Page 32 - M & A Disputes

ing Capital, Seller shall pay Buyer the amount by which Target Working Capital exceeds
Final Working Capital.

(c) Upon completion of the Closing Statement, Buyer shall promptly deliver the Closing
Statement to Seller. During and after the preparation of the Closing Statement, Buyer
shall provide Seller and its representatives with timely access to the employees and rec-
ords of Buyer and the work papers, trial balances, and similar materials used in the prepa-
ration of the Closing Statement. Following receipt of the Closing Statement, Seller shall
within thirty (30) days either (i) accept the Final Working Capital as set forth in the Clos-
ing Statement in its entirety or (ii) deliver to Buyer a written notice (the "Objection No-
tice") containing a written explanation of those items in the Closing Statement that Seller
disputes. Failure by Seller to deliver an Objection Notice within thirty (30) days of re-
ceipt of the Closing Statement shall constitute Seller’s acceptance of the Final Working
Capital, as set forth in the Closing Statement. Following delivery of an Objection Notice,
the parties will attempt to resolve, in good faith, any disputed items. If the parties fail to
reach such a resolution within thirty (30) days after delivery of the Objection Notice, the
unresolved disputed items will be referred to an independent practitioner or consulting
firm that includes practitioners acceptable to Buyer and Seller (the "Arbitrating Practi-
tioners"). Such resolution (the "Practitioner’s Determination") shall be furnished to Buyer
and Seller in writing as soon as practicable after the items in dispute have been referred to
the Arbitrating Practitioners. The Practitioner’s Determination shall be made in accord-
ance with GAAP consistently applied and shall be final and binding on Buyer and Seller.
The fees and costs of the Arbitrating Practitioners shall be allocated to Seller and Buyer
based upon the inverse proportion of success with respect to the disputed items.

This example is typical of language in acquisition agreements. On its face, this language seems straight-
forward to understand and execute. For example, if the agreement stated that target working capital was
$10 million, and the final working capital is determined to be $12 million, then the buyer would owe the
seller an additional $2 million under this postclosing adjustment mechanism. However, practitioners ex-
perienced in mergers and acquisitions (M&A) disputes understand that what appears to be a simple pro-
cess can often become complicated by a host of factors. Some of these factors are discussed subsequent-
ly.

Target Working Capital

The acquisition agreement may mandate consistency between the preclosing reference balance sheet
used in negotiations and the final balance sheet at closing. Because most companies apply more rigorous
and in-depth closing procedures at year-end, an issue may arise regarding which procedures the seller
will use to prepare the reference balance sheet or target working capital referenced in the transaction.
The interpretation of such a section may differ, depending on whether the closing balance sheet used in
negotiations were month-end or other period-end versus the regular reporting year-end. An issue may
arise, for example, if the financial statements used in negotiations were for an interim month-end, and
the agreement called for consistently applied accounting principles. This could create a comparability is-
sue between the target working capital and the closing working capital. Additionally, if the balance sheet
used in negotiations was the prior year-end audited financial statements, and the closing date is an inter-
im date, this could create a similar comparability problem.

Interim-date financial statements are typically prepared on a faster time table (that is, a quicker close)
and, therefore, sometimes result in inconsistent accounting with year-end financial statements because

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