Page 34 - M & A Disputes

reads, "Seller may dispute any amounts reflected on the closing balance sheet or the net asset value re-
flected thereon, provided that seller shall notify buyer in writing of each disputed item and specify the
amount thereof in dispute within 30 days of receipt of the buyer’s closing balance sheet." Often, practi-
tioners are retained to assist sellers in evaluating the buyer’s closing balance sheet and preparing an ob-
jection notice.

Some agreements set forth the form and scope of response and may require the objection notice to in-
clude reasonable detail and supporting documents. At a minimum, these objection notices usually must
identify and explain each item in dispute and list the individual dollar amounts of all objections. On the
other hand, some general clauses only require that the seller notify the buyer that it objects in general
without disclosing details. Whether a client is the buyer or seller will influence the specificity desired in
the objection notice. Parties often dispute whether the seller can submit new items after the initial objec-
tion and whether and to what extent the seller can revise items included in the initial notice. In situations
when the contract is ambiguous, an independent trier of fact may decide the issue.

Buyers have incentives to carefully define in the acquisition agreement the parameters for the objection
notice, allow a short time period between receipt of the closing balance sheet prepared by the buyer and
the required objection cut-off date, mandate complete and specific disclosure of the disputed items by
the deadline, and allow little flexibility for changing the basic theory or amount of the seller’s proposed
adjustment. Sellers typically prefer the opposite.

Access to Books and Records

After closing, the seller is often at a disadvantage because the company books, records, and accounting
personnel have been transferred to the buyer. Therefore, sellers will want to ensure that adequate lan-
guage is included in the acquisition agreement to mitigate the risk of not having sufficient access to
books, records, and key personnel and that the parties are on equitable footing in the postclose adjust-
ment process regarding access to information. Particular attention should be paid to the seller’s ability to
obtain electronic files, such as the general ledger system or other native files. An inability to obtain ac-
cess to such files may greatly increase the cost of postacquisition analyses.

The practitioner can assist the seller with discovery requests, including the identification of relevant
electronic data, accounting or financial systems, and supporting records. The practitioner can also assist
the seller with interfacing with key management and accounting personnel, as well as with helping the
seller prepare the objection notice.

There may be issues if either transaction party asserts that it was constructively prevented from review-
ing the books and records in order to determine what, if any, claims it was entitled to make. In the event
that the parties are precluded from access to books, records, or other relevant information, and the par-
ties then appoint a neutral arbitrator in accordance with the acquisition agreement, the objection notice
could be submitted to the neutral arbitrator for a ruling regarding the amount of appropriate discovery.

Basis of Accounting

Historical

Financial statements are sometimes represented or warranted to be prepared in accordance with histori-
cal company policy as an alternative to GAAP. For example, a clause may read, "The closing balance
sheet shall be prepared, and net asset value calculated, in accordance with (i) the accounting principles
and practices historically used to prepare balance sheets for the business and (ii) GAAP, except to an ex-

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