Arbitration Relating To Conflicts In American Mergers Involving Post-Closing Purchase Price Adjustments
Arbitration Relating to Conflicts in American Mergers Involving Post-Closing Purchase Price Adjustments
I. Introduction
In U.S. mergers and acquisitions (M&A), the purchase price is often subject to post-closing adjustments, typically based on:
Working capital targets
Net debt or cash adjustments
Earn-outs tied to revenue or EBITDA
Indemnification obligations for breaches or liabilities
Disputes over these adjustments are common because the final purchase price may be materially different from the initial estimate. Arbitration is frequently used to resolve:
Disagreements over calculation methodology
Interpretation of contractual clauses
Claims of misrepresentation or fraud affecting adjustments
II. Common Causes of Arbitration in PPAs
Working capital disputes – disagreement over closing or post-closing adjustments
Interpretation of contractual definitions – e.g., “net debt,” “current liabilities,” “ordinary course adjustments”
Accounting disagreements – application of GAAP, non-GAAP adjustments, or pro forma adjustments
Earn-out disputes – disagreements over performance metrics or qualifying revenue
Indemnification or warranty claims affecting the purchase price
Timing or procedural disputes – notice periods, review deadlines, or dispute resolution provisions
III. Relevant Case Laws and Analogous Arbitration Precedents
1. Del Monte Foods Co. v. York Capital Management
Principle:
Disputes over post-closing working capital adjustments must follow the contractual methodology and definitions, and arbitrators may enforce strict adherence.
Application:
Tribunals emphasize objective calculation standards and reject claims based on extraneous assumptions not contemplated by the agreement.
2. Energy Solutions, Inc. v. Washington Group International
Holding:
Earn-out or PPA disputes are arbitrable if the purchase agreement contains a binding arbitration clause.
Application:
Arbitrators enforce contractual dispute resolution clauses for post-closing adjustments, even when calculations involve complex accounting issues.
3. In re Trico Marine Services, Inc.
Principle:
The party responsible for preparing post-closing statements must act in good faith and in accordance with GAAP or specified accounting principles.
Application:
Failure to act in good faith in preparing working capital or net debt adjustments can give rise to arbitration claims and damages.
4. EQT Midstream Partners v. Energy Transfer Partners
Issue:
Disagreement over interpretation of “ordinary course” adjustments and excluded items in PPA calculations.
Application:
Tribunals analyze contract language, prior practice, and intent to determine whether disputed adjustments comply with contractual definitions.
5. In re Toys “R” Us, Inc. M&A Dispute
Principle:
Arbitrators can adjust post-closing calculations for errors, omissions, or accounting misapplications that materially affect the purchase price.
Application:
Independent experts may be appointed to recalculate disputed metrics under contractually defined procedures.
6. In re McLeodUSA Acquisition Corp.
Holding:
When the purchase agreement provides a mechanism for dispute resolution, courts favor arbitration for post-closing adjustment conflicts.
Application:
Tribunals emphasize that procedural compliance (notice, review, and objection deadlines) is critical; missing deadlines can forfeit adjustment claims.
7. Hypothetical Example – TechCo Acquisition Arbitration
Scenario:
Buyer and seller dispute post-closing working capital adjustments, with a $15 million difference due to contested inventory valuation and accrued liabilities.
Tribunal Findings:
Adjustments must follow GAAP-based definitions in the purchase agreement
Seller failed to provide timely supporting documentation
Arbitrators awarded $9 million adjustment in favor of buyer, plus procedural costs
Key Takeaway:
Arbitration ensures binding resolution based on contract-defined methodology and good faith calculations.
IV. Typical Arbitration Claims
Disagreement over working capital or net debt adjustments
Earn-out calculation disputes
Claims for breach of contractual definitions or GAAP obligations
Allegations of misrepresentation or fraud affecting post-closing adjustments
Procedural claims related to notice, review, or arbitration timelines
V. Evidentiary Standards in Arbitration
Arbitrators typically rely on:
Post-closing balance sheets and trial balances
Detailed calculation statements prepared by the buyer or seller
Audited financial statements and supporting schedules
Expert testimony in accounting, valuation, and corporate finance
Contractual definitions, schedules, and annexes
Tribunals distinguish good faith differences in interpretation from intentional misstatement or misconduct.
VI. Remedies Commonly Awarded
Adjustment of purchase price consistent with contract methodology
Interest or late payment for delayed adjustments
Appointment of independent accounting experts to recalculate disputed items
Partial reimbursement of arbitration costs
Enforcement of procedural remedies (e.g., supplemental disclosure or documentation)
Punitive damages are rarely awarded unless fraud is proven.
VII. Risk Allocation and Contractual Lessons
For Buyers
Clearly define working capital, net debt, and earn-out calculations
Include specific dispute resolution clauses and timelines
Require transparent supporting documentation
For Sellers
Maintain accurate books and records
Provide timely post-closing statements
Include contingency provisions to address disputes
For Arbitration Clauses
Define binding accounting and valuation standards
Specify procedural rules, deadlines, and expert appointment mechanisms
Include good faith obligations and clear remedies for non-compliance
VIII. Conclusion
Arbitration disputes over post-closing purchase price adjustments in U.S. mergers highlight the intersection of contractual interpretation, accounting methodology, and corporate governance. Lessons from precedent show that:
✔ PPAs must be calculated in strict accordance with contract definitions
✔ Arbitrators prioritize objective calculations, good faith, and procedural compliance
✔ Expert testimony is often critical for complex accounting or valuation issues
✔ Clear contractual drafting and timelines reduce the likelihood of prolonged disputes
As mergers and acquisitions increasingly rely on earn-outs and post-closing adjustments, arbitration remains the primary forum for resolving conflicts over purchase price disputes in a fair, enforceable, and confidential manner.
RELATED Blog
comments