Federal Court Decides Arbitration for Purchase Price Dispute in M&A Deal

Introduction:

In many business acquisitions, adjustments to the purchase price are made after the deal is closed, based on the target company’s financial situation. Disagreements about these adjustments often arise, and a procedure is set up to resolve such disputes. This blog discusses a recent case involving a stock acquisition and the resolution of a post-closing calculation dispute.

The Deal:

This case revolved around the purchase of a consumer finance company’s stock. The buyer agreed to pay $7.3 million plus an amount based on the “Estimated Closing Net Assets” of the target company. This payment was subject to adjustments after closing, along with the repayment of certain target company debts.

The Stock Purchase Agreement (SPA):

The agreement outlined a process for resolving disputes related to post-closing calculations. If there were disagreements between the parties, an independent accounting firm would step in to make a decision. The decision of the accounting firm would be final and binding on both parties.

The Lawsuit:

Not surprisingly, the buyer and seller disagreed on the post-closing calculations, and the accounting firm settled the matter. However, the seller contested the accounting firm’s decision in a federal Delaware District Court. In response, the buyer initiated legal action in the Delaware Court of Chancery, aiming to confirm the accounting firm’s decision as if it were an arbitration award.

Jurisdiction Matters:

The federal court determined that the Delaware Court of Chancery likely had jurisdiction due to a forum selection clause in the SPA. This clause indicated that the Delaware Court of Chancery would have jurisdiction if the dispute fell within its purview. The federal court reasoned that the Delaware Court of Chancery had authority to review arbitration cases, making it likely that it also had jurisdiction over this dispute. However, the seller could return to the federal court if the Delaware Court of Chancery declined jurisdiction.

Key Takeaway:

In this case, the federal court concluded that the Delaware Court of Chancery had jurisdiction. This decision was based on the fact that under Delaware law, the court had the power to review arbitration decisions. The seller’s argument that the accounting firm acted as an accounting expert (expert determination) rather than an arbitrator was dismissed. The court noted that the dispute resolution procedure allowed the accounting firm reasonable access to information, resembling an arbitration process more than an expert determination. The absence of specific language disavowing arbitration further supported this conclusion.

Case Reference: