Locked Box vs Completion Accounts in Dutch M&A
Purchase price mechanics are often one of the most important negotiation points in Dutch private M&A transactions. Two mechanisms are commonly used: the locked box and completion accounts. Both are designed to deal with the financial position of the target, but they work in very different ways.
In Dutch mid-market deals, the choice between locked box and completion accounts affects timing, risk allocation, closing mechanics and the scope for post-closing disputes. Foreign buyers should understand these mechanisms before signing the letter of intent or term sheet, because the agreed pricing structure will usually shape the SPA.
For general Dutch M&A structuring points, see the M&A Insights in the Netherlands.
Locked box mechanism
In a locked box structure, the purchase price is based on a historic balance sheet date. This date is usually called the locked box date. The buyer assumes the economic risk and benefit of the target from that date, even though legal completion takes place later.
The seller gives undertakings that no value will leave the target between the locked box date and completion, except for specifically agreed permitted leakage. This means the buyer has price certainty, while the seller avoids a post-closing price adjustment process.
The main focus in a locked box deal is therefore on the quality of the locked box accounts and the leakage protection in the SPA.
Leakage and permitted leakage
Leakage is value extracted from the target for the benefit of the seller or seller-related parties between the locked box date and completion. Examples may include dividends, management fees, transaction bonuses, shareholder loan repayments or non-arm’s length payments.
Permitted leakage is leakage that the buyer accepts in advance. This may include salary payments in the ordinary course, agreed transaction costs or specifically identified payments.
The SPA should define leakage and permitted leakage clearly. If the definitions are too broad or unclear, the buyer may lose value without an effective remedy.
Completion accounts
In a completion accounts structure, the purchase price is adjusted after completion based on the actual financial position of the target at completion. The parties agree a preliminary purchase price at closing, followed by a post-closing adjustment.
The adjustment often relates to net debt, cash and net working capital. The SPA must specify the accounting principles, calculation methodology, review process, dispute procedure and timing.
Completion accounts can be more precise than a locked box, but they often create more complexity and a higher risk of post-closing disputes.
Net working capital and debt-like items
Net working capital is frequently negotiated in Dutch M&A deals. The buyer wants the business to be delivered with a normal level of working capital. If working capital is below the agreed target, the purchase price may be reduced. If it is above target, the price may increase.
Debt-like items are also important. These may include shareholder loans, intercompany balances, unpaid taxes, transaction bonuses, pension liabilities, lease liabilities, overdue creditors or transaction costs.
The key point is that these items should be identified and defined before signing. If the SPA is vague, the parties may end up negotiating the economics again after completion.
For more on purchase price adjustments, see Purchase Price Adjustments in Company Acquisitions.
Which mechanism is better?
A locked box gives more price certainty and usually avoids post-closing accounting disputes. It is often attractive for sellers and can also work well for buyers if the locked box accounts are reliable and the leakage protection is strong.
Completion accounts give the buyer more protection against changes in the financial position of the target up to completion. However, they require detailed drafting and can lead to disputes over accounting policies, working capital targets and debt-like items.
There is no single best mechanism. The right choice depends on the quality of the financial information, the time between signing and completion, the bargaining position of the parties and the nature of the business.
Practical takeaway
Locked box and completion accounts are not just accounting concepts. They are legal risk allocation tools.
In Dutch M&A transactions, the purchase price mechanism should be agreed early and drafted carefully. Leakage, permitted leakage, working capital, debt-like items and dispute procedures should be clear before the SPA is signed.
About Dirk de Waard
Dirk de Waard is a Dutch corporate and M&A lawyer focusing on mid-market and cross-border transactions. He advises founders, investors, management teams and international businesses on acquisitions, investments, governance and post-closing disputes in the Netherlands.
Questions about purchase price mechanisms or M&A transactions in the Netherlands? Send an email to dirk.dewaard@viottalaw.com.
