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20 August 2020

Transaction price mechanisms in times of COVID-19

After a record-breaking decade of M&A activity, the COVID-19 pandemic has caused the market to face unprecedented circumstances.

In times like these, parties should consider the key parameters of a contemplated transaction even more carefully. In addition to factors such as pricing, process timelines and contractual undertakings, parties must properly consider the pandemic's potential economic effects on targets when structuring a deal.

This article outlines the differences between the two main purchase price mechanisms that can help to alleviate such economic effects (ie, closing accounts and locked box) and the pros and cons of each.


Closing accounts

Closing accounts are used when no fixed purchase price is set in a sale and purchase agreement (SPA). Instead, an SPA includes an initial and preliminary purchase price that is generally based on the last available audited accounts or forecast accounts at closing. The preliminary purchase price will be paid on the closing date and adjusted after closing based on the then historic figures of the closing accounts (ie, an interim balance sheet usually prepared as at the closing date).

A closing accounts mechanism typically includes interim covenants that oblige the seller(s) in the period between signing and closing to conduct the target's business in accordance with past practice and abstain from manipulating its cash positions.

The closing accounts and, in particular, the resulting adjustment of the purchase price are often subject to lengthy discussion between the parties. To prevent a deadlock if the parties are unable to reach an agreement, the SPA typically provides for a dispute settlement procedure that mostly results in a final settlement by an independent audit expert (eg, a Big Four company).

Once agreed, the actual amount payable under the purchase price adjustment will be a separate payment obligation of either the buyer or the seller depending on the result of the adjustment calculation.

However, the flexibility of the closing accounts mechanism to adjust the purchase price comes with a need for cooperation even after closing.

Locked box

Contrary to the closing accounts, the locked box mechanism provides for a fixed purchase price that is determined based on a target's accounts prepared before signing (mostly the last audited accounts available).

Save for a list of previously agreed items that would reduce the balance sheet value of the target (called 'leakages') and other contractual protections, the purchase price payable at closing will not be further adjusted once the deal has been closed.

The main difference to the closing accounts mechanism is that in a locked box structure the economic risk and benefit will be transferred to the buyer at the locked box date (ie, in most cases 31 December of the year before signing) and not at closing as is the case with closing accounts.

Therefore, in case of a locked box structure, the buyer assumes the risk of acquiring a target for a price higher and vice versa the seller assumes to risk selling for a price lower than the actual equity value at closing.

Pros and cons

Whereas sellers mostly prefer the locked box mechanism due to the fixed purchase price and the potentially less complex process, buyers tend to opt for closing accounts due to the value-for-money certainty this mechanism provides. However, the use of either mechanism must be decided on a case-by-case basis and depends on the individual situation as well as the intentions of the parties.

The following tables outline the main pros and cons of the two mechanisms:

Closing accounts



Value-for-money certainty

Costs for audit expert in case of dispute

Expeditious negotiations

Potential disputes on post-closing adjustment

Less extensive due diligence required

More complex process

Locked box



Fixing of final purchase price before signing

No adjustment to current business value

No closing balance sheet and other elaborate calculations

No update on current figures until after closing

Less prone to disputes

Transfer of risk before transfer of control


The COVID-19 pandemic has had and will continue to have an effect on the economy and the M&A market. Therefore, before entering into an agreement, parties should carefully consider the new circumstances when structuring a deal.

If a deal was almost ready for signing before the pandemic but had to be put on hold because of it, parties must reassess their previous decisions and carefully re-evaluate the particular background of the deal. As long as the pandemic is affecting the M&A market, parties should not hesitate to change a specific deal structure and adapt it to the new circumstances even if the process is at an advanced stage.

This article was first published in International Law Office.

Authors: Alfred Amann, Marija Blagojevic


Attorney at Law

austria vienna