Recent research by the law firm BCLP LLP, using the Solomonic database, shows that there has been a 200% increase in High Court claims issued from 2019 to 2021 related to M&A litigation.  The trend has been sector agnostic, with M&A claims in all sectors increasing over the period.

Although litigation may be the preferred method of dispute resolution for certain types of post M&A dispute, such as those involving allegations of fraud or misrepresentation, parties to M&A transactions should keep in mind alternative forms of dispute resolution, such as independent expert determination, for disputes where accounting principles are at the heart of the dispute.  Compared to litigation, expert determination can be faster, more cost effective and utilise the core skillsets of suitably qualified professionals if used appropriately and planned in advance of a dispute arising, since it is a consensual process agreed between the buyer and seller.

One example of a type of dispute that forensic accountants are often called upon to determine as experts are earnouts, where a sale and purchase agreement contains a contractual provision stating that the seller will receive additional consideration dependent on certain levels of revenue or profitability being achieved.  This is especially relevant in the current environment, where uncertainties in valuing a business due to the pandemic result may result in a proportion of the price being deferred, often for several years after completion.

Earnout disputes often turn on the precise definitions of revenue, costs and profits set out in the sale and purchase agreement (which can often differ from generally accepted accounting principles) and how they apply in practice to the accounts of the acquired business.  It is therefore worth both buyer and seller spending time with an accounting advisor poring over the detail of these agreements to ensure that the objectives the parties have in mind when negotiating the deal are reflected in the final terms of the agreement.  These are often filed away after completion, only to be dusted off sometimes years later by which time the parties may have differing recollections over what was intended at the time of the deal.

Another issue that is easy to overlook under the pressure to get a deal done is how any expert determination provision in the sale and purchase agreement will operate in practice.  For example, I have seen agreements naming the company’s auditors as the independent accounting experts.  A firm independent of buyer, seller and the acquired company is usually a better choice to determine the dispute.  The parties should also consider the logistics of the expert determination process at the time of negotiating the sale and purchase agreement, such as the timing, process for exchanging documentation and how they wish the determination to be rendered, as these can be difficult to agree once a dispute has arisen.

Although neither party to an M&A transaction intends to end up in a dispute, greater elements of deferred consideration, such as earnouts, can result in more judgmental areas for disagreement, sometimes years after the deal completed.  A well-planned expert determination process when negotiating the deal can save parties the time, cost and diversion of senior management time associated with potentially protracted litigation over accounting issues if handled with the appropriate professional input upfront.