By Christopher Letang, Managing Director, Professional Services
The 2014 SRS Acquiom M&A Deal Terms Study found that 66% of deals in 2013 included some sort of post-closing purchase price adjustment, typically based on a combination of the seller company’s working capital, cash, debt and transaction expenses. In the majority of such deals, any dispute over the purchase price adjustment is referred to the independent accounting firm that was agreed upon and named as the chosen arbitrator within the acquisition agreement. Since the arbitrator has already been named, it would seem that the arbitration process would be relatively simple and straightforward. In reality, however, SRS Acquiom has found that implementing the arbitration process with an accounting firm is often a difficult and time-consuming process.
Regardless of what has been laid out in the acquisition agreement, when instances arise that require arbitration, the parties involved in a dispute may look at conflicts of interest, or the mere perception of conflicts, quite differently than they do at the time deal agreements are being drawn up and the idea of needing arbitration is merely hypothetical.
Once a dispute is a reality, the M&A parties or the accounting firm chosen to assume the role of arbitrator may take the view that for an arbitrator to be truly independent, it must have no or extremely limited ties to either the acquirer, the selling shareholders or the selling company’s shareholder representative that serves as the agent for the selling company’s former shareholders. Establishing independence is no easy feat, as it raises questions about where such lines need to be drawn. For example, does the conflict analysis apply solely in regards to the seller representative; does analysis need to extend to the major shareholders in the selling company; or should it encompass all shareholders? While there is no doubt that most accounting arbitrators are respectable and professional, in the heat of a dispute it is not uncommon for one of the parties involved to suggest that a potential arbitrator might be inclined to give preferential treatment to the opposition if the other party is a major entity that the accounting firm could potentially get business from on future deals. In cases where the accounting firm identified in the acquisition agreements has been unable to serve as arbitrator, we have seen it take months to identify a satisfactory replacement firm.
The key to avoiding such delays is flushing out any potential conflicts before a proposed arbitrator is named in the acquisition agreement. Typically, an accounting firm can run a conflict check in a matter of days. If confidentiality is a concern, the parties can identify an arbitrator in between signing and closing a deal.
Additionally, the parties might consider adding a covenant that neither side will take any action after closing that will create a conflict with the agreed upon accounting firm prior to the resolution of the working capital adjustment. Since the parties will generally know within a few months whether there will be a working capital dispute, it generally would not be overly burdensome to agree to refrain from engaging the applicable accounting firm within that period. If any party were to violate this covenant, the agreement could say that it would be responsible for the expenses associated with identifying and engaging a replacement firm.
While it may seem like just another thing for busy M&A lawyers to have to deal with at the close of a deal, ensuring that there are no current conflict issues, and that no new ones will be created after closing, with the accounting arbitrator the parties in a deal have selected to settle a purchase price adjustment dispute can eliminate potential delays and heartache down the road. Jump on any conflict issues early to make sure resolution of your dispute is not unnecessarily delayed.
The views of the author and of SRS Acquiom may not necessarily be those of AXA Equitable Life Insurance Company(NY,NY).