Page 22 - M & A Disputes

acquisition is structured as a stock purchase governed by a stock purchase agreement, this section will
identify the shares to be sold.

Closing Date

The "Closing Date" section identifies the specific time, date, and location of when the transaction is
scheduled to close. In addition to identifying the logistics associated with the closing date, this section of
the agreement typically identifies the obligations and deliverables of both parties at the time of the clos-
ing date, such as stock certificates, releases, employment agreements, noncompete agreements, and
forms of payment (for example, wire transfer information, cashier’s check, promissory note, and so on).

Purchase Price

The scope of the "Purchase Price" section varies from agreement to agreement in terms of the depth of
the discussion. However, this acquisition agreement section generally addresses (a) the consideration to
be exchanged associated with the assets and liabilities to be acquired in the transaction and (b) the com-
ponents to the purchase price (that is, the consideration to be paid at closing, postclosing purchase price
adjustments, and any earnouts).

When disputes over M&A transactions arise, how the parties to the transaction arrived at the agreed-
upon purchase price is frequently a relevant consideration for the forensic accountant.

Purchase Price Adjustment

Another feature common to acquisition agreements is the purchase price adjustment or adjustment
amount provision. Depending on the negotiation of the parties and the structure of the transaction, the
form and calculation of the purchase price adjustment mechanism may vary. However, in general, the
purpose of the purchase price adjustment is to compensate the parties for variations in a balance sheet
measure (for example, inventory, working capital, net assets, or some modified version thereof) at the
closing date from a contractually defined target amount, commonly referred to as the peg.

The calculation of the purchase price adjustment is performed using information contained in a closing
statement or closing schedule prepared as of the closing date. The initial estimated closing statement,
which frequently takes the form of the balance sheet of the target company, is typically prepared by the
seller, who possesses all the accounting records of the target until the close. Depending on the agree-
ment, this estimated closing statement may affect the consideration exchanged at the closing. The seller
typically prepares the estimated closing statement a few days prior to closing, and the payments at clos-
ing are based on the estimates set forth in the estimated closing statement.

Subsequent to closing, either the buyer or seller (depending on the terms of the agreement) will deliver
to the transaction counterparty a "true-up" of the initially estimated closing statement. (The buyer typi-
cally provides this document because it usually has access to the target’s records subsequent to closing,
and the seller does not have such access.) This document, the closing statement, may be audited or certi-
fied by an officer of the company. Acquisition agreements typically afford the preparer of the closing
statement 15–90 days to complete its work and deliver its closing statement to the counterparty.

Upon receipt of the closing statement, the recipient is normally granted a period of access to the ac-
counting records necessary to evaluate the closing statement and to identify any disputes related thereto.
Disputed items are typically required to be identified in reasonable detail in an objection notice within a
window of time after closing. Following an objection notice, the dispute resolution period ensues. Dur-

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