Share Purchase Agreement Working Capital Adjustment
The potentially broader effectiveness and applicability of this approach has not gone unnoticed. The parties to the transaction quickly began using working capital adjustments to address other types of transaction uncertainties. In today`s competitive environment, where purchase prices are often set before due diligence is concluded (for example. B during an auction process), working capital adjustments are often used as a means to determine the final purchase price and not just as a means of adjusting the price up or down, to compensate for generally minor deviations in the cash position of the target transaction at the time of closing. Another important and sometimes controversial topic is the definition of the elements included and excluded in the correction as well as the accounting methods and procedures to be applied for the calculation of these items. This is a critical step. Inattention to these details and errors can lead to costly litigation after closure and significant economic losses. It is essential that the parties` consultants, management, accountants and financial advisors work as a team to design and negotiate these provisions, paying particular attention to objects that could be manipulated, misinterpreted or challenged in hindsight. “The purchase price is based on a net target of $1,000,000, as shown in Appendix A – Estimated Closing Balance Sheet. To the extent that the net labour capital is greater than the net target amount of the working capital on the closing date of the purchase transaction (closing date), this surplus is paid to the seller. To the extent that, on the reference date, net capital is below the net labour capital target, this difference is deducted from the purchase price. In the event of an intervention by an audit firm in dispute, the parties should consider potential conflicts of interest and determine whether the commissions of the designated entity would be proportional to the expected amount of an adjustment at issue. The power of the designated audit firm should be limited only to the issues and the resolution of the contentious elements in the area of the values claimed by the parties.
The arbitrator`s accountant`s decision on the contentious elements and the amount of the correction is generally final and binding. As a general rule, the arbitrator`s fees are allocated in proportion to the amount of the disputed adjustment that is resolved for and against each party. An arbitrator may be necessary in cases where it may be necessary to deal with issues that go beyond purely accounting issues, including questions of contractual interpretation. The Alliant Techsystems case, which we discuss below, illustrates the importance of being specific about the types of problems that can be dealt with by an expert (who in this case, as is the typical case, was an accountant). At a slightly higher level, where an agreement does not clearly distinguish the types of disputes to be decided by a third party (arbitrator or expert) from those to be tried in court, there may be significant differences. As both Alliant Techsystems and NOV Enerflow (also discussed below) illustrate, this type of divergence can be particularly difficult to resolve if alternative resolution procedures have significantly different compensation consequences. As has already been said, it is important not to develop an isolated working capital system. The interaction of the provision with other provisions of the sales contract should always be taken into account, particularly with regard to the possibility of “double counting”.