1 Introduction
1.1 The covenant will provide blanket protection to the Buyer in respect of tax arising on the Company relating to events in the period up to and including Completion, and some events occurring after Completion. This protection will typically apply whether or not the tax in question is primarily a liability of the Company. 1.2 This covenant is a thing of great power in the hands of the Buyer: it is therefore important that it is constrained by appropriate, very specific exclusions, so that it works as intended by both parties.
1.3
In the rest of this chapter the more common exclusions are addressed.
1.4 The use of the phrase “....to the extent that” in the above text is, again, an appropriate way of limiting matters as intended.
2 Provision for Tax in the Relevant Accounts
3.1.1 provision for such Taxation has been made in the Completion Accounts/Last Accounts;
2.1 This first exclusion is the most obvious: there should be no liability on the Seller to the extent that a provision for tax has been included in the Relevant Accounts. As the tax liability has been included in the Relevant Accounts the net assets of the Company have been reduced: this liability has therefore been taken into account by the Buyer in formulating the price for the shares. This broad principle applies whether the deal is based on the Last Accounts or Completion Accounts. It also applies, in our opinion, regardless of the way that the consideration has been computed. It would therefore be unreasonable for the Buyer to seek further recompense from the Seller in respect of such liabilities, despite the fact that they are settled after Completion. They do not pass the litmus test of being unexpected tax liabilities, as provision was included in the accounts. It is this test of unexpected tax liabilities which is the key one. 2.2 The first essential point to establish is whether the deal is based on Completion Accounts or Last Accounts - that is the latest set of statutory financial statements which are available prior to Completion. This fact will determine the correct drafting of this exclusion. As noted earlier, it is surprisingly common for the first draft of the tax covenant not to deal with this point appropriately. So much so, that solicitors should consider having two precedents dealing with each of the situations.
2.3 Chapter 6 explores the various issues relating to the Relevant Accounts and the pivot point that is relevant to the tax covenant being negotiated.
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