482 16 Key Provisions of the Acquisition Agreement
will then mean that the acquirer may walk away or renegotiate the purchase price
before closing.
Price adjustment can also be based on particular contract terms. There are two
main reasons for the parties to choose the adjustment of purchase price at closing.
First, the parties may leave the exact purchase price open at signing but agree
on how the purchase price will be determined and fix the purchase price at closing
on the basis of the outcome of due diligence.
Second, the parties may start with a certain agreed purchase price at closing.
However, there can be a long delay between the signing of the acquisition agree-
ment and the payment of purchase price at closing. If there is no purchase price
adjustment mechanism, profits and losses of the target between signing and clos-
ing are for the account of the buyer. The parties can therefore agree on the adjust-
ment of the purchase price at closing. Typically, the parties agree on financial or
other targets and how the actual circumstances influence the purchase price. If the
actual circumstances at closing are not equal to the agreed targets, either the buyer
or the seller is responsible for the difference.^76
After closing. The parties may agree to use variable payments for many reasons
(Volume II). In business acquisitions, the acquirer typically does not know in ad-
vance whether the quality of the target will be what the vendor has promised. Be-
cause of risks caused by information asymmetries, the acquirer wants to pay less
for the target. On the other hand, the vendor does not necessarily know everything
about the target unless the vendor is a well-informed controlling shareholder or the
deal is an asset deal. Because of the lack of useful information, the vendor may not
want to give extensive representations and warranties about the target’s business.
This can reduce the price even more. The vendor can signal that the price is based on
the true quality of the target’s business, if the purchase price will be fixed after
closing and after the parties have had an opportunity to verify the quality.
The parties can use a combination of different kinds of payment obligations to
mitigate risk for the acquirer and/or reach agreement on a higher purchase price.
Generally, however, deferred payment will increase the vendor’s credit risk expo-
sure (Chapter 20). (a) A fixed component of the purchase price may be payable on
a certain date in the future. A promissory note from the buyer may be secured by
the assets of the business or otherwise. (b) An earn-out clause can provide that
part of the purchase price will be payable on a certain date in the future. The vari-
able component can depend on sales or profitability.^77 (c) The acquirer can furnish
a bank guarantee for the security of the payment of the purchase price. The terms
of the guarantee could be that the bank must pay, if the acquirer defaults in paying
the purchase price and the guarantee is claimed by the vendor.
Example: Dresdner Bank. In August 2008, Allianz SE, a large German insur-
ance company, sold 100% of Dresdner Bank AG to Commerzbank AG for ap-
proximately €8.8 billion. The acquisition made Commerzbank Germany’s largest
(^76) See Goldberg L, op cit, pp 214–216.
(^77) See, for example, Vischer M, Earn-out Klauseln in Unternehmensverträgen, SJZ 98
(2002) pp 509–517.