How prevalent is the use of locked box pricing mechanisms in your jurisdiction and in what circumstances are these ordinarily seen?

Private Equity

Austria Small Flag Austria

In Austria, locked box pricing mechanisms are more frequently seen than closing accounts. Private equity investors tend to prefer locked box structures, particularly when they are on the sell-side. Likewise, experienced trade sellers usually prefer locked box structures. Where the gap between signing and the anticipated date of closing is long (e.g. because of antitrust or other clearance requirements), closing adjustments are the norm. Which parameters are included in a closing adjustment depends on the target business, with the most common combination being adjustments for net debt, working capital, and (sometimes) capex. Equity adjustments are relatively rare.

Japan Small Flag Japan

A locked box pricing mechanism (in which the seller and the buyer agree on a fixed purchase price as of a historical locked box date with special indemnification by the seller for any subsequent value leakage from the target after the locked box date and accrual of interests on the purchase price from the locked box date until the closing) is rarely seen in transactions in which the targets are Japanese companies.

There are a number of transactions in which the target is a Japanese company and in which the purchase price is agreed as a fixed amount and is not subject to any closing adjustment. However, they do not include provisions for leakage indemnification or interest accrual on the purchase price. In such transactions, negative covenants of the seller would usually be provided in the transaction documents to protect the buyer from any decrease of enterprise value of the target; and such negative covenants would typically include prohibitions on the seller from paying any dividend or effecting any material “leakage” from the target.

Mauritius Small Flag Mauritius

As indicated above, there is no specific record of such industry related transactions in Mauritius. However, based on fund documentation we have sighted it is not uncommon to use the locked box pricing mechanism. Prices of shares are usually set out in the constitutional documents of a company and it is for the Board to determine the price of the share. As regards collective investment schemes, except for the first public offering, the purchase and redemption price of a share is based on the net asset value whereby the collective investment scheme will use as specific valuation method to value its portfolio securities to arrive at a net asset value.

Norway Small Flag Norway

According to our surveys, locked box pricing mechanism is used in approximately 50% of the transactions in the Norwegian market, with some variations from year to year. Such variations may be caused by market conditions and the mix of transactions executed by financial sponsors and industrial players. The locked box approach is generally preferred by financial sponsors, while industrial players are often more comfortable with using completion accounts. In controlled auction processes, a locked box approach would normally be preferred unless there are strong arguments for using completion accounts.

Switzerland Small Flag Switzerland

Contrary to the USA and Asia, locked box pricing mechanisms are widely used in Switzerland. In particular in the current sellers' market, sellers seeking to limit balance sheet risks and reduce the risk of post-closing purchase price adjustment disputes will push towards using locked box pricing mechanisms.

Due to the current sellers' market, locked box pricing mechanisms are often combined with an interest payment since the locked box date allowing sellers to participate in the cash flow generated in the period between the locked box date and actual payment of the purchase price (i.e. closing) and buyers tend to accept longer periods between the locked box accounts and closing.

The Netherlands Small Flag The Netherlands

In the Netherlands, locked box pricing mechanisms are used in the far majority of transactions (an internal sample study showed a percentage of 64% of the transactions containing a locked box mechanism).

The locked box approach is the favoured approach of selling financial sponsors, allowing a clean exit and providing the possibility to distribute the consideration more quickly. The absence of any post-completion adjustment eliminates the need to hold back funds in case adjustment works against the seller.

It may be problematic for a buyer to agree to a locked-box mechanism where the target is carved-out from a larger group, since it is easier for the seller to manipulate leakage from the target, for example, by hedging agreements, allocation of group overheads, current accounts and intra-group trading. Generally, however, if carefully drafted, the indemnity for leakage should provide for an adequate remedy.

United Kingdom Small Flag United Kingdom

Locked-box structures are currently the most common pricing structure in UK M&A transactions. There are a number of key benefits to using a locked box concept, primarily it gives certainty of price for both the buyer and seller at the time of signing the deal, reduces the complexity and risks around preparing, reviewing and potentially disputing a final price derived from completion accounts and in auction processes enables competing bids to be more accurately compared.

