Definition:Permitted leakage schedule
📝 Permitted leakage schedule is an annex to the share purchase agreement in a locked box-structured insurance transaction that itemizes every category — and often every specific instance — of value extraction from the target business that the buyer has agreed to allow between the locked box date and deal completion. The schedule transforms the concept of permitted leakage from a negotiating principle into a binding, exhaustive list, serving as the definitive reference for determining whether any post-locked-box payment by the target is permissible or triggers an indemnity obligation.
📊 A typical permitted leakage schedule for an insurance target will enumerate items such as ordinary payroll and benefits costs, pre-budgeted reinsurance premiums, routine commission payments to brokers or coverholders, tax installments, lease payments, declared dividends up to a specified cap, and any seller-related management fees that the parties agree should continue during the interim period. Each item is usually accompanied by a monetary cap or a reference to an approved budget, so the buyer retains visibility over the aggregate outflow. For insurance companies with complex group structures — common among European carriers operating across multiple Solvency II jurisdictions or Lloyd's groups with both managing agent and syndicate entities — the schedule must carefully trace intercompany flows to ensure that what appears as ordinary-course at one level is not extractive at another.
🛡️ Precision in drafting the permitted leakage schedule can prevent some of the most contentious post-closing disputes in insurance M&A. Ambiguity around whether a large claims payment, an unusual facultative placement, or an accelerated bordereaux settlement falls within the schedule's scope has, in past deals, led to protracted arbitration. Buyers' advisors therefore press for specificity — named payees, dollar thresholds, and defined categories rather than catch-all "ordinary course" language. Sellers, conversely, seek enough flexibility to manage the business through what may be a multi-month interim period without seeking consent for every routine transaction. The resulting schedule reflects the commercial balance of power and, in practical terms, functions as a mini-budget governing the target's cash outflows until the keys change hands.
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