DealLawyers.com Blog

Meredith recently blogged about the distinction Delaware courts have traditionally drawn between an “expert determination” and “legal arbitration” when referring to dispute resolution language in the provisions of an acquisition agreement dealing with a purchase price adjustment. That blog pointed out that when the operative language calls for an expert determination, the third-party decision-maker does not have the authority to make binding decisions on matters of law or contract interpretation.  Instead, its authority is limited to factual disputes within its expertise. In contrast, the third-party decision-maker’s authority when acting as an arbitrator is broader and is subject to much more limited review by a court.

The Chancery Court’s decision in Archkey Intermediate Holdings v. Mona, (Del. Ch.; 10/23), points out that Delaware recognizes a third alternative dispute resolution mechanism – an “Accountant True-Up” – and this excerpt from Vice Chancellor Laster’s opinion discusses that ADR procedure:

In between the two poles is another well-established form of ADR: the Accountant True-Up Mechanism. Purchase agreements governing the sale of private companies routinely include Accountant True-Up Mechanisms. Comm. on Int’l Com. Disputes, N.Y.C. Bar Ass’n, Purchase Price Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested Improvements 1 (2013) [hereinafter “N.Y.C. Bar Report”]. In one standard use case, the parties “agree that any dispute concerning the values reported in the financial schedules used by the parties to determine the amount of any price adjustment are to be submitted to an independent accounting firm for a final and binding determination.”

The Vice Chancellor goes on to catalogue the standardized steps involved in an Accountant True-Up:

– The agreement gives the purchaser a defined period of time to prepare a proposed post-closing statement to be used to adjust the purchase price.
– The purchaser submits the proposed post-closing statement to the seller.
– The agreement gives the seller a defined period of time to review the proposed post-closing statement.
– If the seller agrees with the statement, then then the purchase price is adjusted based on the post-closing statement.
– If the seller disagrees with the statement, then the seller submits a written response detailing any objections.
– If the seller submits an objection notice then the parties engage in negotiations for a set period.
– If the disputes remain, they are submitted to an accountant for resolution.
– During the dispute resolution phase, the parties tender initial and rebuttal submissions with supporting documentation.
– The accountant’s determination is final and binding.

The Sheppard Mullin blog that Meredith referred to in her blog pointed out that language in an acquisition agreement to the effect that an independent accountant will serve as “an expert and not as an arbitrator” is a key indicator of the parties’ intent to obtain an expert determination. In this case, the stock purchase agreement provided that the independent accountant “shall act as an arbitrator.” But Vice Chancellor Laster concluded that this was not dispositive, and that the language of the agreement considered as a whole supported the conclusion that the dispute resolution process involved an Accountant True-Up.

As usual, there’s a lot more going on in this case than I can cover here.  Fortunately, Glenn West has a more detailed take on the decision in his latest blog.  In particular, be sure to check out his take on language in the opinion that could form the basis for a “malicious adjustment” claim.

– John Jenkins