Purchase price adjustments sometimes require legal determinations rather than accounting analysis. For example, the issue might be whether the target company’s tax practices were in compliance with applicable law, whether a threat of litigation is sufficient to mandate reserves, or whether the company accurately maintained its capitalization tables. When these issues come up in purchase price adjustments, it can create an issue if the merger agreement says that they are to be resolved by accountants in accounting arbitration who are likely not well suited to conduct the underlying legal analysis on which the accounting determination depends.

Possible solutions for resolving issues such as these are to (i) keep them out of purchase price adjustments and mandate that any issue that requires a legal determination must be handled through the indemnification remedies or (ii) consider alternatives to accounting arbitration for resolution of purchase price adjustments when determining the proper outcome is not something accountants would likely not have the expertise to do well.

Related Stories