As global M&A activity reached record highs this year, so too did the market's appetite for carve-out transactions. A carve-out transaction is the sale of a subsidiary, division, or other part of a larger business enterprise. Carve-outs are generally characterized by an interdependence between the business being sold and the other retained businesses of the seller's group, which adds cost and complexity to the transaction.

Identifying and Defining the "Business"

From a commercial standpoint, a clear understanding of the scope of the divested business avoids any ambiguity in planning and allows clear and coherent analysis of the transaction and its perimeter.

From a legal standpoint, a clear definition of the business is vital to documenting the transaction, including the scope of the post-closing transition matters, accurately and efficiently.

Carve-Out Complications

Carved-out business segments often lack stand-alone financial statements (or such financials are likely to be unaudited), which can make valuation difficult, limit the availability of representations and warranties insurance, and potentially complicate governmental filings, particularly securities law filings if a public company buyer is involved.

Particular attention in diligence and purchase agreement negotiation must be paid to any contracts, other assets, or employees that relate both to seller's retained businesses and to the business being divested and allocation of related liabilities.

From the seller's perspective, both of the complications above can often be eliminated or mitigated through careful, well-advised advance planning, including any pre-closing restructuring activities.

Transition Matters

The seller may agree to continue to provide certain services to the divested business in the form of a transition services agreement ("TSA") (or reverse TSA if the seller needs temporary services from the divested business).

Negotiating and drafting the TSA and related service schedules or statements of work often requires significant input from both seller's and buyer's internal teams.

Key issues and agreements that may also require attention include:

  • If the divested business has an international footprint, cross-border considerations in respect of both any required restructuring and executing the carve-out transaction;
  • Noncompete/nonsolicitation and no-hire agreements in light of the seller's retained businesses, including confidentiality and use restrictions;
  • Shared intellectual property licenses and agreements;
  • Employee matters agreements;
  • Commercial supply or manufacturing agreements; and
  • Leases, subleases, and other shared site or shared services agreements.

Read the full 2021 Transactional Year in Review and 2022 Forecast.

Originally published January 2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.