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Purchase price adjustment disputes often involve intricate interpretive issues in which the meaning of terms that the parties thought they had agreed upon during the negotiation process becomes hotly disputed. Not infrequently, the parties call upon the Chancery Court to sort things out.  Vice Chancellor Will’s decision in Northern Data AG v. Riot Platforms, (Del. Ch.; 6/25) is the latest example of that.

The case arose following an accounting expert’s resolution of various purchase price adjustment issues in the buyer’s favor. The seller sought to have the Court overturn the expert’s decisions, contending that with respect to two items, the accounting expert applied a GAAP standard, instead of also considering the seller’s historical accounting practices reflected on the closing statement it submitted in accordance with the agreement. The seller challenged other determinations on the basis that they exceeded the expert’s authority because they should have been governed by the indemnification provisions of the agreement instead of addressed through the purchase price adjustment mechanism.

Vice Chancellor Will rejected the seller’s argument concerning the expert’s application of a GAAP standard to the purchase price adjustment.  This excerpt from Gibson Dunn’s memo on the decision summarizes her reasoning:

The Court found that the SPA created a hierarchy whereby the Accounting Expert was obligated to apply GAAP as the primary standard. If GAAP allowed for multiple approaches, the Accounting Expert was required to determine the GAAP-compliant approach most consistent with the Illustrative Closing Statement. However, if GAAP allowed for only one approach and the Illustrative Closing Statement was noncompliant with the permitted methodology, the Accounting Expert had to apply the approach that complied with GAAP for PPA purposes.

The Court agreed with the Accounting Expert that GAAP only allowed for a single approach with respect to the accounting items at issue, which approach was not compatible with the Illustrative Closing Statement. The Court upheld the Accounting Expert’s determination, as the SPA provided that his resolution would be final and binding absent manifest error, and he had not committed such error in his assessment under GAAP.

Vice Chancellor Will agreed with the seller that the accounting expert exceeded his authority in attempting to resolve the validity of an account receivable and an account payable reflected in the seller’s net working capital through the purchase price adjustment process. Here’s how the memo summarizes that aspect of her decision:

In both cases, there were factual questions about whether the receivable and payable had already been paid, and the Court addressed how the validity of such items interacted with Seller’s representations regarding the target’s accounts receivable and indebtedness. The Court emphasized that the PPA true-up process had a “limited” role that was intended only to account for changes in the target’s business between signing and closing.

The goal of the PPA was to keep all measures other than such changes consistent, “to prevent parties from extracting value for which they did not bargain.” The Court determined that the validity of the two payments, however, turned on events that occurred prior to the relevant period and did not reflect changes in the target’s business during such period.

Instead, the Vice Chancellor concluded that although accounting matters may be implicated in determining the validity of the payments, the timing of the events in question meant that they implicated the accuracy of the seller’s reps & warranties.  Accordingly, those claims should be pursued under the stock purchase agreement’s indemnification terms and not through the purchase price adjustment process.

– John Jenkins