Headed for an M&A Post-Acquisition Dispute? Stay Cool for the ‘Win’
November 04, 2021
Keeping emotions in check is one of several strategies for receiving the benefit of your bargain when an independent accountant is called in to resolve your dispute.
The global M&A market is hot. Blazing hot. As of early August, the total number of transactions had surpassed 35,000, representing a jump of more than 24 percent compared to last year. The value of all that activity reached $3.6 trillion — surpassing the full-year tally of $3.59 trillion in 2020.
But where there’s fire there’s smoke.
All that available cash and rush of deals bring the potential for more disputes after transaction closing. A dispute can ignite on the seller’s side with disappointment over the final sales price after learning that they didn’t achieve an earnout payment, or the buyer’s side after learning that the entity’s financial position wasn’t as advertised during due diligence.
Whatever the source of conflict, both parties are likely to examine post-closing financial results and events to make sure they receive the full benefit of their bargains in today’s competitive market. All it takes is for one party to feel they did not get what they expected to stir up conflict and send the deal tumbling into dispute.
Of course, an M&A deal can fall into post-acquisition dispute for any number of reasons. (See sidebar, “What’s the Beef?”) Resolution is typically dictated by terms in the sales and purchase agreement (SPA), which frequently calls for an independent accountant (IA) to serve as a neutral decision maker if the parties cannot settle an accounting-related dispute among themselves. The IA’s determination is usually final and binding.
What’s the Beef?
Common reasons for an M&A post-acquisition dispute
• Disagreement over contractual adjustments to the purchase price
• Alleged breach of representations and warranties involving financial or operational issues
• Disagreement about the level of working capital
• Disagreement over materiality
• Disagreement about whether agreed-upon earnout targets were met
If your dispute is hurtling toward resolution by an IA — despite your best pre-closing due diligence and negotiations — it helps to know what to expect during the resolution process, which can be a mystery for those unfamiliar.
And should you find yourself at the mercy of an IA, keeping a cool head can improve your position.
The Resolution Process Revealed
The resolution process would seem to be straightforward but in fact can be something of an enigma. That’s because many SPAs often do not provide details about how the process will be carried out. Even among those that do, the process can deviate from what is stated subject to the parties’ agreement. For instance, although a SPA often sets forth a timeline for the IA to render a decision in as little as 30 to 45 days, the entire process can easily take much longer.
To better prepare yourself for the potential road ahead, here are six common steps to expect.
Step 1. Kick-Off Meeting. The IA may conduct an initial meeting to gain a general understanding of the issues in dispute and to reach agreement on the timing of next steps. Both parties and their legal counsel are typically expected to attend. Generally, the best practice is to hold this meeting prior to the formal engagement and include both the disputed items and the process and timeline in the engagement letter so there’s no ambiguity over these issues.
Step 2. Discovery Phase. Often, sellers don’t retain access to the books and records of the sold entity and so they may wish to seek discovery; however, the SPA may be ambiguous about whether discovery is allowed. Yet, a party may still assert that they have not been provided access to information required to sufficiently assess the items in dispute. In that case, either party or both may request a discovery phase. If the parties dispute the need for discovery, they may ask the IA to make a ruling. As a best practice, the inclusion of a discovery phase as part of the process should be addressed up front and included in the engagement letter.
Step 3. Initial Submission. Most often the parties will simultaneously submit initial position papers that explain their positions and provide supporting documentation with respect to each of the items in dispute. This frequently includes a viewpoint about why their positions should prevail and why the other party’s should not.
Step 4. Rebuttal Submission. Often, after reviewing the opposing initial submission, both parties have the opportunity to simultaneously submit a second written submission rebutting positions taken by the other side.
Step 5. Additional Information Requests. The IA may ask either party for more information through written requests, or there may be in-person or virtual hearings and/or IA interviews of those most knowledgeable about the disputed areas. While these actions extend the timeline — depending on the type of issues, the size of the dispute and the strength of the submissions — they nonetheless provide helpful insight and additional evidence that enable the IA to make more-informed decisions.
Step 6. Final Determination. After a review of submissions and armed with additional input as needed, the IA makes a final determination, often in the form of a written report. The content may vary depending on whether the parties require a “reasoned” or “summary” report. A reasoned report usually includes the amounts to be awarded for each disputed item and the underlying rationale. A summary report may include only the amounts to be awarded for each disputed item or just the total amount of the award.
Get the Benefit of Your Bargain
What’s the difference between paying out millions of dollars or receiving millions post-dispute? It typically comes down to the merits of your positions — but be mindful about the way you engage with the IA. Here are some tips:
Get Googling. When a SPA calls for an IA to settle a dispute, both parties typically need to agree on the specific individual who will serve in that role. Do your research! Look into the candidates’ backgrounds, case histories, and experience — who’s expertise is most appropriate for your dispute? Does the candidate have experience in your particular industry, for example?
Mind the GAAP. The SPA often requires that working capital or an earnout metric be calculated in accordance with a specified accounting framework. And that the framework be consistently applied. Know this: If one party’s position complies with GAAP and the other party’s does not, the IA will usually lean toward GAAP. And when both comply with GAAP, the IA will often look to historical treatment to evaluate which of the parties’ positions is more consistent with past practices.
Stick to the facts. The IA is unlikely to decide issues of fairness or make a ruling based solely on what is equitable. He or she is looking to the SPA for answers. Yes, this may seem unfair, but that’s the way the game is played. So you want to avoid submissions that lean toward what you think is fair and instead frame your positions so they are most advantageous relative to the terms of the SPA.
Keep your head. It’s easy to get caught up in the emotions behind a position. Resentment can leap off the pages of your written submissions to, or interviews with, the IA. That can obscure otherwise strong positions. No matter how sympathetic an IA may be, they will likely base their determinations on objective evidence, so avoid making pleas that deter from the strengths of your arguments.
Lean into expertise. Do you have access to an experienced accounting practitioner? Use him or her. Practitioners with experience on both the buy and sell sides and serving as neutral accountants can be your ace in the hole in preparing for a dispute. Why not use all your resources to get what you bargained for in a deal?
© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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