Explore a real-life M&A case where an accounting error led to a potential $38 million overpayment by the buyer. Learn about the conflict, court ruling, and the lessons to be learned from this situation.
M&A Stories
March 04, 2021
Introduction:
Purchase price adjustments based on a company’s net worth after a deal is common but often leads to disputes. Here’s a case where an accounting mistake might make a buyer pay $38 million more than necessary.
The Deal:
In the health insurance sector, a strategic acquisition took place. The seller agreed to a base price of $750 million plus an adjustment based on the target company’s net worth.
The Issue:
The agreement allowed for adjusting the price based on the target’s net worth at closing compared to an estimated value at the agreement’s signing. After the deal, the buyer found that the target’s net worth was $38 million higher than the seller’s estimate. This discrepancy was mainly due to the target’s incorrect use of a new accounting standard in their calculations.
The Conflict:
Despite knowing the calculation was wrong, the buyer used the target’s flawed accounting method to determine the net worth at closing. This was against the terms of the agreement. The seller protested and followed the dispute resolution process, which involved arbitration by KPMG. In response, the buyer requested the court to make KPMG use the same incorrect accounting standard.
The Ruling:
The court denied the buyer’s request, as the agreement stated that KPMG should accurately apply the new accounting standard. As a result, the buyer is likely to pay $38 million extra for a net worth that wasn’t actually there.
This case is referred to as Golden Rule Financial Corporation v. Shareholder Representative Services LLC, C.A. No. 2020-0378-PAF, Court of Chancery of Delaware, (Submitted: October 30, 2020. Decided: January 29, 2021).
Lesson Learned:
Looking back, it’s clear the buyer should have checked the accuracy of the target’s net worth calculation before finalizing the agreement.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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