Disentanglement covenants in M&A transactions (3)

A final class of subject matters that need to be agreed upon in M&A transactions include (i) arrangements that continue after closing in order to smoothen the organisational and operational effects of the desinvestment; and (ii) the intra-company agreements (rather: inter-company agreements) between one or more of the acquired companies and the seller’s business. Those agreements are obvisouly suspect of not being market-conform in order to steer profits somehow within a group of companies.

I will address both in the blog post below.

The two mentioned type of disentanglement related covenants are probably the most important ones:

  • Intra-company agreements: in order to ascertain that the purchaser does not acquire a loss-making business because the seller has arranged highly unfavourable terms and conditions for itself, the ordinary course supplies by the acquired companies to the seller’s other subsidiaries are often terminated. Please note that these agreements contribute to the value of the acquired companies and are not, as such, of a transitional nature.
  • Transitional services: the sold companies are often highly dependent on the availability of various services and facilities provided by their former holding company. To a lesser extent, this may also apply to services or facilities (if only in certain countries) hosted by the sold companies for the benefit of their former affiliated companies. For that purpose, a share or asset purchase agreement will typically contain a transitional services agreement that provides for an uninterrupted continuation of various services. The typical aspects to be addressed are the legal entities that are formally entitled to (responsible for) the service, the duration of each such service (i.e. not all services can be terminated easily), the service fee, payment and invoicing arrangements, particularities related to the service and the contact persons after closing. For ICT matters, which might include the availability of enterprise software systems, more elaborate arrangements are often necessary.

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