Merger and Acquisition Disputes in Challenging Economic Times
As most forensic accountants and business valuators know, post-acquisition disputes between an acquirer and target company are on the rise. These conflicts can be disruptive, time-consuming and expensive. To help in successfully resolving a dispute, the post-acquisition advisor needs to be extremely well versed in accounting, business valuation, economics, finance and litigation. In times when bank failures and bankruptcies are not uncommon, resolving post-acquisition disputes can be a formidable challenge.
The most common disputes involve post-closing adjustments for working capital or net assets, indemnity or fraud claims, and earnout disputes. In a dispute involving both working capital and indemnity claims, for example, working capital claims are typically measured on a dollar-for-dollar basis while indemnity claims can be measured dollar for dollar, over a finite period or into perpetuity.
The measurement of damages into future periods is predicated on assessing whether the misstatement will affect future periods; the buyer’s expectations were based on future performance; the business was significantly devalued after the acquisition; and the misstatement would have been “material” to a “willing buyer.”
Potential disputes in mergers and acquisition transactions can often be just as complex as the deals themselves. It is the acquirer that instigates a dispute on the grounds that it’s unable to complete the deal because of financial shortfalls, although there are exceptions.
In a 2009 roundtable discussion published in Financier Worldwide, one participant commented:
“The economic downturn has significantly increased the number of commercial disputes, and it has changed the nature of dispute resolution. Where once parties could resolve their differences through negotiation because they sought to preserve an ongoing business relationship, they are now realizing that there is not a next transaction on the horizon, so that litigation and arbitration, as opposed to mediation or reconciliation, become more likely.”
Throughout history we have seen that challenging economic times inevitably lead to a significant rise in conflicts between organizations. In attempting to resolve post-acquisition disputes, even the financial expert comes to terms with the fact that there is a finite amount of ways to resolve it, and each approach has its benefits and downsides.