When a business is sold, the deal often does not complete on the same day it is signed. There can be a real gap of months or even years between signing and completion, during which the company's financial position can change. Many share sale agreements deal with this through a price adjustment clause, and understanding how these clauses actually work, and how far they can be stretched later, matters for any business owner buying or selling a company.

The basic idea behind a price adjustment clause is fairness. The parties agree on a baseline financial position at signing, and compare it against the company's actual position at completion. If the company's liabilities have gone down in that period, it has effectively become more valuable while still under the seller's control, so the seller is paid more, in proportion to the stake actually being sold. If liabilities have gone up, the price moves the other way, in the buyer's favour. This only works if both sides use the same accounting basis throughout, since the whole point of the clause is to isolate a real, agreed change in financial position, not to reopen the deal later based on a different way of counting things.

This is where disputes tend to arise. Once completion has taken place, either party may seek to introduce new accounting items, such as deferred tax liabilities or amortisation, that were never part of the original comparison basis, in an attempt to obtain a more favourable purchase price. Malaysian courts have taken a firm view on this. Neither the buyer nor the seller is permitted to introduce new accounting items after completion in order to rewrite the price adjustment formula agreed upon at signing. The original accounting basis, as it stood when the deal was signed, generally governs the calculation, regardless of the arguments advanced after completion.

The principles discussed above were applied in the case of Kenbee Sdn Bhd v Glory Drive Sdn Bhd, which I will be sharing and analysing in a later post. Stay tuned.

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