2005 - Some of the concepts mentioned in “The Role of
the Litigation Consultant in Post-Closing Purchase Price Adjustment
66, were successful in a recent mediation involving claims
of over $20 million.
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.
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.
major issues in dispute over the closing financial statements
The value of the inventory.
going-concern value of the remaining cost of prior acquisitions.
necessity for setting up a reserve for the cost of cleaning
up the pollution caused by one of the seller’s production
material decrease during the past year from the historic
gross profit percentage.
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
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
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.
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.
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.
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.