What Does Litigation Holdback Mean?
A litigation holdback relates to funds being held after closing by a buyer of a company's shares. It applies if the company being acquired has pending litigation that will be resolved subsequent to closing. The buyer will attempt to estimate the outcome of the litigation, and then hold back sufficient funds to ensure the outcome is covered.
Divestopedia Explains Litigation Holdback
A litigation holdback only applies to the acquisition of shares, not assets. It protects the buyer from buying a company with a potential future liability that has not yet been estimated or accrued on the books. Litigation holdbacks typically take a long time to get released, as final settlement or resolution of the corresponding litigation needs to happen first.
A seller will often want to sell the shares of the company rather than the assets as this is more tax effective. If there is pending litigation, it is best for the seller to estimate the probability of the outcome since this will improve the seller's negotiation position on a litigation holdback. Most sophisticated buyers will include a litigation holdback clause in the stock purchase agreement, so the seller should assume this holdback will be requested and prepare to negotiate on it.