US eyes using locked box in merger contracts

Author: Olly Jackson | Published: 20 Apr 2018

Locked box contracts in M&A transactions are growing in popularity in the US, shifting the transaction risk closer to the buyer.

Usually, US M&A transactions have favoured the completion accounts mechanism approach, where the buyer pays for the level of assets and liabilities of the target right on completion after a post-completion pricing adjustment. This approach is deemed to be riskier for the seller because it takes the economic risk right up to completion and gives them less control over the ultimate selling price.

Locked box contracts, those where the parties agree a fixed equity price calculated using a recent historical balance sheet of the target company, is often coupled with a ticking fee that compensates a seller for the buyer’s delay in completing a deal. With this, and the fact that a seller has the benefit of determining the price and avoiding the cost of completion accounts, the risk would...