In the merger and acquisition (M&A) process, both the buyers and the sellers can spend significant amounts of time performing their due diligence and negotiating a Purchase and Sale Agreement (PSA). This agreement is created in hopes of reducing post-closing risk exposure. Even with the best of intentions, after the deal has closed the parties may find themselves in disagreement over certain portions of the PSA.
At The Frazer Firm, we have noticed three common post-closing M&A disputes: closing accounts (or completion accounts), contingent payments, and breach of representation and warranties.
In today’s article, we will go over each of these common disputes in depth. If you are dealing with any of these legal disputes, it is imperative to seek legal counsel from a knowledgeable business attorney, like those at The Frazer Firm. Don’t hesitate to contact our law firm today.
It is not uncommon for private businesses to include a purchase price adjustment post-closing. This adjustment accounts for the target’s changes in net debt and working capital. These purchase price adjustments compensate both parties for the changes that may occur in the target’s balance sheet between the closing date and the PSA’s defined balance.
It is typically up to the buyer to prepare and submit the closing financial statement to the seller. Post-closing disputes can occur when there is a disagreement in the calculation of such an adjustment between the parties.
Contingent payments, or “earn-out” clauses, can be part of the transaction to compensate the seller based on the future performance of the target. Contingent payments are commonplace and are used to bridge any differences between the buyer and the seller’s outlook of the target’s expected financial performance. They can able be used to create a financial incentive for the target’s post-closing management team.
These deals are referred to as “contingent payments” because the payout depends on the future performance of the target, which is subject to many uncertainties and risks. Often, contingent payments can lead to disputes between both parties post-closing.
Common reasons for this include differences of interpretation between parties, disagreements due to changes in accounting policies, and changes in the direction and management of the target post-closing.
There are inherent complexities in contingent payments; to avoid these disputes post-closing, there needs to be trust between both parties and precision in the drafting of PSA.
Breach of Representation and Warranties
Representations are statements of existing facts or past facts surrounding the target and warranties promise that existing or future facts and obligations are or will be true. Representations and Warranties (R&Ws) in a PSA provide risk protection to both the buyer and seller.
After closing, the buyer who now has full access to the company’s books and records may discover that the seller’s R&Ws were untrue. A breach of R&Ws can be complex, and the buyer will need to determine – in consultation with counsel – whether the R&Ws were fraudulent or just poorly drafted.
Calculating the damages due to the breach of R&Ws is even more complex and may require engaging an expert forensic accountant. The business litigation attorneys at The Frazer Firm frequently work with accounting experts in litigating M&A related disputes.
Resolving Disputes After Closing
Closing should be a time for celebration for both the buyer and the seller, not a time for disputes. Resolving disputes after closing can not only be time-consuming and costly, but also emotionally draining on the new business owners and restrictive on the growth prospects of the continuing business.
At The Frazer Firm, our business is protecting your business, and we take that seriously. We are experienced in resolving complex legal disputes and we focus on proactively protecting your business. Call us today at (561) 295-1551 and let us focus on efficiently and effectively solving your business’ post-closing merger and acquisition disputes.
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