By: Guillermo Daffir Madrigal Monroy
Among various ways to acquire a company, there is what the Anglo-Saxon world calls a “share deal” or the purchase of shares. On the other hand, an “asset deal” involves acquiring another company’s assets and liabilities. Regardless of the chosen operation, it will always be crucial to consider the legal, financial, and due diligence aspects when carrying out these types of operations to ensure they are conducted correctly and to understand the current situation of the acquired company.
Alongside these measures, it is common to observe the use of price adjustment clauses in this type of operation. Such clauses regarding price adjustments function as a policy in relation to the warranties and declarationsdeclarations and warrantiesmade by the parties in these types of operations, as their function is to determine the final purchase price based on adjustments that may occur before or after the closing date. In other words, the use of these clauses is optimal in case of disagreement between the parties in this type of transaction about the actual value of the company.
Usually, these clauses can be identified into two main groups: clauses adjusting the price at the closing date or clauses adjusting the price after the closing date.
The former focuses on calculating the price based on facts or events occurring at the closing date, aiming before the closing date. On the other hand, clauses adjusting for events or circumstances occurring after the closing date aim to adjust for events or circumstances occurring after the closing date.
The structure of each type of clause will depend on different objectives sought during the transaction. Concerning the former, the financial statements at the beginning of the transaction, previous ones, and up to the closing date will be evaluated to establish metrics defining the value of the company. This, in the latter, attention will be paid to factual information or events occurring after the closing date. Additionally, in this latter case, other variables come into play (unfunded liabilities, pension obligations, the company’s cash balance, real working capital, etc.) for price adjustment. As can be seen, there are diverse variables and considerations (financial, corporate, and legal) to take into account, so while a price adjustment clause may be useful to establish the real value of the company, it can also generate certain discrepancies between the parties.
Therefore, drafting this price adjustment clause may or may not lead to a quick and effective understanding of the company´s value, or it may oppose the transaction parties on the real value of the operation, leading to a dispute between them, which makes it advisable for greater effectiveness to resort to arbitration.
At Vega, Guerrero & Asociados, the corporate and dispute resolution teams are available to provide advice and offer our services to address these types of disputes. In case of any doubts that may arise regarding the article, we are open to providing guidance. If you have any questions or concerns regarding this article, please do not hesitate to reach out for assistance.
