FILED: NEW YORK COUNTY CLERK 01/17/2017 11:25 AM INDEX NO. 655726/2016 NYSCEF DOC. NO. 40 RECEIVED NYSCEF: 01/17/2017 EXHIBIT C
September 22, 2016 In re Hestia B.V. Purchase and Sale Agreement Amended Section 5(d)(i) Earnout Dispute Notice of the Sellers Representative Pursuant to Section 5(d)(i) of the Agreement1 and as a result of Purchaser s failure to timely provide information requested by the Sellers Representative pursuant to Section 5(d)(ii),2 the Sellers Representative hereby amends his Section 5(d)(i) Earnout Dispute Notice dated August 31, 2016 to set forth his disagreement with the calculation of the Earnout Amounts contained in Purchaser s purported (a) Income Statement for the twelve month period ending January 31, 2016 and Earnout Statement for the twelve month period ending January 31, 2016 (collectively, the 2016 Earnout Statement ); and (b) Earnout Statements for each of the periods ending February 29, 2016, March 31, 2016, April 30, 2016 and May 31, 2016, respectively (collectively, the Four Extended Earnout Statements and with the 2016 Earnout Statement, the Five Earnout Statements ). The basis for the Sellers Representative s disagreements with Purchaser s calculations of the Earnout Amounts is set forth below, to the extent he is reasonably able to do so. I. DISAGREEMENT WITH PURCHASER S CALCULATION OF THE EARNOUT AMOUNTS SET FORTH IN THE FOUR EXTENDED EARNOUT STATEMENTS A. Calculation of Actual Gross Profit and the Earnout Amount for the Extended Earnout Period The Sellers Representative disagrees with Purchaser s calculation of Actual Gross Profit for the Extended Earnout Period as set forth in each of the Four Extended Earnout Statements. Purchaser appears to calculate Actual Gross Profit for each of the Four Extended Earnout Statements using a twelve month period ending on the last day of the month for each of the Four Earnout Statements -- i.e., a twelve month period ending February 29, 2016, March 31, 2016, April 30, 2016 and May 31, 2016, respectively. Purchaser s calculation violates the terms of the Agreement governing the calculation of Actual Gross Profit during the Extended Earnout Period. The Agreement directs that Actual Gross Profit for the First Earnout Period (including for the avoidance of doubt, any Extended Earnout Period) shall be calculated based on the twelve-month period ended on January 31, 2016 as automatically extended to the First Extended Earnout Date, which is defined as the earlier of (a) May 31, 2016 and (b) the last day of any month during the period commencing on February 1, 2016 until May 31, 2016 in which 1 Agreement refers to that certain Purchase and Sale Agreement by and among GardaWorld Consulting (UK) Limited, Hestia B.V., the Sellers, the Sellers Representative and Garda World Security Corporation (solely for purposes of sections 12.3 and 12.16), dated as of July 10, 2015. All capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement. 2 Purchaser delayed until the evening of August 30, 2016 to respond to the Section 5(d)(ii) Requests of the Sellers Representative (Third Set), delivered on August 5, 2016. Purchaser s delay denied the Sellers Representative the opportunity to address the new disclosures in his initial Section 5(d)(i) Earnout Dispute Notice, which was due the next day, thereby necessitating this amended notice. Moreover, despite the additional information provided in the delayed production, Purchaser still has not fulfilled its disclosure obligations under Section 5(d)(ii) and, as set forth below, the Sellers Representative reserves all his rights in that regard.
