Page 67 - M & A Disputes

Chapter 6

Role of the Neutral Practitioner

Introduction and Background

It is common for practitioners to be identified in purchase agreements to act in a neutral capacity to re-
solve disputes of an accounting nature. These disputes arise from the buyer and seller having differing
views with respect to accounting or financial reporting issues. Such issues relate to various provisions in
the purchase agreement that have an impact on the purchase price. These provisions include, but are not
limited to, purchase price adjustments (working capital, net assets, and so on) (see chapter 2, "Postclos-
ing Purchase Price Adjustments," of this practice aid) and earnout provisions (see chapter 3, "Earnout
Provisions and Disputes," of this practice aid). These provisions and common disputed items are dis-
cussed in other sections of this practice aid. Our illustrative acquisition agreement purchase price ad-
justment clause is provided again subsequently. In this clause, to the extent that the buyer and seller
cannot resolve the disputed working capital items by themselves, any remaining disputes are to be sub-
mitted to a practitioner (the arbitrating practitioner) for final and binding resolution.

Section 1.8Purchase Price Adjustment

(a) Within sixty (60) days following the Closing Date, Buyer shall prepare a closing state-
ment (the "Closing Statement") setting forth the Working Capital as of the Closing Date
(the "Final Working Capital"). The Closing Statement shall be prepared in accordance
with GAAP applied on a consistent basis.

(b) If the Final Working Capital is equal to the Target Working Capital, then no adjustment
to the Purchase Price shall be made. If the Final Working Capital exceeds the Target
Working Capital, Buyer shall pay to Seller the amount by which Final Working Capital
exceeds Target Working Capital. If the Target Working Capital exceeds the Final Work-
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 Closing
Statement in its entirety or (ii) deliver to Buyer a written notice (the "Objection Notice")
containing a written explanation of those items in the Closing Statement that Seller dis-
putes. Failure by Seller to deliver an Objection Notice within thirty (30) days of receipt 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 par-
ties 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 unre-
solved disputed items will be referred to an independent practitioner or consulting firm
that includes practitioners acceptable to Buyer and Seller (the "Arbitrating Practitioners").
Such resolution (the "Practitioner’s Determination") shall be furnished to Buyer and Sell-

© 2020 Association of International Certified Professional Accountants 65