An M&A deal uses locked box: fixed price at SPA signing on locked-box-date balance sheets, no post-closing adjustments — in exchange for seller undertakings not to “strip” the company during signing–closing. But post-closing, buyers discover pre-closing “mega” dividends, parent-debt repayments, cheap asset sales to affiliates… VND 25 billion in “leaked” value. Handling? Locked-box mechanics and anti-leakage.
Legal basis
- Civil Code 2015, Articles 385, 401, 418–419: contract content is party-agreed — locked-box mechanics, “permitted leakage” definitions, and sanctions turn on the SPA.
- Enterprise Law 59/2020/QH14: dividend and asset-transfer decision authority — verifying whether “leaks” were properly authorized.
- Accounting Law 88/2015/QH13: transaction-recognition bases during locked-box periods.
What locked box is — 3 pillars
1. Fixed price: purchase price set at SPA signing on locked-box-date figures (usually the latest accounting period-end) — no post-closing adjustments like closing accounts. Simple, price-certain.
2. No-leakage covenant: from locked-box date to closing, sellers/targets must not transfer value to sellers/affiliates — except listed “permitted leakage”.
3. Leakage indemnity: all non-permitted leakage is indemnified 1:1 (every leaked dong repaid) — typically free of de minimis/basket limits.
“Leakage” forms — 6 types
1. “Mega” dividends: above-normal dividends, or dividends from locked-box-period profits (already priced in).
2. Related-party debt repayments: early parent/shareholder loan repayments at “preferential” interest.
3. Cheap asset sales: below-market asset transfers to affiliates.
4. “Spiking” management fees: abnormally high internal management/service fees during locked-box periods.
5. “Mega” compensation: sudden management (seller’s people) pay rises and bonuses pre-closing.
6. Waived benefits: forgiven related-party debts, abandoned receivables, terminated favorable contracts…
Detecting leakage — 4 tools
1. Locked-box-period cash-flow reconciliation: review every outflow from locked-box date to closing — versus prior periods, hunting “spikes”.
2. “Leakage audits”: SPAs should grant buyers independent-audit rights post-closing — costs on the at-fault party.
3. Seller confirmations: at closing, sellers certify no non-permitted leakage — false certification grounds indemnity claims (and possibly fraud).
4. Interim monitoring: buyer information-access and management-meeting participation during signing–closing (within competition-law bounds) — early detection over post-closing surprises.
Handling leakage — 3 steps
1. Quantify leakage: measure each item (versus normal/permitted levels) — with independent-audit confirmation.
2. Claim 1:1 indemnity under SPA leakage indemnity — typically de minimis/basket-free, faster than ordinary R&W.
3. Disputes: if sellers deny, resolve per SPA dispute clauses. Note: sophisticated leakage (“moderately low” transfer prices, “moderately high” fees) is harder to prove than crude leakage (mega dividends).
What should permitted leakage include?
Ordinary-course items: policy-based compensation, declared-ratio dividends, market-price intra-group transactions… List in maximum detail — anything off the permitted-leakage list counts as leakage.
Locked box or closing accounts?
Locked box: simple, price-certain, dispute-free adjustments — suits buyers trusting figures and cooperative sellers. Downsides: leakage risk (this topic) and buyer “blindness” to post-locked-box-date movements. Closing accounts: fair, closing-reality-reflecting — but breed adjustment disputes (see EXP-6209). No perfect mechanism; choose per deal specifics and trust levels.
Leakage found pre-closing?
Best case — buyers may: demand reversal/cessation pre-closing; adjust price (despite “fixed” locked box, parties may agree adjustments); or treat as CP/no-leakage-covenant breach to renegotiate, even terminate for grave leakage.
Interest on leaked value (ticking)?
Good SPAs charge sellers interest on leaked value from leakage date to indemnification (equity ticking) — buyers paid prices including leaked value. Don’t forget this in SPA negotiations.
Seller is a fund fully distributed post-closing?
Real risk — closed funds distributing to investors are hard to chase. Prevent: escrow for leakage indemnity (hold back part of price 6–12 months post-closing), or fund-manager guarantees. Don’t let leakage indemnity become “paper” against asset-less sellers.
Contact FLAT Law Firm
FLAT Law Firm advises M&A buyers: designing anti-leakage locked-box mechanics, negotiating permitted leakage, and handling discovered leakage. Engage from SPA negotiation — locked boxes without anti-leakage “locks” are just open boxes.
This article has been quality-reviewed by the FLAW AI Legal Council