Discover the intricate dynamics of M&A transactions through a recent Delaware Court of Chancery decision that underscores the complexities of working capital adjustments. In a $345 million acquisition, a dispute over the inclusion of discretionary bonuses in post-closing working capital calculations highlights the critical need for precise contract language. Follow this real-world example to understand the legal nuances and resolution processes that can impact your next deal. This blog is essential reading for entrepreneurs, business owners, CFOs, CEOs, board members, and legal professionals navigating the M&A landscape.
M&A Stories
June 29, 2024
In many M&A transactions, the purchase price is adjusted based on the difference between the estimated closing working capital and the actual closing working capital. Typically, the seller prepares this estimate, and after the deal closes, the buyer calculates the actual working capital. Disagreements often arise between the seller and buyer over these calculations, triggering a dispute resolution process that involves referring the matter to an independent accountant for resolution.
A recent Delaware Court of Chancery decision highlights this process in the $345 million acquisition of a consumer financial services company. The agreement stipulated a purchase price adjustment based on the variance between the estimated and actual working capital at closing.
Post-closing, the buyer calculated that the working capital included $1.3 million in bonuses. The seller disputed this, asserting that the actual bonuses at closing amounted to $300,000. The buyer contended that the $1.3 million represented the prorated share of discretionary bonuses for the year, which were neither paid nor known at the time of closing.
The seller wanted this dispute referred to the independent accountant for resolution as per the agreement. However, the buyer sought a court determination on whether discretionary bonuses should be included in the working capital calculation.
The court sided with the buyer, ruling that the contract language regarding the bonus component of working capital was ambiguous. Thus, the court will address this issue first before referring the matter to the independent accountant for final determination.
This case underscores the importance of clearly defining in the purchase agreement whether discretionary bonuses should be included in the working capital calculation.
Case Reference: Curo Intermediate Holdings Corp. v. Sparrow Purchaser, LLC, C.A. No. 2023-0371-NAC, Court of Chancery of Delaware, (June 5, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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