Brattle Principal Adoria Lim recently coauthored the article “The unaccounted cost of accounting – sounding terms in purchase agreements,” published in the December 2015 issue of Financier Worldwide.
The authors discuss primary sources of disagreements between merging and/or acquiring parties over the interpretation of “accounting sounding” terms in purchase agreements. Specifically, the imprecise use of accounting-sounding terms and references, such as “accounts payable,” can often result in disagreements, if not litigation, between parties.
The authors highlight several cases as examples of disputes over accounting-sounding terms, including the recent ruling in the JP Morgan Chase acquisition of Washington Mutual and the subsequent litigation surrounding WaMu’s liabilities at the time of the sale.
Another source of disagreement over accounting-sounding terms the authors discuss is the exclusion of “unusual” or “extraordinary” items in the calculation of an earn-out provision, and the differing opinions between buyers and sellers as to what should be considered “usual” or “extraordinary.”
The authors conclude that without specifically identifying the nature of items to be included, the use of imprecise accounting-sounding terms will continue to be a source of contention and litigation. To avoid this, they advise for purchase agreements to be as specific as possible, and to consult an accountant when determining which accounting terms to use to ensure the terms match your intent.
The article is available for download below.