the Actual Gross Profit for the First Earnout Period equals or exceeds. See Agreement 5(a)(i), 13.1 (defining terms Extended Earnout Period, First Earnout Period, and First Extended Earnout Date ). These provisions unambiguously direct that, during the First Earnout Period (including any Extended Earnout Period), Actual Gross Profit shall be calculated over a period of 12 through 16 months collectively -- i.e., over the twelve months ended January 31, 2016 extended though May 31, 2016 -- subject only to earlier termination if Actual Gross Profit equals or exceeds in any month during that extended First Earnout Period. Purchaser s failure to calculate Actual Gross Profit and the Earnout Amount for the Extended Earnout Period for the First Earnout Period consistent with the terms of the Agreement constitutes a breach of 5 of the Agreement. II. DISAGREEMENTS WITH PURCHASER S CALCULATION OF THE EARNOUT AMOUNTS SET FORTH IN THE FIVE EARNOUT STATEMENTS A. Basra Governorate The Sellers Representative disagrees with the reduction of from the calculation of Actual Gross Profit on the following grounds: a. The reduction of Actual Gross Profit is impermissible under the terms of 5 of the Agreement. Under the Agreement, Purchaser s. Accordingly, Purchaser s attempt to reduce Actual Gross Profit by constitutes a breach of 5 of the Agreement; b. In the alternative, the reduction of Actual Gross Profit by the is improper because it is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: i. Purchaser has failed to supply sufficient competent evidential matter to show that the. To the contrary, evidence supplied by the Purchaser showed that,. Moreover, pursuant to of the Agreement, Purchaser (and the Operating Companies) have a duty, which continued through and beyond May 31, 2016, to use good faith efforts to, which duty precluded Purchaser from. Accordingly, for both of these reasons, the proposed reduction of Actual Gross Profit by the amount of is improper; 2
ii. In the alternative, to, in whole or part, such amount should, consistent with past practice of the Company and its Subsidiaries,. B. 3 Afghanistan Withholding Tax The Sellers Representative disagrees with the from the calculation of Actual Gross Profit Afghanistan Withholding Tax on the following grounds: of the so-called a. The Actual Gross Profit by the amount of the Afghanistan Withholding Tax is impermissible under the terms of 5 of the Agreement. Pursuant to the Agreement, the definition of Actual Gross Profit excludes any and all corporate or entity-level Taxes.... See Agreement 13.1(a)(definition of Actual Gross Profit, Taxes, and Taxing Authority ). Because Purchaser contends that the Afghanistan Withholding Tax and Purchaser s attempt to do so constitutes a breach of the Agreement; b. In the alternative, to the extent that the Afghanistan Withholding Tax the Afghanistan Withholding Tax is impermissible because it is premised on Purchaser s that was known or knowable, in whole or part, as of December 2, 2015, the date when Purchaser submitted its Closing Statement and Closing Date Working Capital., however, was not recorded by Purchaser on either the Closing Statement or the Closing Date Working Capital. Pursuant to 4(b) of the Agreement, Purchaser may not amend, adjust, supplement or modify the Closing Statement or the amount of the... Closing Date Working Capital.... Accordingly, Purchaser may not attempt, in violation of the contractual protections of 4(b) of the Agreement, pursuant to 5; c. In the alternative, the Afghanistan Withholding Tax is improper because it is not in accordance with applicable accounting requirements nor consistent with the past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: i. Afghanistan Withholding Tax is improper 3 Each of the Earnout Amounts in the Five Earnout Statements reflect an increasing portion of the reducing Purchaser s calculation of Actual Gross Profit. For the reasons set forth above, the Sellers Representative disagrees with the recognition of any and all of the related to the so-called Afghanistan Withholding Tax. 3
. Accordingly, ; ii. In the alternative, the Afghanistan Withholding Tax could properly be recognized as of the last day of any of the Five Earnout Statements, : (a) that period prior to February 1, 2015, must be recognized as either (i) period prior to February 1, 2015 or alternatively (ii) on the Operating Companies consolidated income statement for periods after February 1, 2015 in a, so as to not violate applicable revenue matching principles and distort the reported profit margins of the Operating Companies; and (b) which accrued for any period after February 1, 2015 must be recorded in such a manner as to not violate applicable revenue matching principles and distort the reported profit margins of the Operating Companies. Accordingly, during the period after February 1, 2015. Because Purchaser has failed to supply sufficient competent evidential matter to show, despite repeated requests of the Sellers Representative, ; d. In the alternative, Afghanistan Withholding Tax the Afghanistan Withholding Tax is impermissible because it is premised, in whole or part, on Purchaser s and which, if Purchaser s assertions are proven, of the Agreement based on the including potentially those the Company contained in. Under the Agreement, Purchaser s recovery for is solely limited to the amounts identified in those provisions of of the Agreement governing. See. Accordingly, Purchaser s attempt to the Afghanistan Withholding Tax is contrary to the terms of the Agreement, would result in a windfall to Purchaser and should not be allowed. 4
