for the net assets is £1 for £1. If there are no provisions relating to distributions or other forms of extraction in the stub period between the Last Accounts Date and Completion, the two parties may accept that the Sellers can withdraw funds from the Company so that the net assets are no greater than £500,000. 4.11 It is possible to enter into esoteric debates as to whether the consideration on some deals is computed by reference to the net assets at all: if the price payable is computed as a multiple of the earnings before interest, tax, depreciation and amortisation (“EBITDA”), then the level of the net assets may not directly feature as part of the computation of the price. However, it has to be recognised at the end of the day that the purpose of the tax covenant is to give protection against unforeseen tax liabilities: the business risk to the Buyer is that the profits that are generated post-completion are subject to a higher than expected tax burden, as some unforeseen tax liabilities arise. The inclusion of a tax covenant based on accounting information in accordance with IFRS or UK GAAP, can give some of that protection. 4.12 It is difficult to see why any Sellers should enter into a tax covenant if they will always be due to make payments to the Buyer regardless of their actions prior to Completion. They need to know that the price adjustment implicit in the tax covenant will only occur if there are tax liabilities which are unforeseen. 4.13 In the case of Debenham Broadband Limited, if there had been no specific requirement as to the level of the net assets at Completion, then this would be a deal structured on the basis of Last Accounts, with the additional protection in respect of stub period tax. 4.14 There can be situations where Completion Accounts are produced but solely to determine some valuation measure, such as the turnover or gross profit of the business. In these circumstances it probably makes more sense to construct the tax covenant around the Last Accounts rather than the Completion Accounts, as the level of the net assets at Completion does not impact on the consideration payable. 4.15 For the Sellers, they require a degree of certainty as to the Consideration that they are likely to receive for their shares. They therefore need the protection of knowing that they will only be liable for unforeseen tax liabilities; this protection is conventionally provided by reference to a statement of net assets - either the Last Accounts or Completion Accounts.
5 The Period Between the Last Accounts Date and Completion
5.1 If a transaction is based on Last Accounts, the question has to be addressed as to the status of tax payments made between the Last Accounts Date and Completion. If there is an underprovision of tax liabilities in the Last Accounts, then this should give rise to a claim under the tax covenant. It is no solace to the Buyer if the tax in question is settled prior to Completion: the key fact is that the Last Accounts were the determinant of value, and they overstated the net assets.
5.2 Therefore the appropriate mechanism for giving effect to this is that the covenant clause should refer to Taxation in respect of Events on or before Completion. There
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