May 26, 2021

Post-Closing Disputes: New Del. Case Addresses Purchase Price Adjustments

It’s pretty common to appoint an independent accountant to referee post-closing purchase price adjustment disputes. It’s also pretty common to fight about whether a particular dispute falls within the accountant’s jurisdiction under the terms of the agreement. This recent blog from Francis Pileggi highlights a Delaware Superior Court decision on the topic. Here’s an excerpt:

A common type of business litigation case in Delaware involves post-closing purchase price adjustments, a variation of often-litigated earn-out disputes. Many agreements for the sale of a business include a provision that appoints an independent accounting firm to resolve disputes regarding a determination post-closing of working capital as of the closing date, for example, which impacts the final purchase price. A well-reasoned and pithy analysis of this type of issue was featured in a recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in the matter styled LDC Parent, LLC v. Essential Utilities, Inc., C.A. No. N20C-08-127-MMJ-CCLD (Del. Super. Apr. 28, 2021).

This decision determined that the particular post-closing dispute involved was subject to the binding decision of an independent accountant. More specifically, the parties disagreed about whether a Capital Expenditure, defined in the agreement as actually paid or payable, was properly capitalized according to U.S. GAAP. The Court rejected the argument that the issue was one of contract interpretation that should be subject to judicial review–and agreed with the argument that the dispute was covered by a clause that made it fall within the scope of the independent accountant’s decision-making authority.

The blog also says that this case is one for the litigators & deal lawyers to stick in their respective tool boxes, because while the Court decided that it didn’t need to address the often vexing issue of whether the accountant was serving as an “arbitrator” or an “expert,” the opinion includes many cites to Delaware opinions that have addressed that issue in the context of similar post-closing dispute clauses.

John Jenkins