Explore the intricacies of resolving working capital disputes in M&A agreements, with a focus on the case of Agiliance, Inc. v. Resolver Soar, LLC. Learn about the importance of clear dispute resolution language and its impact on M&A transactions.
M&A Stories
February 1, 2019
In this M&A blog post, we discuss the importance of clarity in dispute resolution procedures in asset purchase agreements, with a focus on net working capital adjustments. This case, Agiliance, Inc. v. Resolver Soar, LLC, sheds light on the need for precise language and the implications of different dispute resolution mechanisms.
The Scenario:
The seller, a Delaware corporation in the enterprise risk intelligence software business, entered into an asset purchase agreement with the buyer. The agreement stipulated that the purchase price could be adjusted based on the difference between preliminary net working capital and the net working capital recorded at the closing date.
Dispute Resolution Process:
The agreement established a process for resolving disputes about net working capital. It required the buyer to provide the net working capital statement before closing. The buyer and seller were expected to resolve disputes in good faith. The seller could object within thirty days with specific written notice, detailing objections and proposed adjustments.
The Twist:
When the buyer and seller couldn’t agree on the net working capital, the seller initiated arbitration. The buyer claimed the agreement required “expert determination” rather than arbitration, hoping for a more favorable outcome.
Court’s Decision:
The court ruled that the agreement clearly intended arbitration, not expert determination, for dispute resolution.
Further Dispute:
The buyer argued that the court, not an accounting firm, should decide whether the seller’s objections were timely and with a reasonably detailed explanation for its objections. The court stated that this was a procedural matter for the accounting firm to decide, not the court.
Key Takeaway:
Using the term “arbitration” in the purchase agreement, rather than “expert determination,” is vital for clarity.
Case Reference:
Agiliance, Inc. v. Resolver Soar, LLC, No. 18-CV-4945 (JMF), Court of Chancery of Delaware, (Submitted: November 15, 2018. Decided: January 25, 2019).
By John McCauley: I help people start, grow, buy and sell their businesses.
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