There are certain types of transactions where locked box constructs are more difficult to construct and these are primarily in situations where there is a pre-sale reorganisation of operational businesses (e.g. carve-out divestitures). These transactions tend to rely on pro-forma balance sheets involving a number of adjustments and therefore cannot robustly support the locked box mechanic and relevant leakage undertakings.

Belgium Small Flag Belgium

In Belgium, locked box pricing mechanisms are used in almost half of the transactions. They are especially prevalent in transactions with a deal value of more than EUR 100 million.

The locked box approach is the favoured approach of selling financial sponsors, allowing a clean exit and providing the possibility to distribute the consideration more quickly. The absence of any post-completion adjustment eliminates the need to hold back funds in case adjustment works against the seller.

It may be problematic for a buyer to agree to a locked-box mechanism where the target is carved-out from a larger group, since it is easier for the seller to manipulate leakage from the target, for example, by hedging agreements, allocation of group overheads, current accounts and intra-group trading. Generally, however, if carefully drafted, the indemnity for leakage should provide for an adequate remedy.

China Small Flag China

China M&A transactions may involve either a locked box approach or a “U.S.-style” completion accounts construct (with a purchase price adjustment based on net debt and working capital at closing). In a transaction involving an acquisition of a Chinese company by a financial sponsor, a completion accounts construct remains in most circumstances the buyer’s preferred approach because this approach (i) requires less comfort on the balance sheet prior to signing, (ii) does not require the buyer to underwrite the risk of developments between signing and closing and (iii) potentially allows the buyer to benefit from purchase price adjustments that are not specifically negotiated with the seller (whereas under the locked box approach, the buyer would need to negotiate prior to signing how items on the balance sheet will affect the purchase price). In a transaction involving a sale by a financial sponsor seller, however, a seller in the China market would typically consider carefully with its financial advisor the pros and cons of each approach in light of the negotiation dynamics and the identity and sophistication of the buyer, rather than proposing either approach by default. According to Chinese local counsel, a locked box construct is increasingly popular among Chinese individual investors for smaller-sized or less complex transactions, where it offers the parties certainty of price and reduces deal execution costs.

Finland Small Flag Finland

Locked-box mechanisms are common in auctions and are particularly prevalent in transactions involving financial sponsor sellers, who generally prefer certainty concerning the purchase price and ability to distribute the purchase price promptly to their investors. Moreover, an interest component calculated from the locked-box date is commonly used and typically negotiated on case-by-case basis depending on the business under acquisition. Buyers, in such situations, spend significant time and resources on thorough due diligence, modelling and valuation in order to accurately assess the purchase price and likelihood of leakage etc.

France Small Flag France

In situations where the purchaser is a special purpose vehicle with no substance, the sellers will require the financial sponsors to provide, together with their binding offers, equity and debt commitment letters with certain funds commitment. Under the equity commitment letters, the financial sponsors irrevocably undertake to fund the bidding company if the bid is successful.

When reviewing the offers, the sellers will make sure that (i) the funding obligations of the financial sponsors and/or their debt providers are subject to no or very limited documentary conditions and (ii) the commitment letters can, upon closing, be enforced by the sellers themselves.

Germany Small Flag Germany

Locked-box structures are currently the most common approach in German M&A transactions. There are obviously a number of key benefits to using a locked box concept, the most obvious being that it gives certainty of price for both the buyer and seller at the time of signing the deal which is also the reason why a locked-box is clearly favour by financial sponsor sellers. However, a locked-box concept is also commonplace now among strategic sellers as locked-box share purchase agreements are considerably less complex and in auction processes the bids of the different bidders are much easier to compare. Also, a locked-box prevents the lengthy process of preparing, reviewing and potentially disputing the final price adjustment derived from completing accounts and does not tie up the target's management prior to signing with providing the necessary data for the different line items in relation to the adjustment items in completion accounts.

