M&A Vocabulary – Experts explain: Cash Pooling and M&A Transactions

published on 18 January 2024 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

Although primarily a financial instrument, cash pooling arrangements may also be of importance for M&A transactions.

What is Cash Pooling?

Cash Pooling is a common tool of centralized cash management within national or international company groups operating their business from different subsidiaries, branches, or divisions. It allows for a more efficient approach to cash liquidity (i.e. more interest earned and less interest paid) within a group of companies with one central unit providing sufficient, but not excessive liquidity to subsidiaries or business units. Various models for cash pooling arrangements exist:

Cash pooling within one legal entity or within legal entities within one country or cross-border cash pooling involving several countries in which cross-border cash pooling is permitted;
Notional cash pooling in which actual funds are not transferred, but only relevant bank balances adjusted or physical cash pooling in which funds are transferred in and out at the end or beginning of a banking day to a centralized account.

Each cash pooling method, depending on the country, may have its regulatory challenges. Countries with foreign exchange restrictions (e.g. India or Vietnam) may for example not allow for currency mixing or transfers of funds outside a country.

The following considerations and restrictions may also have to be taken into account during an M&A transaction in the light of an existing cash pooling scheme.

Due Diligence

Depending on the country in which a target company operates a cash pooling arrangement, there may be a documentation requirement in respect of the cash-pooling arrangement, depending on the accounting treatment of the intra-group cash pooling transactions. Incorrectly implemented or insufficiently documented cash pooling arrangements may – depending on the relevant jurisdiction – lead to a violation of mandatory minimum capital requirements of the target with potential consequences for the group and/or the directors of the target.

Incorrectly implemented cash pooling schemes may also lead in some countries to a violation of foreign exchange laws.

Share Purchase Agreement (SPA) Drafting

There may also be drafting points in respect of the SPA, in particular the definition of the purchase price. Quite often, purchase prices are defined on a cash free and debt free basis, and the parties to a M&A transaction would need to consider what a particular cash pooling scheme means for such definitions.

Post M&A Integration

Another common practical and operational challenge of M&A transactions is the post-merger or acquisition integration. Cash pooling schemes are no exception. Depending on the scheme operated, relevant banking and/or intragroup arrangements have to be terminated or changed in order to release a target from a cash pooling scheme or integrate such a company into a new one. A transitional arrangement may be required to cover relevant operational issues.

In summary, cash pooling is and remains an instrument of efficient treasury management, which may also have certain effects on M&A transactions in various stages. As always, all potential scenarios ant their effects on an M&A transaction have to be at least considered, in order to form a view as to potential risks linked to cash pooling schemes during and after a M&A transaction.