Proper Structuring of Post-Closing Relationships as a Key Factor of a Successful M&A Transaction

In M&A transactions, the sale of a company is often associated with the idea of a simple exit. The owner transfers their shares or equity interests to a new investor, receives the agreed purchase price, and the transaction is, in principle, complete.

In practice, however, the situation is far more complex. Proper structuring of relationships after closing (i.e. completion of the transaction) often significantly influences the overall success of the transaction. After the sale, the seller does not necessarily act solely as the obligor and beneficiary vis-à-vis the buyer. The seller may also become a manager, a lender or even an investor within the buyer’s group.

The Seller’s Position Post-Closing under the SPA

Following closing, the seller’s position under the SPA (Share Purchase Agreement, i.e. the agreement pursuant to which the company’s shares or equity interests are transferred) is typically defined by two principal roles:

I. Seller as Obligor – Liability under Representations and Warranties

The seller is obliged to fulfil the commitments arising from the representations and warranties provided in the SPA (i.e. statements relating to the target company and guarantees as to their accuracy). These commitments constitute a liability relationship, under which the buyer is entitled to claim damages or other contractual remedies in the event of a breach of the representations and warranties.

II. Seller as Beneficiary – Right to the Purchase Price

On the other hand, the seller has a right under the SPA to receive the purchase price, which the buyer typically pays at closing. Payment of part of the purchase price may, however, be deferred to a period after closing and linked to the future performance of the target company through an earn-out mechanism.

The payment of an earn-out is usually conditional upon the achievement of predefined financial metrics such as EBITDA (earnings before interest, tax, depreciation and amortisation), revenue or other key performance indicators. An earn-out may also be linked to non-financial metrics, for example the acquisition of a key customer or regulatory approval of a product. Earn-outs are most commonly used where the seller and buyer have differing expectations regarding the future development of the company. For the seller, an earn-out represents the opportunity to receive an additional portion of the purchase price if optimistic assumptions about the company’s performance materialise. For the buyer, it serves as protection against paying an unjustifiably high purchase price if the expectations associated with the transaction are not met.

From the perspective of Slovak law, an earn-out represents a portion of the purchase price that is subject to a condition precedent. It is therefore crucial to clearly and comprehensibly define:

the method of calculating the earn-out,
the method and timing of its payment,
dispute resolution mechanisms,
the process for verifying the metrics used to calculate the earn-out, for example through audited financial statements or an independent expert, in order to avoid disputes over the correctness of the calculation,
the governance of the company during the period in which the earn-out is measured, in particular the seller’s information and reporting rights and restrictions on material decisions without the seller’s consent.

Authors

Cyril Hric
Director, Legal

Peter Dibala
Senior Legal Consultant, Legal

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Other Possible Roles of the Seller Post-Closing

In addition to rights and obligations under the SPA, the seller may also act in other roles after closing. These relationships are typically governed by separate documentation. In practice, three models are most commonly encountered.

I. Seller as Manager

The buyer often wishes the seller or key members of the target’s management team to remain involved in the company after the transaction. In such a case, the seller’s position as manager is usually governed by a management agreement, which should place particular emphasis on:

the scope of the management’s powers and responsibilities within the new group,
remuneration for management services,
arrangements for conflicts of interest, non-compete undertakings, protection of know-how and trade secrets, and
assessment of compliance with employment law.

A crucial aspect is the structuring of good leaver and bad leaver provisions, which determine the circumstances in which a manager may leave the company without losing their entitlements (good leaver) and when those entitlements are forfeited (bad leaver). Management agreements should ideally be prepared prior to signing the SPA and attached to it as schedules, thereby minimising the risk of ambiguities and disputes after signing. The motivation of the management team may be further strengthened by option schemes, performance-based bonuses or participation in a future exit.

II. Seller as Lender

It is relatively common for payment of part of the purchase price to be deferred to the future, with such deferred payment being formally structured as a loan granted by the seller to the buyer (Vendor Loan). In this scenario, the seller becomes a creditor of the buyer, who repays this portion of the purchase price in agreed instalments, typically with interest.

Vendor loans are often subordinated to other forms of debt financing, which is usually a requirement of the buyer’s financing banks. In cross-border transactions, notification and registration obligations must be considered. It is also advisable to assess the tax aspects of this element of the transaction, particularly in the area of transfer pricing.

III. Seller as (Re-)Investor

In some transactions, it may be advantageous for the seller to reinvest part of the received purchase price into the buyer’s group, thereby acquiring an equity stake in it. This model enables the seller to participate in the future growth of the group and increases their motivation to ensure the successful integration of the target company into the new structure.

Before reinvesting, it is in the seller’s interest to carry out thorough due diligence of the buyer’s group, including an assessment of its legal and financial status, governance structure and shareholders’ agreements. From a legal perspective, it is particularly important to regulate the terms of acquisition of the stake, tag-along rights (which protect minority shareholders by allowing them to participate in a sale by the majority shareholder on the same terms), mechanisms for resolving deadlock situations, exit scenarios, pre-emption rights and restrictions on the transferability of interests. The tax implications of the reinvestment should also be examined, especially in the case of cross-border structures.

The Story Does Not End with the Sale

The seller’s role does not necessarily end with the signing of the transaction documents. The seller may remain part of the further development of the business as a manager, lender or investor. Proper structuring of these relationships is often one of the key factors determining the success of the entire transaction.

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