Page 23 - M & A Disputes

ing this period for dispute resolution, the buyer and seller will work to resolve disputed items. If such
items cannot be resolved during this period, the acquisition agreement will likely address the procedures
available to the parties for purposes of alternative dispute resolution (ADR). Often, the acquisition
agreement identifies the role of a neutral accountant to participate in the resolution of disputed items.

Earnout Clauses

Earnout clauses are sometimes incorporated into acquisition agreements as a means to make a portion of
the consideration to be paid to the seller contingent on the future performance of the target’s operations.
Such clauses can be effective at bridging perceived value gaps between buyers and sellers. Typically, an
earnout involves both accounting and financial reporting issues. As such, practitioners are commonly
involved in the drafting of the earnout provision in the acquisition agreement, and subsequently, forensic
accountants are often involved in determining the performance outcome and its related impact on the
purchase price.

Representations and Warranties

The "Representations and Warranties" section of the acquisition agreement provides protection to both
the buyer and the seller with respect to the transaction. Representations are statements of past or existing
facts. Warranties are promises that existing or future facts are or will be true. The representations and
warranties made by the seller are typically among the most lengthy and negotiated elements of an acqui-
sition agreement.

The representations and warranties made by the seller serve three primary purposes. First, they are de-
signed to be informational to the buyer with regard to the seller’s operations. Representations and war-
ranties accompanied with the buyer’s due diligence enable the buyer to understand the seller’s opera-
tions prior to the execution of the acquisition agreement. Second, the representation and warranties may
provide predicates for allowing the buyer to terminate the transaction subsequent to the execution of the
acquisition agreement and prior to the closing date. Third, the representations and warranties serve as a
framework for the seller’s indemnification obligations made to the buyer subsequent to the closing date.

Some examples of representations and warranties often made by the seller are that the organization is in
good standing, the historical financial statements provided to the buyer are in accordance with generally
accepted accounting principles (GAAP), the books and records of the target are fairly stated in all mate-
rial respects, all known material liabilities have been disclosed, the assets are of a certain agreed-upon
quality, and no material adverse change (MAC) or material adverse event has occurred.

Covenants

Preclosing covenants represent promises and agreement between the parties to do or not do something
during the time period between the agreement execution and the transaction closing date. Such cove-
nants are either made by the seller or buyer, and such covenants are either of the affirmative or negative
nature.

Affirmative covenants obligate a particular party to perform certain actions during the period between
the execution of the acquisition agreement and the closing date. Such affirmative covenants may include
obtaining the necessary approvals from board members or regulatory agencies; providing access to the
appropriate documents, including books and records; and filing all appropriate financial documents and
forms of the target company.

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