Balancing Growth Potential and Legal Considerations in Structured Acquisitions

Watch our latest edition of JSA Live, where partner Archana Tewary discusses, that despite concerns about the economic outlook, strategic acquisitions of profitable companies have been occurring steadily. Acquirers are using structures that allow for adjustments and earn-out based payments based on the target company’s post-acquisition performance. This approach motivates the selling promoters to continue growing the business. However, when implementing such structures, factors like exchange control laws and tax laws need to be considered, especially for foreign acquirers. Each transaction requires tailored solutions to achieve the parties’ commercial objectives within the legal framework.


As many had predicted towards the end of last year, strategic acquisitions or acquisitions of cash-flow positive or profitable companies have been steadily ongoing despite concerns regarding the economic outlook this year.

However, acquirers are clearly sensitive to the impact industry or market conditions may have on the growth potential of targets post-acquisition and thus, are seeking structures which allow for post-closing adjustments and earn-out based payments. Such structures would see the acquirer pay a majority of the consideration for the shares of the target at closing but retain the ability to adjust the amount paid based on the actual performance of the Company as per audited numbers pre-Closing. Earn-outs are also built into the transactions to ensure that the remainder of the consideration is only paid if the performance of the target meets certain pre-identified metrics. This approach is combined with the retention of the promoters or key managerial personnel who were key to the growth of the target and may the target attractive to the acquirer in the first place. Such a structure is also a great motivator for the selling promoters to continue to grow the business for at least some time post-Closing. This is apart from the indemnity related escrows which have been a part of deal-structuring for quite some time now – all of these factors make for a complex set of requirements which the deal team has to navigate and put in place.

However, there are a few material considerations to be borne in mind when implementing such structures from the perspective of exchange control laws and tax laws as well.

Where the acquirer is a foreign entity, the maximum extent to which the acquirer can hold back any portion of the consideration or adjust the price post-closing is regulated and the price at which the acquirer can acquire the target is also regulated. Foreign acquirers may look at a staggered acquisition whereby the sellers remain as minority shareholders – this would also incentivize the sellers to continue to contribute to the company.

Where the acquirer is a foreign owned and controlled entity, the acquisition requires extensive structuring and even escrow mechanisms can require a great deal of thought and precision. Even where the acquirer is an Indian owned and controlled person, there may be tax implications to deferred consideration structures or earn-out structures and of course, exchange control laws have to be complied with if the sellers are non-residents.

There is no “one size fits all” solution and each transaction will call for the legal advisor to find a way to achieve the commercial objectives of the parties within the framework of the applicable laws.