Share Purchase Agreement Working Capital

As has already been said, it is important not to design a working capital provision in isolation. The interaction between the provision and other provisions of the sales contract should always be taken into account, in particular as regards the possibility of `double counting`. In Brim Holding Company, Inc. v. Province Healthcare Company (2008 WL 2220683 (Tenn. Ct. App. May 28, 2008), Brim Holding Company, Inc. Brim Healthcare, Inc.

obtained from the Province Healthcare Company. The seller has undertaken to keep the buyer unharmed for an outstanding dispute. The buyer paid US$50,000 to settle the dispute and claimed this amount as part of the indemnification. However, the seller had entered a reserve of US$50,000 on the balance sheet of the dispute and therefore defended the claim on the grounds that the amount was already covered. Although the court accepted that the seller`s approach was logical, it found that the documents supported double recovery, given that the compensation was drafted in such a way as to cover all damages and not only for an amount that is not reserved elsewhere. At the time of negotiating the roadmap, the parties may have very different conceptions of the appropriate amount of working capital for the company. A potential buyer of an early-stage business may consider working with relatively high working capital to seize growth opportunities, while the seller may have completed the same transaction with a tight “working capital” budget. In other words, the buyer may view the “normal trajectory” of the transaction as a growth trajectory (with the associated regular investment), while the seller views it as a stable price (growth investments are exceptional and depend on funds outside the framework of “working capital”).

Each Party will wish to ensure that the Agreement correctly reflects its understanding of the concept of “ordinary course” with respect to the activity in question. One of the reasons why the parties did not reach an agreement or agreement on this point is probably that the agreement did not allow for the recovery, on the basis of compensation, of a ceiling of $7.4 million and a deductible of $4.9 million, while the purchase price adjustment limit alone was capped at $12.4 million. The decision between the price adjustment mechanism and the compensation mechanism therefore had a significant impact on the amount that could be recovered in the event of a dispute. A working capital barrier is intended to ensure that the buyer receives, at the time of the transaction, the expected mix of assets and liabilities (i.e. the normal working capital of the business necessary for the operation of the business). It is possible to change the mix of current assets and liabilities without affecting earnings and EBITDA, allowing a seller to retain its EBITDA, but not provide the promised mix. As a result, the buyer would end up having less future cash than he had negotiated. It is important to ensure that items are not included in “current assets” and “current liabilities” if they are to be treated separately elsewhere in the sales contract. Assuming that the buyer does not engage in an asset purchase transaction at the close of accrued work obligations, such as vacation pay. In this case, these items should not be cited as “current liabilities” for working capital purposes, failing which the seller could “compensate” the buyer for liabilities that the buyer did not actually assume. .

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