Share sale – deferred consideration and retention arrangements

This could be due to insufficient funding the party seeking to acquire the shares of the target company can consequently suggest that they pay part of the purchase price in one or more instalments. Alternatively, the buyer may have their doubts pertaining to the seller’s ability to honour any warranty or indemnity claims that surface after completion. The former could therefore insist that part of the purchase price be retained as security for such claims.

With respect to a deferred payment structure, it is the seller’s prerogative to acquiesce to the buyer’s request. In other words, this cannot be imposed on the entity that sells their shares. If the seller agrees to a deferred payment structure, a portion of the purchase price will generally be paid by the buyer on the date of completion and the remainder will be provided in one or more instalments after completion has taken place. The share purchase agreement will expressly articulate the date (or dates) for payment and the exact amount the seller is owed. Nevertheless, it is imperative for the seller to appreciate that they run the risk of the buyer not paying the deferred element on time or in fact, at all.

In regard to retention arrangements, they are usually contemplated when the buyer feels the seller cannot satisfy their post-completion payment obligations. Hence, if the seller were going through financial difficulties, it would be in the buyer’s best interest to retain part of the purchase price in case any liabilities materialise. Of course, the seller will not easily agree to a retention as they would want the proceeds as soon as possible. It will essentially boil down to the bargaining power and the negotiation skills of the parties involved.

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