that the above form of adjustment does not form a sufficient relationship between net assets and price to justify an Overprovisions clause. Under this argument a very material overprovision for tax may be deliberately included without affecting the multiplier.
1.8 When dealing with a transaction involving Completion Accounts, it is our view that there should not be an Overprovisions clause unless it is the level of the net assets which determines the amount of the Consideration. Otherwise the Sellers have every incentive to include an excess tax provision in the Completion Accounts. If the level of net assets determined the Consideration there is every reason for an Overprovisions clause.
2Understatement
8.1.2an Understatement arises, or;
2.1
Again, a reminder of the definition is needed:
“ Understatement ” means any amount by which the assets in respect of Taxation of the Company (other than in respect of deferred tax) are found to have been greater than the amounts at which they are stated in the Completion Accounts for reasons other than the use of an Accounts Relief, Post-Completion Relief or Buyers Group Relief;
2.2 The example of an Understatement given in Chapter 4 related to VAT: the Company failed to recover certain VAT inputs in the period up to Completion.
2.3 The Buyer might well argue, with some justification, that there can be certain occasions when the recovery of Tax in respect of pre-completion periods might reflect some special exercise undertaken at the instigation of the Buyer, and that it is arguable that this should be to the benefit of the Buyer, whether or not there are any claims to be made under the tax covenant.
2.4
As noted below an Understatement is one class of Sellers’ Relief.
3Sellers Relief
8.1.3 a Sellers’ Relief has been used to reduce or eliminate a Tax Liability for which the Covenantors are not liable under this Deed; or
3.1
Again, a reminder of the definition will assist:
“Sellers’ Relief” means any Relief arising in the Company before Completion which is not a Buyer’s Relief;
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