Asset deal vs Share deal

An asset deal is a transfer of assets (goodwill or business as a going concern, patents, equipment) where the liabilities remain with the seller. A stock or share deal is a transfer of stocks/shares where the buyer acquires the entire legal entity, including assets and liabilities.

Advice: As a buyer, an asset deal is more advantageous as it prevents you from suffering the liabilities associated with the legal entity. As a seller, a share deal is more tax-efficient and allows you to be definitively released from the debts attached to the entity whose shares are sold.

Bad leaver

A clause of a shareholders' agreement providing that a partner/shareholder leaving the company for misconduct must resell their shares at a significant discount.

Advice: Be extremely precise regarding the definition of the relevant misconduct and on the methods for calculating the share price.

Boilerplate

These are the “standardised” terms usually located at the end of an agreement: applicable law, jurisdiction, entire agreement, divisibility. Often overlooked because they are perceived as purely administrative, they are the first terms consulted in the event of a dispute.

Advice: Never Copy/Paste a boilerplate provision between contracts which are not subject to the same law.

Conditions precedent (CPs)

These are the suspensive conditions: events that must occur or conditions that must be satisfied for the transaction to be finalised. For instance, it may involve obtaining authorisations or financing.

Advice: Always attach a long stop date, i.e. a deadline by which, if the CPs are not satisfied, the transaction lapses.

Drag-Along

A joint exit obligation clause. This is a clause in a shareholders' agreement used to avoid deadlock situations. Should the majority shareholder wish to sell the company, the minority shareholders must sell their own shares.

Advice: For minorities, it may be useful to negotiate a floor price below which the drag-along provision cannot be activated to avoid being forced to sell at a loss. A preemption clause or anti-dillution provision may also be stipulated allowing minorities to be offered the share sale as a matter of priority.

Earn-Out

A clause imposing the payment of a price supplement depending on the performance of the target company.

Advice: Precisely specify how to apply the clause. Point of attention: in English law, earn-out clauses which are drafted as requiring the parties to come to an agreement at a later time, or an "agreement to agree" are not considered binding (Morris v Swanton Care & Community Ltd [2018] EWCA Civ 2763).

Leakage

In a so-called "Locked Box" deal, meaning a transaction where the price is fixed according to historical balance sheets, "leakage" refers to any cash outflow for the benefit of the sellers between the balance sheet date and the day of the sale, such as dividend payments or exceptional bonuses. The aim of these terms is to prevent amounts from "leaking out" once the price is set. The term will require the seller to reimburse any unauthorised leaks.

Advice: It is necessary to draft a precise list of "permitted leakage", that is to say the authorised amounts (usual employees' salaries, current management fees, etc.) to prevent the buyer from challenging each operational expense at closing.

Locked Box

A price fixing mechanism based on the historical accounting records of the company. The price is fixed and the risks and profits are transferred retroactively to the buyer.

Advice: Buyers must conduct a rigorous due diligence on the referenced accounting records.

Material Adverse Change (MAC)

A term allowing the purchaser to cancel the transaction if an event occurs that catastrophophically degrades the value of the target before closing.

Advice: As a seller, expressly exclude general and generic economic conditions (inflation, war) so that the provision can only be activated in the event of a problem specific to your business.

Pari Passu

An equal treatment term. This provision allows the creditors or shareholders of the same rank to be paid proportionally without priority over each other.

Advice: Always check the ranking status of your claim in the waterfall to ensure that other debts of the company have not become “senior” (priority) compared to yours.

Tag-Along

A joint exit right. If the majority shareholder wishes to sell their shares, the minority shareholders have the right, but not the obligation (contrary to a drag-along term), to join the sale under the same conditions.

Advice: In a shareholders' agreement, make sure that the tag-along applies even in the event of a partial sale of their shares by the majority.

Waterfall

This is the provision that defines the order of priority in which money is distributed between sellers, creditors, or others. The provision may be present in the context of a company sale, in a loan agreement to define the order of repayments, or in the context of a company winding-up for the treatment of various creditors.

Advice: Beware of liquidation preference terms by which investors can be granted priority payment but also larger amounts, which, in the event of an average exit, would leave nothing to the founders.

The liquidation preference defines the order and amount of the distribution of money during an “event of liquidation” (which includes a sale of the company, a merger or a judicial liquidation).

There are two main variants:

Non-Participating (Standard): The investor has a choice between:

• recovering their initial investment (often noted 1x), or
• converting their shares into ordinary shares to receive their prorate share of the capital (if the sale is very successful);

Participating (Double Dip):

• the investor first recovers their initial investment, AND
• they receive their pro-rata share of the surplus alongside the other shareholders.

Advice: Always analyze the contract in depth: the waterfall alone can be misleading if other clauses interfere, such as liquidation preference.