Determination of the Final Purchase Price in M&A Transactions

Settlement of disputes on Closing Accounts – a minefield for experts?

The parties to an M&A transaction usually instruct an expert to make the final decision on the purchase price in connection with a closing accounts mechanism, if they cannot find an agreement on the final amount themselves. Many of the relevant clauses commonly used in sale and purchase agreements, however, lack clarity, leave ambiguities or contain gaps, often leading to substantial problems in practice. The article explains material issues that practitioners are facing and describes solutions on how the legal and financial advisers to the parties and the expert can avoid or mitigate those problems.

Article in Betriebs-Berater | BB 16.2018 | 16.4.2018

The contractual rules in sale and purchase agreements (SPAs) in M&A transactions with a Closing Accounts mechanism regarding the final determination of the purchase price are often incomplete and result in uncertainties and risks not only for the parties but also for the expert who makes the final determination. This may extend the expert proceedings, increase the cost for the parties and may make the expert’s result contestable. Comprehensive contractual rules as to the proceedings and material content (such as to compulsory consultations of the parties or the authorization of the expert to consult a lawyer in case of interpretation issues) are therefore advisable and both in the parties’ and the expert’s interest.

Closing Accounts ≠ Financial Statements

In case the parties refer to different rules and sources for the preparation of the Closing Accounts it is strongly advisable that they agree on a clear hierarchy which fits to the relevant case.

The purpose of Closing Accounts is different from that of annual financial statements. Several rules for the preparation of annual financial statements do therefore not apply to Closing Accounts. This is especially the case regarding the point in time as to which adjustment events have to be taken into account, i.e. such events relating to the period covered by the financial statements that only become known after the respective effective date. If the SPA remains silent on this point – which is often the case – in our opinion the relevant point in time is the date when the party who prepared the Closing Accounts submitted them to the other party.

Annual financial statements prepared in accordance with German GAAP (HGB) or IFRS are subject to materiality thresholds that are in most cases not suitable for Closing Accounts and also not intended by the parties to apply. In order to avoid long-lasting discussions and interpretation difficulties for the expert, the parties should explicitly agree on the non-applicability of materiality thresholds. Should they wish otherwise the SPA should provide for specific amounts.

The main article contains detailed insights in some possible mistakes often made in practice and provides solutions and sample clauses for SPAs.


Main article in German language: BB 16.2018, S. 840 ff. 

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