A typical working capital section contains language along the lines of the following:

  1. At closing, Seller shall deliver its working capital statement.
  2. As soon as possible following closing, but within 60 days thereof, Buyer shall deliver notice of any adjustments to that statement.
  3. The shareholder representative shall then have 30 days to dispute any of the adjustments. If the shareholder representative fails to respond within such time period, he shall be deemed to have accepted Buyer’s calculations.
  4. Once there is a final agreed-upon figure, appropriate purchase price or escrow adjustments will be made.

One related detail often left unclear is what happens if the buyer fails to deliver the notice of adjustments within the required time frame? Has it forfeited its right to do so? If so, does that mean that the working capital statement delivered by the seller at closing is the final statement, and that the buyer has no right to object to it?

Most buyers will object to that conclusion. Their position will be that if they deliver their calculations late, the selling shareholders are only entitled to any damages resulting from the late delivery. This rarely would result in any identifiable damages. This could essentially give buyers the right to deliver their calculations within any reasonable timeframe.

The parties should consider what outcome they desire. There is an argument that both parties should be obligated to meet a timeframe, rather than there being consequences if one side misses the deadline but no consequences if the other side does so.

To avoid this issue, consider adding a sentence to the merger agreement that specifically says something like this:

If Buyer fails to deliver notice of any adjustments within such day period, the shareholder representative shall have the right, at his election, to either (i) determine that the Working Capital Statement delivered by the Seller at Closing shall be deemed for all purposes hereunder to be the final statement for purposes of calculating the [Closing Working Capital Balance], and such determination shall be binding on the Buyer with the Buyer having no further rights to object or require adjustments thereto or (ii) require the Buyer to deliver such Working Capital Statement within ten (10) days of the shareholder representative’s demand therefor.

Whichever option the shareholder representative elects to choose will likely depend on whether the price adjustment is one-way or two-way (meaning whether it is an adjustment that can only decrease the purchase price or an adjustment that can increase or decrease the purchase price). If it is a two-way adjustment mechanism, the shareholder representative may demand that the buyer deliver the statement if it thinks a positive price adjustment will result.

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