Not every M&A financial dispute belongs in a purchase price adjustment. Discover why the Delaware Court of Chancery differentiated between accounting methodology and factual inaccuracies in a recent case, shifting millions. This post illuminates how precise contract drafting regarding PPA expert scope versus R&W indemnification is crucial for buyers, sellers, and advisors in lower middle market private deals, ensuring disputes are handled in the right forum to protect your negotiated deal terms.
M&A Stories
June 13, 2025
While accurately defining accounting methodologies for purchase price adjustments (PPAs) is paramount, another layer of complexity can arise when financial inaccuracies extend beyond mere accounting interpretation into questions of factual validity. This distinction often trips up less experienced practitioners, yet it carries significant implications for who resolves a dispute and under what terms.
This precise challenge surfaced recently in a Delaware Court of Chancery case involving the acquisition of a data center company by a Bitcoin mining company. A key part of their deal involved a PPA tied to the target company’s closing indebtedness and net working capital. To resolve potential disagreements over the exact amount of indebtedness and net working capital, the parties agreed to submit any disputes to an independent accounting expert for a binding determination.
A significant disagreement involved a $1.2 million receivable that the buyer claimed was not a genuine asset, having been double-billed to a customer whose prior payment had already satisfied the debt. The other concerned a nearly $3 million electricity bill that the seller believed was erroneously included in accounts payable, arguing it had already been settled or offset.
The buyer in this instance attempted to have these disputed amounts adjusted through the PPA process. However, the court unequivocally rejected this approach. Its reasoning was fundamental: these were not disputes about accounting methodology (how a specific accounting principle like GAAP should be applied). Instead, they were about the factual accuracy and validity of the underlying asset or liability. Was that $1.2 million truly owed? Did that $3 million truly represent an outstanding liability?
Such questions directly implicate a seller’s representations and warranties (R&Ws) within the stock purchase agreement. These are the seller’s contractual promises about the state of the business—for example, that all receivables are “bona fide” or that the list of liabilities is “complete and accurate.” When these promises prove to be untrue, it constitutes a breach of a representation.
The court emphasized that the accounting expert in a PPA is typically empowered only to apply accounting principles and calculate financial metrics. The expert does not act as an arbitrator to determine if a legal promise (an R&W) has been broken. Crucially, the stock purchase agreement in this case stipulated that indemnification was the “sole and exclusive remedy” for breaches of representations and warranties, and these indemnification claims were subject to a $2.7 million cap on liability. The court understood that allowing a factual R&W breach to be resolved through the uncapped PPA mechanism would undermine the fundamental risk allocation agreed upon by the sophisticated parties.
For legal advisors, this distinction is not a mere technicality; it is a critical aspect of deal architecture. The lesson is to draft the purchase agreement with precision, clearly delineating the scope of the PPA expert’s authority. This authority should generally be confined to mathematical accuracy and the application of defined accounting methodologies. Any dispute pertaining to the factual truthfulness, existence, or validity of an asset or liability that breaches a representation or warranty should be explicitly channeled to the indemnification provisions, complete with their agreed-upon caps, baskets, and survival periods. This clarity ensures that disputes are resolved in the intended forum, protecting the negotiated balance of risk and reward in the transaction.
See: Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023-0650-LWW (Court of Chancery of Delaware 2025).
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 in lower middle market private target deals..
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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