Termination of cash pool contracts in the context of M&A transactions

published on 14 April 2025 | reading time approx. 2 minutes

In the context of corporate transactions, it is often necessary to unwind existing liability structures and terminate related arrangements – such as cash pooling agreements. The method chosen for doing so can involve different legal and commercial risks that must be carefully assessed.

Cash pooling is commonly used within corporate groups, meaning between the parent company and its affiliated entities as defined in Sections 15 et seq. of the German Stock Corporation Act (AktG). It is designed to optimize cash flows and ensure liquidity across the group. This is primarily achieved by covering the ongoing liquidity needs of group members and simplifying payment processes, while at the same time reducing transaction costs – for example, by avoiding bank margin fees.

The structure of a cash pool, whether it involves upstream and/or downstream loans, may vary, but in practice, the most common model is a downstream structure, with the parent company acting as cash pool leader.

Termination of Cash Pool Agreements

As a general rule, cash pool agreements are terminated shortly before closing when an M&A transaction is legally completed. Until that time, the target companies often still rely on financing provided through the cash pool.

Once termination is initiated, the outstanding balances must be determined and settled. There are several ways to achieve this:

1. Direct repayment by the target company

The target company may directly repay the outstanding amounts to the seller. In practice, however, this often fails due to insufficient liquidity. Alternatively, the repayment may be externally financed by the target company. This, however, carries a risk of clawback under Section 135 (1) No. 2 of the German Insolvency Code (InsO), if insolvency proceedings are opened against the target company within one year of repayment. In that case, the repayment could potentially be reversed.

Even if the contract provides that the buyer or a third party will bear any resulting losses, this may negatively impact the purchase price.

2. Repayment by the buyer

The buyer may assume and repay the target company’s outstanding obligations, thereby releasing the target from its liabilities. The buyer then has different structuring options: the repaid amount may be treated either as an equity contribution to the target or as a shareholder loan.

However, if structured as a loan, this may be considered an indirect detriment to creditors, potentially triggering a clawback. This risk does not arise in the case of an equity contribution.

3. Set-off against the purchase price

Another option is to offset the repayment amount against the purchase price. From an economic perspective, this is equivalent to an equity injection into the target’s capital reserves, with the seller simultaneously waiving the repayment claim.

4. Waiver of claims by the seller

The seller may waive the repayment, either before or as part of the closing. This approach involves relatively low legal risk. However, it may be disadvantageous from a tax perspective – especially if the claim is no longer considered recoverable, such as in the case of a financially distressed target.

5. Sale of receivables to the buyer

In practice, the most common solution is for the seller to assign its repayment claims arising from the cash pool to the buyer. The buyer can then freely structure the receivables, for instance by setting specific repayment terms or interest rates. This enables the buyer to extract value from the target company.

Termination Options

Cash pool agreements are generally terminable at any time, unless otherwise contractually agreed. Generally, the termination does not involve any particular legal difficulties.

Conclusion

In many transactions, cash pool agreements are an integral part of how group companies manage liquidity. Unwinding them can be more complex than it seems – and the way it’s done can create legal and financial risks for both buyer and seller. A carefully planned exit strategy helps avoid problems, particularly if the target company becomes insolvent down the line.