Legal due diligence, legal deal structuring & documentation - Case study

Issue

Our client considered acquiring a target at a high acquisition price, based upon the representation of the seller that the target would have a “secured” turnover over the next 10 years.

Our client wanted us to assess the legal risks related to the target and its business.  Our key focus was to identify any risks which may jeopardize the future turnover of the company.  

Approach	Findings
Review of corporate structure, ownership of assets, business contracts, financing and securities, etc.
Perform an in-depth analysis of the key business contract

Recommendation

Given the importance of the contract for the target, the risks of early termination were assessed as high and as a potential “show stopper”.

The best solution would be that the target would agree with the service provider prior to closing upon a clarification/modification of the contract terms so as to obtain certainty and comfort about the duration of the contract term (and thus about the future turnover and profitability of target).

Alternatively, we recommended client  to request for a seller’s special covenant in this respect in the Share Purchase Agreement, secured with either (a portion of) the purchase price being withheld or put in escrow, or by reasonable collateral provided by the sellers (e.g. bank guarantee, corporate guarantee of the sellers, etc.). 

Results

Our client discussed this issue with the seller which appeared not to be very surprised.  However, it was in contradiction with the seller’s own presentation of the target. 

The seller was not willing to request the supplier for a clarification of the contract, nor to provide any covenants or guarantees in the Share Purchase Agreement.  

Given the uncertain but high legal risk on the one hand, and the breach of trust on the other hand, the client decided not to pursue the deal.