C. Unbilled Accounts Receivable The Sellers Representative disagrees with the reduction of from the calculation of Actual Gross Profit arising from the, on the following grounds: a. The reduction of Actual Gross Profit by the amount of the is impermissible under the terms of 5 of the Agreement. recover. Under the Agreement, Purchaser s sole remedy for its inability to invoice or Purchaser s attempt to and thereby both the Agreement;. Accordingly, constitutes a breach of 5 of b. In the alternative, to the extent that the was, the reduction of Actual Gross Profit by the is impermissible because it is premised on Purchaser s recognition of a contingent liability that was known or knowable, in whole or part, as of December 2, 2015, the date when Purchaser submitted its Closing Statement and Closing Date Working Capital. Such a contingent liability, however, was not recorded by Purchaser on either the Closing Statement or the Closing Date Working Capital. Pursuant to 4(b) of the Agreement, Purchaser may not amend, adjust, supplement or modify the Closing Statement or the amount of the... Closing Date Working Capital.... Accordingly, Purchaser may not attempt, in violation of the contractual protections of 4(b) of the Agreement, to now record a liability which it failed to recognize as of the Closing Date for the sole purpose of expensing that liability and reducing the calculation of Actual Gross Profit pursuant to 5; c. In the alternative, the reduction of Actual Gross Profit by the is improper because it is not in accordance with applicable accounting requirements nor consistent with the past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: i. Purchaser has failed, despite repeated requests of the Sellers Representative, to supply any competent evidential matter Accordingly, to the extent the was so accrued, Purchaser s 5
attempt to record a duplicative and recognize a related expense to reduce Actual Gross Profit would violate applicable accounting requirements and yield an unwarranted windfall to Purchaser; ii. In the alternative, to the extent the, Purchaser may not recognize such liability as an expense affecting Actual Gross Profit in the twelve month period ending January 31, 2016 or any periods ending thereafter, as such expense related to a which was known or knowable in its entirety prior to February 1, 2015 and accordingly should be recorded, if at all, as an expense either (a) to periods prior to February 1, 2015 4 or (b) if recorded in any period after February 1, 2015, then recorded as an extraordinary item on the Operating Companies consolidated income statement in such a manner that it does not affect Actual Gross Profit, so as to not violate applicable revenue matching principles and distort the reported profit margins of the Operating Companies; d. In the alternative, to the extent that the was, the reduction of Actual Gross Profit by the amount of the is impermissible because it is premised on Purchaser s recognition of a supposed undisclosed contingent liability that was purportedly known or knowable as of July 10, 2015 and which, if Purchaser s assertions are proven, might support a provisions of. Under the Agreement, Purchaser s recovery for is solely limited to the amounts identified in those. Accordingly, Purchaser s attempt to reduce Actual Gross Profit by 4 The Sellers Representative notes that, in its August 30, 2016 disclosures, Purchaser revealed that, in connection with the 2016 Earnout Statement, it expensed (thereby reducing Actual Gross Profit reported in the 2016 Earnout Statement) on the grounds that such an. The Sellers Representative believes that expense is included for the purported that is the subject of this disagreement, even though the brief explanations Purchaser has given for recognizing the separate expense amounts are entirely different. Because Purchaser has denied the Sellers Representative the ability to explore the basis for both the and the, however, the Sellers Representative has been unable to confirm his belief or explore the different rationales Purchaser has offered for recognizing the expenses. To preserve his rights, the Sellers Representative objects to the recognition of the based on either the reasons set forth in the text above or, to the extent Purchaser seeks to justify the expense on a different rationale, because Purchaser has offered. Consistent with his objections set forth below with respect to Purchaser s failure to comply with its disclosure obligations under Section 5(d)(ii) of the Agreement, the Sellers Representative reserves his right to amend, modify or supplement this disagreement, as appropriate. 6
