A value date (the date of the lock box) is set in the lock mechanism. This is usually a relatively new date between the last closing date of the balance sheet and the date of the signing of the share purchase agreement (SPA). On the other hand, when a closure mechanism is used, the purchase price is calculated and negotiated by reference to a recent series of ice accounts dating before the signing date of the ZSE, commonly referred to as the Locked Box Date. Therefore, since the amount of cash, debt and working capital is known to the parties at the time of the signing of the OSG, the agreed price of the target transaction is set and recorded in the GSB. Therefore, the buyer is not able to adjust the purchase price after closing and must rely on contractual guarantees (through guarantees that are usually supported by compensation) to ensure that no loss of value will escape from the box before the reference date. One of the main effects of this approach is that economic exposure (benefit and risk) to the objective is effectively transferred from the seller to the buyer at the time of the blocked trade and not on the reference date. As mentioned above, an important aspect of a locked box mechanism is that no value will escape from the field until the closing date. Leakage refers to the seller who extracts the value of the target in the period from the lock field date to the completion date. The parties must identify the possible sources of the leak, the obligations of the seller to avoid that the leaks are usually supported by compensation in pounds per pound. It should be noted, however, that in some jurisdictions, such as India, it is not possible to make price adjustments after the completion of cross-border transactions, since equity valuations must still comply with certain mandatory rules established by the Indian competent authorities (including the Reserve Bank of India) that do not allow CSE parties to freely adjust the price after the close. As a general rule, significant governance controls are imposed on the supplier to determine how the transaction should be managed from the spa signing date to the completion date.
To this end, it is necessary to include in the spa important and prescriptive safeguards in order to avoid any loss of value of the target company after the signing. The seller must ensure that there is no leakage between the lock-down date and the completion date and that contractual restrictions must be imposed to compensate the buyer for leaks that cannot be considered an “authorized leak”. Approval of what is allowed and not will be an important part of the negotiations. “leak” means any transfer of value from the target entity to the creditor between the date of the lock field and the completion date. For example, “leakage” often includes the payment of dividends and management bonuses, payments to directors or related persons, costs and expenses related to the sale and paid by the target company, or any waiver of amounts due by the seller to the target company. On the other hand, “authorized leaks” include the payment categories necessary to allow the target entity to continue its activities properly. For example, “authorized leaks” generally include short-term intra-group payments on terms consistent with previous practices, staff salaries and any other identified item agreed by the parties and already included in the price. What is “leakage” and what are typical anti-leaks? Traditionally, share purchase agreements under English law provided that the purchase price would vary depending on the net assets of the target at closing or, in some cases, by referring to another measure, such as working capital. If the objective is to be loaned by shareholders or intragroup, you expect the buyer to control any increase in these credits during the spread period, not only for possible leaks, but also to understand the proposed use of the funds.