In share deals, the purchase price is rarely a simple fixed amount. Instead, the parties must agree on how the price will be calculated and finally settled. Two mechanisms are most commonly used in practice: the locked box and completion accounts. Each has different legal and practical consequences for the seller.
Price Settlement in Share Deals
In a share deal, the parties not only agree on the purchase price, but also on the mechanism for its settlement. This mechanism determines:
- when the economic risk passes to the buyer,
- whether and how the price may be adjusted after closing,
- how financial data of the target company is used.
The two most frequently applied mechanisms are:
- the locked box, and
- completion accounts.
What Is a Locked Box Mechanism?
Under a locked box mechanism, the purchase price is calculated based on the financial position of the company as at a fixed historical date (the locked box date).
As a result:
- the price is determined in advance,
- there are no post-closing price adjustments,
- the buyer assumes the economic risk from the locked box date.
Between the locked box date and closing, the seller is generally prohibited from extracting value from the company.
Leakage and Permitted Leakage
A key element of the locked box mechanism is the concept of leakage.
Leakage refers to any transfer of value from the company to the seller after the locked box date, such as:
- dividends,
- management fees,
- shareholder loans or repayments.
The parties usually agree that:
- leakage is prohibited, unless
- it qualifies as permitted leakage expressly defined in the agreement.
If prohibited leakage occurs, the seller is typically obliged to reimburse the buyer.
What Are Completion Accounts?
Completion accounts are a price settlement mechanism based on the financial position of the company as at the closing date.
Under this mechanism:
- an initial price is paid at closing,
- completion accounts are prepared after closing,
- the price is adjusted based on actual figures (e.g. cash, debt, working capital).
This means that the final purchase price is not known at the time of closing.
Post-Closing Adjustments
Completion accounts usually involve:
- preparation of financial statements after closing,
- review and potential disputes between the parties,
- settlement of price adjustments once the accounts are agreed.
As a result, the transaction does not end economically at closing, but continues until the price is finally settled.
Key Differences Between Locked Box and Completion Accounts
The most important differences between the two mechanisms concern:
- Timing of price determination
Locked box: before closing
Completion accounts: after closing - Economic risk
Locked box: passes to the buyer at the locked box date
Completion accounts: remains with the seller until closing - Post-closing involvement
Locked box: no price adjustment after closing
Completion accounts: post-closing adjustments required - Complexity
Locked box: simpler and more predictable
Completion accounts: more complex and time-consuming
Seller Perspective – Advantages and Disadvantages
Locked Box
From the seller’s perspective, a locked box mechanism:
- provides price certainty,
- allows a clean economic exit at closing,
- limits post-closing involvement.
However, it requires:
- reliable historical financial data,
- strict control over leakage,
- careful drafting of permitted leakage provisions.
Completion Accounts
From the seller’s perspective, completion accounts:
- may be perceived as more flexible,
- reflect the actual financial position at closing.
At the same time, they:
- create uncertainty as to the final price,
- may lead to disputes after closing,
- prolong the seller’s involvement after the transaction.
Which Mechanism Is Used in Practice?
Both mechanisms are used in Polish share deals. The choice depends on:
- the availability and quality of financial information,
- the structure of the transaction,
- the parties’ approach to risk allocation.
Each transaction requires an individual assessment before the price mechanism is selected.
Key Takeaway for Sellers
Locked box and completion accounts are two fundamentally different approaches to price settlement in share deals.
Understanding:
- how each mechanism works,
- when the price is effectively fixed,
- what risks remain after closing,
is essential for sellers to properly assess the consequences of the agreed transaction structure.
In practice, the choice between a locked box and completion accounts is often analysed as part of a broader sell-side advisory process, combining legal, transactional and execution considerations.
Note on Legal and Transactional Advisory
Dulewski Sikora advises sellers in share deals, including the structuring of price mechanisms and full legal execution of transactions.
