M&A disputes : a professional guide to accounting arbitrations

373 Pages·2017·2.77 MB·English

by  Biemans

(cid:2)
TrimSize:6inx9in Biemans ffirs.tex V1-06/21/2017 6:19pm Pagei
M&A
Disputes
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ffirs.tex V1-06/21/2017 6:19pm Pageii
TheWileyFinanceseriescontainsbookswrittenspecificallyfor
finance and investment professionals as well as sophisticated
individual investors and their financial advisors. Book topics
rangefromportfoliomanagementtoe-commerce,riskmanage-
ment, financial engineering, valuation and financial instrument
analysis,aswellasmuchmore.Foralistofavailabletitles,visit
our Web site at www.WileyFinance.com.
Founded in 1807, John Wiley & Sons is the oldest indepen-
dent publishing company in the United States. With offices in
North America, Europe, Australia, and Asia, Wiley is globally
committed to developing and marketing print and electronic
products and services for our customers’ professional and per-
sonal knowledge and understanding.
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ffirs.tex V1-06/21/2017 6:19pm Pageiii
M&A
Disputes
A Professional Guide
to Accounting Arbitrations
(cid:2) A. VINCENT BIEMANS (cid:2)
GERALD M. HANSEN
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ffirs.tex V1-06/21/2017 6:19pm Pageiv
Copyright©2017byJohnWiley&Sons,Inc.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin
anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or
otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright
Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough
paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222
RosewoodDrive,Danvers,MA01923,[phone],fax[phone],orontheWeb
atwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe
PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,
[phone],fax[phone],oronlineathttp://www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest
effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe
accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied
warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated
orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategies
containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha
professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanyloss
ofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental,
consequential,orotherdamages.
Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please
contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outside
theUnitedStatesat(317)572-3993orfax(317)572-4002.
(cid:2) (cid:2)
Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Some
materialincludedwithstandardprintversionsofthisbookmaynotbeincludedine-booksor
inprint-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedin
theversionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.
FormoreinformationaboutWileyproducts,visitwww.wiley.com.
LibraryofCongressCataloging-in-PublicationData:
Names:Biemans,A.Vincent,1977-author.|Hansen,GeraldM.,1967-author.
Title:M&Adisputes:aprofessionalguidetoaccountingarbitrations/A.
VincentBiemans,GeraldM.Hansen.
Othertitles:Mergersandacquisitionsdisputes
Description:Hoboken,NewJersey:JohnWiley&Sons,2017.|Series:Wiley
financeseries|Includesindex.|
Identifiers:LCCN2017009404(print)|LCCN2017014047(ebook)|ISBN
9781119331933(pdf)|ISBN9781119331940(epub)|ISBN9781119331919
(cloth)
Subjects:LCSH:Consolidationandmergerofcorporations–Accounting.|
Arbitration(Administrativelaw)
Classification:LCCHG4028.M4(ebook)|LCCHG4028.M4.B542017(print)|DDC
657/.96—dc23
LCrecordavailableathttps://lccn.loc.gov/2017009404
CoverDesign:Wiley
CoverImages:©maxuser/Shutterstock
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ffirs.tex V1-06/21/2017 6:19pm Pagev
The authors would like to thank their wives,
Lenora and Rachel, for their love and support and,
importantly, their willingness to listen to excited
work stories that have GAAP as the protagonist.
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ftoc.tex V1-06/21/2017 6:19pm Pagevii
Contents
Preface xi
Acknowledgments xv
About the Authors xvii
PARTONE
The M&A Dispute Framework 1
(cid:2) (cid:2)
CHAPTER 1
Introductionto M&A Disputes 3
CHAPTER 2
The Post-ClosingAdjustmentand DisputeProcess 14
CHAPTER 3
Post-ClosingNetWorking CapitalAdjustments 26
PARTTWO
Core Concepts and Issues 41
CHAPTER 4
The Natureof GAAP 43
CHAPTER 5
PastPracticesin Accordance withGAAP 54
vii
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ftoc.tex V1-06/21/2017 6:19pm Pageviii
viii CONTENTS
CHAPTER 6
Target NetWorkingCapital 81
CHAPTER 7
Transaction-SpecificAdjustments 92
CHAPTER 8
AuditedFinancial Statements and AuditingConcepts 106
CHAPTER 9
Subsequent Events, NewPositions,and NewInformation 117
