M&A Disputes. Biemans A. Vincent

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      In the event the seller submits an objection notice, many purchase agreements provide for a period of negotiation (e.g., 30 days) between the parties to resolve the objections prior to a formal dispute resolution process.

      During this negotiation period, the parties will share and discuss information regarding their positions on the adjustments proposed by the buyer. Frequently, the seller will request additional supporting documentation from the buyer to more fully understand the basis for the buyer's proposed adjustments. It is not unusual for several of the proposed adjustments to be resolved between the parties during this negotiation period.

      The negotiation process is not only an opportunity for the parties to exchange information. It also allows the parties to critically assess their positions and the positions of their counterparty. As various items are often discrete, as opposed to interdependent, it is common for multiple items to be resolved as the parties trim and exchange their respective “weak” positions. We discuss the negotiation process and the “resolution matrix” that can assist a party in analyzing its position across various items in Chapter 10.

      If the parties are unsuccessful in reaching an agreement on all of the seller's objections to the buyer's proposed closing statement, the unresolved items, now the “disputed items,” are submitted to an accounting arbitrator for a final and binding determination. The accounting arbitration process is often specifically provided for in purchase agreements for which such a process is relevant (i.e., transactions with post‐closing purchase price adjustment provisions related to an accounting metric such as net working capital).

      The types of disputed items that typically end up being submitted to an accounting arbitrator for resolution – as opposed to being resolved through negotiation – are often proposed adjustments that are significant in dollar amount, involve real or perceived departures from the company's historical accounting practices, require significant judgment under GAAP, and/or involve real or perceived departures from provisions of the purchase agreement such as transaction‐specific non‐GAAP adjustments. For example, the buyer proposes to reduce accounts receivable by $1 million based on its assessment that certain older receivables should be written off in accordance with GAAP. The seller perceives the change as based on the buyer's preference for a strict accounts receivable aging methodology to determine the allowance for doubtful accounts. The seller disputes the proposed adjustment as violating the purchase agreement provision requiring the use of the seller's historical accounting policies.

      The disputed items that end up being tendered to the accounting arbitrator for resolution are documented, discussed, and supported in the various submissions to the accounting arbitrator. After considering the information provided by the parties, the accounting arbitrator renders a determination on each of the disputed items, formally resolving the dispute.

      THE DISPUTE RESOLUTION PROCESS

      Purchase agreements commonly provide a framework for calculating net working capital as well as procedures to finalize the amount and resolve any related disputes. Purchase agreements, however, do not necessarily specify each element of the accounting arbitration process. Either way, a typical dispute resolution process includes the following steps:

      1. Retention of the accounting arbitrator

      2. Parties' initial submissions

      3. Parties' rebuttal submissions

      4. Arbitrator interrogatories and document requests

      5. Hearing (optional and relatively uncommon)

      6. Arbitration award

      This section provides a brief overview of those major elements of the dispute resolution process (i.e., the activities from the engagement of the arbitrator through resolution). We discuss the mechanics of the arbitration process, including the selection of the accounting arbitrator and the various submissions to the accounting arbitrator, in more detail in later chapters.

      The first step in the formal dispute resolution phase is the retention of the independent accountant. In order to retain the accounting arbitrator, the parties first have to agree on his or her selection. Purchase agreements vary in the extent of guidance they provide on the selection of the accounting arbitrator, ranging from very little guidance to highly specific instructions. For example, some purchase agreements simply state that the parties will jointly select and retain an accounting arbitrator while other purchase agreements include a list of individuals in order of preference. More is discussed on this topic in Chapter 11.

      After selecting an accounting arbitrator, the parties have to agree with each other and the accountant on the terms of the engagement. That can involve substantial effort and multiple drafts of the accountant's engagement letter as that letter typically defines the dispute, lays out the procedures to be followed, and establishes the boundaries of the arbitrator's authority. As a result of the selection process and the detail commonly included in the engagement letter, the retention of the independent accountant can take much longer than the parties anticipated when the purchase agreement was drafted.