Purchase Price Adjustment Clauses: Why Parties Should Be Wary When Using Them

• Published date: 25 November 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, M&A/Private Equity, Corporate and Company Law, Trials & Appeals & Compensation
• Law Firm: Crawley MacKewn Brush LLP
• Author: M&A Risk Advisor, Matthew Scott and Rowan LaCasse

A purchase price adjustment clause is a clause sometimes used by parties to purchase agreements to help allocate risk in the event that the value of underlying assets and liabilities change between the signing of the agreement and the transaction closing. These price adjustments occur post-closing when closing date numbers are finally determined. Common post-closing adjustments are based upon changes in working capital, net worth or net asset value of the target company.

While carefully considered and negotiated price adjustment clauses can effectively mitigate risk to ensure that parties to an M&A transaction receive fair market value at the time of closing, disagreements over such clauses are common. Parties should be wary when using such clauses.

Draft With Care to Avoid Ambiguity

Parties should approach the drafting of price adjustment clauses with great care. Price adjustment clauses are subject to general principles of contractual...