A story on locked box mechanism


A battle of egos is how I remember the incident.

I was once involved in an M&A transaction which the consideration was based on a locked box mechanism.*

In addition to lawyers, there were also financial adviser and investment banker involved in the deal.

All the advisers were in a conference call to discuss the terms of the transaction. There were senior partners and associates from law firms representing the seller and buyer on that call.

The financial adviser (acting for one party) and the investment banker (acting for the other party) discussed at length the financial technicalities in determining the purchase price. As the discussion was on financial matter, the lawyers on both sides were silent.

The financial discussion went on for some time and then…

The financial adviser said in a condescending tone, “That is not how a locked box mechanism work! There is an article by one of the Big Four to explain how a locked box mechanism should work. You can read the article to get some understanding.”

This, of course, did not go down well with the investment banker. The investment banker retorted, “I don’t care about your locked box or pizza box. I have CFA qualifications!”

The call went silent for a while. Someone suggested to adjourn the call.

I thought I heard “pizza box” wrongly but my colleague told me that was not the case. We resumed the call later and the discussion continued as though nothing happened.

All in a day’s work of an M&A lawyer.

*For a locked box mechanism, the parties agree on a fixed price on the date of signing of the SPA. The purchase price is generally based on a balance sheet drawn up as of an agreed date and settled between the parties before the SPA is signed. Leakage is prohibited from the target company between the date to which the accounts were drawn up and the completion date, save for payments in the ordinary course of business and payments agreed between the parties. Examples of leakage include dividends, management charges and bonuses. The permitted payment is taken into account in arriving at the purchase price.


This post was first posted on Linkedin on 24 June 2022.

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