2.4 Any tax which is unprovided in the Relevant Accounts will therefore not be covered by this exclusion. We can look at this by reference to a simple example. The assumption is that the deal is based on Last Accounts. The corporate tax liability relating to the period ended at the date of the Last Accounts is £250,000, but provision has been made for only £210,000. The main covenant will mean that the Buyer is able to make a claim for the Tax Liability as it relates to a period prior to Completion. As this exclusion is also in place, the Buyer’s claim will be limited to the corporation tax for which a liability has not been included in the Last Accounts, which is £40,000. If this limitation was not in place, the Buyer would be able to claim the full £250,000, despite the fact that he would have formulated his price for the Company in the knowledge that a provision for tax of £210,000 had been made. 2.5 If we are dealing with a transaction involving Completion Accounts, then the pivot point is Completion and the concern is to ensure that appropriate provision is made for Taxation in those Completion Accounts. The accuracy or otherwise of the tax provisions in the Last Accounts has no direct impact on the protections in the tax covenant. If tax was under-provided in the Last Accounts, this can be corrected in the stub period, and the net assets can be reduced to the appropriate level in the Completion Accounts. With such a mechanism the Sellers will normally have borne the full cost as the consideration will have been reduced by the fall in the net assets, so as to reflect the full liability. 2.6 In such a transaction the cut-off point for payments of tax will be Completion: in other words any liabilities settled prior to Completion should not feature on the Completion Net Assets Statement and such settled liabilities should also not feature in the tax covenant. 2.7 If there are to be no Completion Accounts, then the concern is the accuracy of the Last Accounts: the tax covenant will bite if a Tax Liability is under-provided in the Last Accounts. The fact that such Tax Liability may have been settled in the stub period between the Last Accounts and Completion should not reduce the obligations of the Covenantors. 2.8 In such a transaction the cut-off point for payments of tax will be the Last Accounts Date: any Tax Liabilities settled prior to that point should not feature in the Last Accounts and should not feature in the tax covenant. 2.9 In our opinion the fact that there may not be a clear linkage between the price payable for the shares and the net assets is not a relevant factor of concern: if the price is determined solely by reference to some measure of profits, then it is possible that the multiplier applied will be coloured by the amount of the net asset backing. Even if this is not the case, and the level of the net assets has had no influence on the pricing of the transaction, it is not likely that the Buyer will wish to forego the protection of the tax covenant. It is equally unlikely that the Seller will accept responsibility for anything other than unexpected liabilities.
2.10 The wording of this exclusion to the tax covenant is sometimes extended to exclude tax for which provision has been made and also tax which is referred to in a note to
128
Made with FlippingBook Learn more on our blog