In a locked-box transaction, leakage is value extracted from the target business by the seller (or related parties) between the locked-box date and completion that is outside the agreed permitted leakage. Examples include dividends declared and paid, related-party transactions on non-arm’s-length terms, payments of management fees not in the ordinary course, and the assumption or payment of the seller’s transaction costs by the target.
The seller typically gives a leakage covenant in the share sale agreement, with permitted leakage (a defined list of approved categories) and a dollar-for-dollar refund obligation for any unpermitted leakage.