Greece Small Flag Greece

Locked box mechanism is gaining ground in M&A transactions in Greece, mainly due to the complexity of negotiations in relation to the closing price adjustment calculations. That being said, it is not yet the prevailing mechanism, since parties are still more familiar with the ‘more traditional’ closing accounts mechanism. This has also led to circumstances where, although typically locked box was used, in reality ‘leakage’ and ‘permitted leakage’ elements were formed in such way that resembled the closing accounts calculations (i.e. debt, debt-like items etc). Locked box mechanism will be typically used in circumstances where: (a) there is not a big time gap between singing and closing; or (b) there is a private auction sale process whereby the seller: (i) intends to receive and compare clear bids without having to take into account the various closing mechanics; and/or (ii) is not willing to enter into complex parallel negotiations, in relation to closing adjustment, with more than one party; or (c) the target’s business is not unpredictable.

Ireland Small Flag Ireland

Five years ago it was virtually unknown and now on all auction deals and PE exits, it is always used. It is less common on acquisitions from founders or on spin outs of a part of a wider corporate structure.

Luxembourg Small Flag Luxembourg

Locked box is the most common and ordinarily used pricing mechanism.

Locked box pricing mechanisms are more typically seen when parties are looking to minimise post transaction adjustments to consideration as would occur with closing accounts pricing mechanism.

Russia Small Flag Russia

The acquisition of a minority interest in a Russian entity can be notifiable. The percentage of shares triggering a filing depends on the type of entity: thresholds are 25, 50 or 75 per cent of voting stock of a Russian joint-stock corporation, or 33.3, 50 or 66.6 per cent of the voting shares in a Russian limited liability company. The shares to be taken into account in-to the calculation include all shares held or to be acquired in the envisaged transaction by the acquirer or any other company of the acquirer’s group.
The acquisition of a minority interest in a foreign company is generally not notifiable; as a rule only the acquisition of more than 50 per cent of shares/voting stock of a non-Russian company triggers a filing requirement. An exception from this rule can, for example, apply in case of a joint venture between competitors.

Poland Small Flag Poland

They are available and familiar to parties but not used in every deal.

Portugal Small Flag Portugal

Locked box pricing mechanisms have become very frequent in M&A transactions in Portugal over the last years.

Given the time and resources expended in the preparation and negotiation of the more traditional “closing accounts” (following the closing date, as the name implies), locked-box mechanisms have been accepted in Portugal as an easier way to structure the price payable for shares of the target.

Locked-box mechanisms are thus now widely used across the board by both private equity and industrial/strategic actors but is favored in particular by the sell-side rather than by the buy-side (as buyers will sometimes wish for the price of shares to take into account the performance of the target company until the closing date, particularly when a significant amount of time is expected to pass between the “reference” equity purchase price date and the closing date).

Sweden Small Flag Sweden

Locked box pricing mechanisms are commonly used in Sweden. In our experience, locked box mechanisms are chosen in approximately 50% of all the transactions. Locked box mechanisms used to be more predominant but during recent years the use of other purchase price adjustment mechanisms (i.e. closing balance sheet mechanisms and other forms of true-ups) have increased, and are now on a par with the locked box structure. We believe the increased use of purchase price adjustment mechanisms is partly due to the increased number of carve outs on the Swedish market lately. However, locked box pricing mechanisms are still particularly favoured by financial sponsors. In transactions where there is a financial sponsor on the sell-side, the locked box pricing mechanism is chosen in approximately 80% of the transactions.

United States Small Flag United States

Locked box transactions are used in a small minority of transactions in the U.S.

Malta Small Flag Malta

Whilst locked box mechanisms are sometimes applied in Malta, their use is not prevalent for M&A and private equity transactions. Whilst the use of such a mechanism may be on the rise, there is no data available to discern any particular or specific trends in this regard.

Updated: January 8, 2019