CHAPTER FIFTEEN
OVERPROVISIONS, UNDERSTATEMENTS, SELLERS’ RELIEF AND CORRESPONDING SAVINGS
8.1
If:
8.1.1an Overprovision arises, or;
Executive Summary
A An Overprovision should only be treated as for the benefit of the Covenantors to the extent that it is not caused by a change in the rates of taxation or any change in tax law or practice, all with retrospective effect. This is on the basis that the Buyer should have both the benefits as well as the burdens from such changes, as part of the risks associated with running the Company. B The Buyer may well not agree to the inclusion of an Overprovisions clause if the Consideration is not directly linked to the level of the net assets at Completion. Otherwise there is the prospect of more artful Sellers being able to include an overprovision in the accounts deliberately, at no cost to themselves, so as to have a buffer against claims under the tax covenant.
C In the classic tax covenant the Correspondings Savings clause gives the prospect of a recovery for the tax impacts of timing adjustments.
D It is generally accepted that Overprovisions, Understatements, Sellers’ Reliefs and Corresponding Savings should be used initially to reduce or extinguish any payments then due under the tax covenant. To the extent that a balance remains, it is relatively standard for this to be used to make recovery of amounts previously paid under the tax covenant. Any remaining balance after such carry-back can then normally be used against future amounts potentially payable under the tax covenant.
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