RESOLVING M&A DISPUTES
M&A transactions are fraught with risk and uncertainty. Even the most well prepared and logical transactions can fail to produce anticipated levels of growth, or implode altogether.
Transactions that fail to deliver, especially where one party is believed to have misled the other, tend to result in disputes. Disputes may, for example, cover representations and warranties, price adjustments or price determination clauses, or tax covenants. According to Accuracy, most post-acquisition disputes can be attributed to four factors: volatility in the target company’s markets finding its way into the transaction, ambiguity in the wording of the SPA, pressure to acquire and the ‘thrill of the deal’, and fraud.
Purchase price plays a significant role in the successful negotiation of any M&A deal. Accordingly, a purchase price adjustment can result in inherent uncertainty and jeopardise a transaction agreement between buyer and seller. The sale and purchase agreement (SPA) provides a description of the purchase price, ordinarily calculated based on a comparison between the preliminary closing date accounts and the final closing date accounts. However, it is typically the seller that prepares the preliminary closing date accounts and the buyer that prepares the final closing date accounts, which can create tensions and disputes between the parties.
Earnouts can also be a source of dispute post-close. An earnout is a potential payment that a buyer may make to a seller after closing, based on the performance of the target company (or a certain segment of the business) during an agreed period after deal completion. Earnouts are often used when the parties cannot agree on the value of the company due to uncertainty surrounding its future performance. But the metrics used to define whether an earnout milestone has been achieved – such as revenue, earnings before interest, taxes, depreciation and amortisation (EBITDA) or net income, for example – can lead to arguments.
Jul-Sep 2020 issue
Richard Summerfield