Working Capital Adjustment Purchase Agreement

In Alliant Techsystems, Inc. v. Midocean Bushnell Holdings L.P., C.A. No. 9813-CB (Del. c. 24 April 2015), the Delaware Court of Chancery was asked to rule on whether to resolve a dispute over accounting standards (a) under the price adjustment dispute resolution mechanism that referred the disputes to an external accountant, or (b) through a contractual claim for damages under the indemnification provisions of the agreement. That is why we have not taken a decision on this. The dispute arose when the buyer used a different accounting method in its calculation of 60 days of “net working capital” after closing than the one the seller had used in its gullible estimate before closing. As a result, an adjustment of $4 million in favour of the seller was converted into an adjustment of $22 million in favour of the buyer (as measured by the target of $188 million).

USD in both cases). The working capital adjustment period did not prevent the buyer from bringing an action for compensation A consistency problem may arise in the reference balance sheet, the document of which is often attached as the timetable of the provision for working capital adjustment. While the inclusion of such a balance sheet generally helps to ensure consistency in calculations, it is important to include all items for which an adjustment can be expected, including those that may have a zero balance at the time the target is calculated. Otherwise, there could be a dispute as to whether these items should be excluded altogether or whether they were omitted solely because they had a zero balance at the time the target was calculated. The required working capital is typically calculated in the Letter of Intent (LOI) phase of the procurement process and can be refined during the due diligence process. Typical post-closing adjustment provisions focus on the target company`s liabilities and assets that fluctuate due to business activity between the time the parties agree on a purchase price and the actual closing of the transaction, which may be months after the initial price agreement. The most common adjustments are based on the difference between the actual net working capital (NOC) of the target at closing and an agreed target amount expected at closing. Disagreements about working capital are usually resolved without litigation, but those who have ended up in court can provide valuable lessons for lawyers and business people. Without ensuring that the final amount of working capital corresponds to the target amount, the accounting classification of an asset could be affected by intermediate events, resulting in different treatment in the reference balance sheet than in the final settlement. An example of this can be found in Mehiel v. Solo Cup Company (2007 WL 901637 (Del. Super.

Ct. 26 May 2007), where the merger agreement included a post-closing working capital adjustment with an arbitrator to resolve disputes. This was a real estate value of $5.6 million that had been treated as a current asset at the time the target amount was traded because the asset was for sale. .

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