Mediation Using Experts

By Philip Zimmerman

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AUGUST 2005 - Some of the concepts mentioned in “The Role of the Litigation Consultant in Post-Closing Purchase Price Adjustment Issues,” page 66, were successful in a recent mediation involving claims of over $20 million.

The Dispute

The case involved an industry-leading public corporation and the former owners of a large, privately held, regional firm in the same industry. The dispute was over calculating their post-closing purchase price adjustment. The closing occurred after the seller’s year-end statements were prepared. Shortly after the closing, the purchaser had its outside CPA firm do an interim audit.

The agreement provided for post-closing adjustments to the purchase price to be first calculated and then priced by the same multiple of earnings as had been used for similar items. The agreement allowed the parties 30 days to negotiate their differences. If they could not agree, they were to mediate for up to 60 days, and if there was still no agreement, they had to proceed to arbitration under the administration and rules of the American Arbitration Association.

The major issues in dispute over the closing financial statements were:

  • The value of the inventory.
  • The going-concern value of the remaining cost of prior acquisitions.
  • The necessity for setting up a reserve for the cost of cleaning up the pollution caused by one of the seller’s production facilities.
  • The material decrease during the past year from the historic gross profit percentage.

Experts

Because these issues were primarily accounting in nature, each party retained a CPA litigation consultant for assistance in the settlement talks and alternative dispute resolution procedures. After the settlement talks failed, the parties filed for mediation and chose a mediator from a list of those with subject-matter expertise.

Fortunately, each party retained attorneys with subject-matter and alternative dispute resolution experience that were willing to confide in the mediator. This made the mediated settlement easier to achieve.

The Mediation

The purchaser’s litigation consultant’s report and testimony laid out its claims against the seller. The seller’s litigation consultant’s report and testimony were helpful in answering these allegations. This service by the litigation consultants helped to reduce the claim, originally over $20 million, to an amount closer to what the seller indicated to the mediator, in confidence, that it was willing to pay. Fortunately, again, each party had the appropriate corporate representation present at the mediation listening to the experts, parties, attorneys, and the mediator to evaluate how their case, after rebuttal, might be settled or adjudicated by the arbitrators in case they were not able to reach a mediated settlement.

After three days of mediation, the parties were within several hundred thousand dollars of each other. The public corporation’s deputy general counsel, however, had prior instructions from his board of directors not to settle for less than a certain amount. He related this in confidence to the mediator before announcing to the other party that he wanted to terminate the mediation and proceed to arbitration because the parties were still too far apart to settle. The mediator requested, and the parties agreed to, a short stay, in order to work separately with the parties to help them close the gap before they went to arbitration.

Creativity in Mediation

Skilled mediators use creative techniques to help bring about a settlement. The mediator’s analysis of the purchaser’s financial position showed that, due to a slowdown in the economy, the purchaser’s quarterly earnings for its first three fiscal quarters were slightly behind the previous year’s. The mediator confidentially pointed out to the deputy general counsel that it might be possible to increase earnings in the fourth quarter if the proceeds from the settlement were realized before the year-end. Apparently, the representative went back to the board of directors and obtained a lower settlement figure, which brought the purchaser into settlement range. The mediator could then help the parties agree to a mediated settlement, and save them the time and money required by a lengthy arbitration. Counsel had previously estimated the cost of such an arbitration would be in excess of $1 million.


Philip Zimmerman, CPA, APM, is a business consultant and member of the American Arbitration Association’s and the CPR Institute for Dispute Resolution’s panels for mediation and arbitration. His website is www.mediatorpz.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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