PARTTHREE
The Accounting Arbitration 133
CHAPTER10
MitigationofPost-ClosingPurchase PriceDisputes 135
(cid:2) (cid:2)
CHAPTER11
Selectionand Retentionof an AccountingArbitrator 148
CHAPTER12
The Parties’ InitialSubmissions 158
CHAPTER13
Further Submissions,Proceedings,and Considerations 175
CHAPTER14
The ArbitrationAward 188
PARTFOUR
The Disputed Items 203
CHAPTER15
Overviewof DisputedItems 205
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans ftoc.tex V1-06/21/2017 6:19pm Pageix
Contents ix
CHAPTER16
Inventory 221
CHAPTER17
AccountsReceivable 247
CHAPTER18
ContingentLiabilities 267
CHAPTER19
RevenueRecognitionand Expense Accruals 278
PARTFIVE
Other Topics 289
CHAPTER20
(cid:2) GoverningAgreementsand Contractual Choices 291 (cid:2)
CHAPTER21
InteractionwithIndemnificationProvisions 306
CHAPTER22
OtherMechanisms,Earn-Outs, and Locked Boxes 317
CHAPTER23
InternationalConsiderations 337
Index 347
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans fpref.tex V1-06/21/2017 6:19pm Pagexi
Preface
Why This Book
M&A transactions continue to be an important part of the
corporate and investment landscape. Many of the purchase
agreements governing those transactions contain post-closing
purchase price adjustment mechanisms. As a result, after-the-
fact adjustments to the purchase price are commonplace.
In many instances, those adjustments remain limited to a
series of uncontroversial accounting true-ups. Purchase price
adjustmentmechanismscan,however,haveasignificantimpact
on the deal value to one or both parties. Sellers and buyers can
(cid:2) (cid:2)
be easily caught off guard by a sizeable proposed adjustment,
problems with the company’s accounting, or some perceived
unreasonable position by the counterparty. In some instances,
the impact on the ultimate purchase price paid by buyers and
received by sellers can make or break transactions.
In the event of a dispute regarding a post-closing purchase
price adjustment, the purchase agreement commonly provides
for the matter to be brought before an independent accountant
for resolution. The parties rely on their attorneys and accoun-
tants to advise them on the successful resolution of those
disputes before the accounting arbitrator. The resolution pro-
cess, however, can be opaque for those unfamiliar with it and
the area is under-published. Moreover, there are distinguishing
characteristics and unique considerations when comparing the
field of M&A accounting arbitrations and the broader legal
and accounting professions.
This book seeks to provide guidance to current and poten-
tialpractitioners,whetherin-houseorataprofessionalservices
firm, in resolving—and perhaps preventing—M&A disputes.
xi
(cid:2)
(cid:2)
TrimSize:6inx9in Biemans fpref.tex V1-06/21/2017 6:19pm Pagexii
xii PREFACE
It aims to provide the reader with an in-depth walkthrough of
the M&A dispute resolution process and practical guidance
on achieving the best results for their clients from the dili-
gence phase through final resolution. It also seeks to provide
would-be arbitrators with the handhelds needed to arrive at an
informedandappropriateaward.Inadditiontoadiscussionof
the post-closing purchase price dispute resolution process, this
book also discusses steps the transaction parties can take to
potentially mitigate the scope and severity of any post-closing
purchase price dispute.
TheOrganization ofthe Book
Wehaveorganizedthebookintofiveseparate,butinterrelated,
parts.
The first part—The M&A Dispute Framework—provides
an introduction to purchase price adjustment mechanisms, an
(cid:2) overviewofthepost-closingpurchasepriceadjustmentprocess, (cid:2)
and the dispute resolution process before the accounting arbi-
trator.Italsoprovidesamorespecificintroductiontonetwork-
ing capital adjustment mechanisms. We selected net working
capital adjustment mechanisms as the primary basis for discus-
sionthroughoutmostofthisbookforitsprevalenceinpractice
as well as the analogous applicability of many of the identified
issues to other adjustment mechanisms. Notably, post-closing
adjustment mechanisms and the related dispute resolution pro-
cess can be—and often are to some extent—customized as they
are contractual in nature. Notwithstanding, the (net working
capital)adjustmentmechanismsandresolutionproceduresgen-
erally have more in common than they are different.
The second part—Core Concepts and Issues—discusses
a variety of recurring elements across purchase price adjust-
ments and disputes, including the nature of GAAP, the
common requirement of consistency with historical accounting
practices, the determination of target net working capital,
transaction-specific adjustments, selected audit topics, and
subsequent events.
(cid:2)