M&A Disputes. Biemans A. Vincent

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СКАЧАТЬ style="font-size:15px;">      Purchase agreements vary in the level of detail provided regarding the accounting arbitration proceedings. Purchase agreements can range from providing only general guidelines regarding the submissions to the arbitrator to including a detailed process.

      It is not uncommon for the detailed arbitration process to be first set forth in the independent accountant's engagement letter or agreed to immediately after his or her retention. The process is generally more involved than a simple exchange of information and positions. By means of example, the following schedule, or some variation thereof, is commonly used for accounting arbitrations:

      1. The parties simultaneously provide their initial submissions to the accounting arbitrator.

      2. The parties simultaneously provide their rebuttal submissions to the accounting arbitrator.

      3. The accounting arbitrator sends his document requests and/or interrogatories to the parties.

      4. The parties submit responses to the accounting arbitrator's document requests and interrogatories.

      5. An (optional) in‐person hearing may be held in some matters.

      6. The accounting arbitrator issues the award.

      The time between each step in the process varies from matter to matter depending on the scope of the items in dispute, scheduling conflicts of the parties and the accounting arbitrator, and other factors. The initial submissions, rebuttal submissions, and the parties' responses to the arbitrator's document requests and interrogatories are also provided to the opposing party. In practice, the arbitrator often cross‐forwards the parties' submissions upon having received the submissions from both sides.

      The initial and rebuttal submissions should generally be accompanied by all supporting documentation necessary for the accounting arbitrator to review and assess the respective parties' position on each item in dispute. At a minimum, the parties typically include the purchase agreement, the preliminary closing statement, the buyer's proposed closing statement, and the seller's objections thereto as well as a selection of correspondence and supporting documentation already exchanged between the parties with their initial submissions. In addition, the parties can submit additional factual and financial supporting documentation, including, for example, various spreadsheets, company documents reflecting business or accounting practices, and historical financial statements. In addition to the typical supporting documentation, the parties can also include affidavits from individuals that are knowledgeable regarding the company's accounting or other relevant topics. The parties can also include expert reports or expert affidavits with their submissions, such as an expert report that discusses the industry in which the company operates to provide context for the argued accounting treatment.

      After the initial submissions, the parties typically have an opportunity to provide rebuttal submissions. In most cases, the sole purpose of rebuttal submissions is to provide each party an opportunity to provide rebuttal arguments and accompanying supporting documentation in response to the positions of the other party as presented in their respective initial submissions. Rebuttal submissions are generally not intended to facilitate the raising of new issues. It is not uncommon for parties to abandon (concede) some of their positions in their rebuttal submissions based on the support provided with the opposing party's initial submission.

      After receiving the initial and rebuttal submissions, the independent accountant will, if necessary, issue document requests and interrogatories that include questions for the parties. In some proceedings there can be multiple rounds of arbitrator document requests and/or interrogatories based on the nature and complexity of the disputed items and the information already provided by the parties.

      In addition to written submissions and the accompanying supporting documentation, there can be a hearing before the accounting arbitrator. If the parties elect to have a hearing, it is typically a one‐day event consisting of presentations from both sides and an opportunity for the arbitrator to ask questions in person.

The Arbitration Award

      After analysis of the information provided by the parties and in accordance with the terms of the applicable purchase agreement, the independent accountant provides the parties with a determination for each of the disputed items in the agreed‐upon level of detail (the “award”). In practice, the award can range from a one‐page schedule to a fully reasoned award report that incorporates a detailed discussion of the independent accountant's considerations in support of his or her conclusion. In addition to decisions on the individual disputed items, the award can also include a calculation of the impact on the purchase price and an allocation of the fees and expenses of the independent accountant between the parties. The parties can preemptively provide for the type of award in the purchase agreement or, as commonly occurs, they can decide on it later in the process, for example, at the time of the retention of the accounting arbitrator.

      A key aspect for an appropriate resolution of a post‐closing purchase price dispute is for the parties, their advisors, and the accounting arbitrator to understand the specific mechanics and requirements for preparing the final closing statement including the net working capital (or other purchase price adjustment trigger).

      Purchase agreements vary and often contain transaction‐specific provisions that may include, for example, non‐GAAP measures for specific items. The arbitrator and the parties should be careful to closely observe the provisions of the purchase agreement that governs the transaction at hand in presenting and reaching a determination regarding the disputed items.

CHAPTER 3

      Post‐Closing Net Working Capital Adjustments

      At a basic level, a company's net working capital is the difference between its total current assets and its total current liabilities. In summary, current assets are cash and other assets that are reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of the business.2 Current assets include items such as accounts receivable, inventory, and prepaid expenses. Similarly, current liabilities include short‐term liabilities such as accounts payable, accrued liabilities, and the current portion of long‐term debt. In essence, net working capital is the short‐term capital available to be used by the business in its day‐to‐day operations.

      For purposes of many valuation analyses, the analyst considers whether the company has sufficient working capital to operate its business. If the company has a shortfall of or excess working capital, an adjustment needs to be made to the value of the company. Such adjustments can have a dollar‐for‐dollar impact on the valuation.

Example: Comparative Valuation Impact

      ◼ Company A and B are identical. Company A has sufficient working capital to operate its business (no excess or shortfall). Company B has the same amount of working capital and in addition has a bank account with $1 million in surplus cash (i.e., excess working capital).

      ◼ The value of Company B is $1 million higher than Company A as the buyer could buy Company B, extract $1 million, and end up with the same company as if the buyer had purchased Company A.

      ◼ Note: The example is simplified and ignores possible complications such as adverse tax effects. Moreover, excess cash is – in practice – not necessarily transferred with the company but may be extracted by the seller prior to closing.

      NET WORKING CAPITAL ESTIMATION AND ADJUSTMENT

      On the date the transaction is closed, neither the seller nor the buyer can necessarily precisely determine the amount of net working capital that is transferred with the business. Even if the closing date were at the end of a quarter or fiscal year, which is typically not the case, not enough time would be available to go through the regular end‐of‐period closing СКАЧАТЬ