A capital preservation statement is a declaration in which the seller commits to keeping a portion of the purchase price available, for an agreed-upon period, as security for any warranty claims the buyer may have. It is a relatively inexpensive alternative to a bank guarantee or escrow: the seller is generally allowed to invest the amount, as long as it can be quickly converted back into cash. The underlying shareholders are also usually jointly and severally liable for its fulfillment.
When sell a business, the seller is generally expected to provide certain warranties and indemnities to the buyer. If a warranty subsequently proves to be incorrect or if a risk for which an indemnity was provided materializes, the buyer will want to recover damages from the seller.
However, the seller is usually a holding company that is not economically active, and the purchase price received will quickly be paid out to the underlying shareholders. To prevent the seller from having no assets to cover the loss, a buyer often requires the seller to provide security.
There are various forms of security, such as a bank guarantee or holding a portion of the purchase price in the notary’s bank account (the amount is then held “in escrow”). This article discusses another form of security: the capital preservation statement.
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What is an asset conservation statement?
An asset preservation statement is exactly what the name suggests: a statement by the seller that they will preserve a certain amount of assets. The seller commits to the buyer to keep a portion of the purchase price available for a specified period. The seller is often permitted to invest the amount to generate a return, as long as it can be quickly converted back into cash.
In addition, the underlying shareholders are required to make up any deficit immediately; after all, they determine what happens to the money in the holding company. Typically, this means that the seller's shareholders are jointly and severally liable or surety for the seller's obligations under the asset maintenance statement.
Why choose an asset conservation statement?
The capital preservation statement is one of the least burdensome forms of security a seller can provide. Bank guarantees and escrow accounts are costly because the bank or notary charges fees for these services. Currently, the costs of negative interest rates are also passed on. With escrow, there’s the added issue that the withheld amount is held in escrow by the notary, meaning the seller cannot use this money for investments.
In contrast, the capital preservation agreement is relatively inexpensive; moreover, the parties are free to determine its content themselves, and, as described above, the seller is generally allowed to invest the amount and earn a return on it.
What should you look for in an asset conservation statement?
The asset preservation statement must be proportionate to the purchase agreement. For example, the amount to be maintained is often related to the seller’s maximum liability (the “cap”) for the general warranties, and the term is related to the period during which claims for damages due to a breach of the warranties may be made.
It is important to a buyer that the amount can be made available as cash within a short period of time to satisfy a claim. Thus, the buyer will want regular insight into the amount and use of the money and will want that recorded in the asset maintenance statement.
A seller must be aware that the seller’s shareholder is often held personally liable in the event that the seller fails to fulfill its obligations under the capital maintenance declaration. If the shareholder is married, the consent of the spouse or registered partner will be required to assume the personal liability or provide the guarantee issued in connection with the capital maintenance declaration. For both parties, it must be very clear what is to happen if the buyer files a claim. May the seller dispute the claim and refuse payment? What if a claim is filed just before the end of the term?
The trick is to write the asset conservation statement in such a way that it provides the buyer with the desired security while at the same time minimizing the burden on the seller and his shareholders. Finally, the asset preservation statement should contain a clear roadmap of everyone's rights and obligations so that it does not itself become a breeding ground for disputes.
Frequently Asked Questions
What is a capital preservation statement in the context of a business acquisition?
A statement in which the seller agrees to set aside a portion of the purchase price for a specified period as security for any warranty claims the buyer may have.
Why is a capital preservation statement less expensive than a bank guarantee or escrow?
This is because there are no fees for the bank or notary, and no negative interest is charged. Furthermore, the seller is generally allowed to invest the amount, which is not possible with escrow.
Are the seller’s shareholders personally liable?
This is often the case: shareholders usually assume joint and several liability or act as guarantors for the seller’s obligations under the capital maintenance declaration. If a shareholder is married, the consent of the spouse or registered partner is generally required as well.
How is the amount determined?
The amount is usually related to the seller’s maximum liability (the “cap”) under the warranties, and the term refers to the period during which the buyer can still claim damages.
What should a buyer look for in an asset preservation statement?
In particular, the focus is on the speed with which the amount can be converted into cash to settle a claim, and on regular insight into the size and use of the funds set aside.
