Reevaluating Purchase Price Adjustments From a Seller’s Perspective
July/August 2009 The M&A Lawyer
Jorge L. Freeland
DOWNLOAD PDF: Reevaluating Purchase Price Adjustments From a Seller’s Perspective
We recently completed a survey of 87 publicly available private company acquisition agreements to ascertain the current state of market practice of purchase price adjustments in acquisition agreements (the 2008 Survey)1 as well as a comprehensive review of the 57 published opinions on purchase price adjustment disputes to better understand the judicial view of the related litigation.2 This article incorporates the results of these two endeavors and offers some alternatives to avoid many of the pitfalls that have befallen prior sellers in the unfortunate, but common event where the buyer's proposed purchase price adjustment seeks to adjust for indemnification issues that go beyond the purchase price adjustment.
In today's M&A environment, it is standard practice in acquiring a private company to have a purchase price adjustment in the calculation of the purchase price. The purchase price adjustment is designed to ensure that the target company is delivered at closing with a predetermined balance sheet (or components thereof) or the purchase price is adjusted upward or downward. At the same time, most acquisition agreements have specific limitations on the buyer's indemnification rights in the form of caps and deductibles to provide the seller some assurance as to the net proceeds of the transaction.3 Because the purchase price adjustment incorporates both accounting and legal principles and is intertwined with indemnification, its complexity and visible effects on the economics of the transaction have resulted in the most frequent source of post-closing disputes between the parties to private company acquisitions. More often than not, when the parties have gone to court to resolve these issues, the seller has come out on the short end of the litigation.
1 - Jorge L. Freeland & Nicholas D. Burnett, 2008 Survey of Private Company Purchase Price Agreements, The M&A Lawyer, June 2009.
2 - Jorge L. Freeland & Nicholas D. Burnett, What to Expect When You Are Expecting a Purchase Price Adjustment Dispute, (forthcoming 2009).
3 - See First Annual Private Target Mergers & Acquisitions Deal Points Study, published by the Mergers & Acquisitions Market Trends Subcommittee of Negotiated Acquisitions of the American Bar Association's Section of Business Law (March 27, 2006) at p. 56-63. More specifically, the study found that 28% of agreements reviewed had an indemnifi cation cap of less than 10% of the purchase price; 15% of agreements had an indemnification cap of 10%; and 27% of agreements had an indemnification cap between 10-15%. Id. at 63.
|