment clauses in merger & acquisition contracts (PDF)

Inhaltsangabe:Introduction:
The topic of Mergers and Acquisitions (M&A) is currently on everyone¿s lips. No day passes by without reading about a planned or realised M&A transaction in the newspapers. The last few years have been record years for the M&A business. The year 2007 could in fact top the record year of 2006. Although, the first half of 2007 was remarkably successful, the subprime crisis of the credit markets led to a slow-down in the second half. However, M&A transactions with a transaction volume of approximately $ 4.830 billion took place worldwide in 2007. The forecasts for 2008 expect a recession of the transaction volume of up to 25 % of the previous year. Mega-deals will not make the headlines as often as in 2007, because banks became more careful in granting credits for such deals due to the subprime crisis. However, M&A International INC. (MAI) expects that the subprime crises will have only little impact on small and medium-sized M&A transactions and 2008 will still be a good year for the M&A business.Various companies have also taken advantage of the weak U.S. Dollar exchange rate and plan M&A deals overseas. Since the wind has not yet been taken out of the M&A businesses sails, the challenge of performing a successful M&A transaction remains.
Like any other businesses, M&A transactions are a dynamic process which has to be accounted for. When a buyer purchases a company (target), the assets of the company cannot be held in stasis until the transaction is settled. The company is in a constant flow and its value changes constantly. This makes it hard to determine a precise purchase price that remains valid from the beginning until the end of the transaction process. Since the value of the company changes through this process, the purchase price has to be adjusted. Therefore, purchase price adjustment tools have to be part of the M&A contract to ensure so. Generally, legal counsels are assigned to draft M&A contracts for the parties. Although, an M&A team should consists not only of lawyers, but also of accountants, tax consultants and others, where every member is specialised in a certain field, the legal counsel should have a general overview, since he is the one drafting the contract. The quality of his drafting becomes apparent when disputes arise. Most lawyers have no clue about company valuation methods or the principles of orderly accounting. However, these two applications are essential when it comes to drafting [...]