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Closing Adjustment Provisions in M&A Transactions: Avoiding Common Disputes

August 1, 2010, Kevin R. Shannon, Michael K. Reilly

In most M&A transactions, there is a delay (sometimes significant) between the negotiation of the purchase price (the "Purchase Price") and the closing of the transaction (the "Closing"). During that period, numerous events can occur that may affect the transaction and the reasonableness of the negotiated Purchase Price. Recognizing such possibilities, M&A practitioners may attempt, particularly in private company transactions, to protect their clients through the negotiation of provisions that address events which may occur prior to Closing. For example, in many private company transactions, the purchase or merger agreement (the "Agreement") provides for an adjustment (the "Closing Adjustment") to the Purchase Price to reflect the changes in certain of the target company’s assets and/or liabilities typically between a specified date prior to the execution of the Agreement and the date of Closing.

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