contrary to the terms of the Agreement, would result in a windfall to Purchaser and should not be allowed. D. Unbilled Accounts Receivable The Sellers Representative disagrees with the reduction of from the calculation of Actual Gross Profit arising from the, on the following grounds: a. The reduction of Actual Gross Profit by of on the grounds that such amounts are is impermissible under the terms of 5 of the Agreement. The amount sought to be. Under the Agreement, Purchaser s sole remedy for its inability to invoice or recover the amount of any See. Accordingly, Purchaser s attempt to Actual Gross Profit by constitutes a breach of 5 of the Agreement; b. In the alternative, the reduction of Actual Gross Profit by is improper because it is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: i. Purchaser has failed, despite multiple requests by the Sellers Representative, to supply sufficient competent evidential matter to show that the. Moreover, pursuant to t, Purchaser (and the Operating Companies) have a duty, which continued through and beyond May 31, 2016, to which duty precluded Purchaser from discontinuing all reasonable efforts to. Accordingly, for both of these reasons, the proposed is improper; ii. In the alternative, to the extent that any, such portion should be on the Operating Companies consolidated income statement so that it does not affect Actual Gross Profit because the prior to February 1, 2015 and for the twelve month period ending January 31, 2016 or any period thereafter would be inconsistent with applicable revenue matching principles and would distort the reported profit margins of the Operating Companies. 7
E. Unbilled Accounts Receivable The Sellers Representative disagrees with the reduction of the calculation of Actual Gross Profit arising from the, on the following grounds: from a. The reduction of Actual Gross Profit by the recognition of a reserve of is impermissible under the terms of 5 of the Agreement. The amount sought to be would reduce the aggregate amount of the -- i.e., the. Under the Agreement, Purchaser s sole remedy for its, and. Accordingly, Purchaser s attempt to reduce Actual Gross Profit by recognizing a associated with the constitutes a breach of 5 of the Agreement; b. In the alternative, the reduction of Actual Gross Profit by recognition of a associated with the is improper because it is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: i. Purchaser has failed to show that a is appropriate because it has failed to supply sufficient competent evidential matter demonstrating that an, in full or part. Moreover, pursuant to, Purchaser (and the Operating Companies) have a duty, which continued through and beyond May 31, 2016, to which duty precluded Purchaser from concluding that. Accordingly, for both of these reasons, the proposed reduction of Actual Gross Profit by recognizing a is improper; ii. In the alternative, to the extent that any portion of the is appropriate, such portion should be on the Operating Companies consolidated income statement so that it does not affect Actual Gross Profit because the against which the relate to earned prior to February 1, 2015 and for the twelve month period ending January 31, 2016 or any period thereafter would be inconsistent with applicable revenue matching principles and would distort the reported profit margins of the Operating Companies. 8
F. Unbilled Accounts Receivable The Sellers Representative disagrees with the the calculation of Actual Gross Profit on the grounds that such a reduction is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. In particular, despite multiple requests by the Sellers Representative, Purchaser has failed to supply any competent evidential matter sufficient to show that the whole or part. To the contrary, Purchaser seeks to without reference to the Operating Companies experience and without considering the substantial improvements the Operating Companies made in their internal controls based on their, which should enable the Operating Companies to realize an even higher success rate for effort in attempting to, in than previously experienced. Moreover, Purchaser seeks to after having invested far less time and. Accordingly, because Purchaser has failed to supply any competent evidential matter to show that the based on a method inconsistent with past practices of the Company and its Subsidiaries, the proposed reduction to Actual Gross Profit is improper. G. Training WIP 5 The Sellers Representative disagrees with the reduction of the calculation of Actual Gross Profit arising from the WIP related to training costs on the grounds that such a reduction is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: a. Despite multiple requests by the Sellers Representative, Purchaser has failed to supply documents or other information sufficient to show that the. Among other things, Purchaser s explanations 5 Purchaser initially disclosed that it had Training WIP in calculating Actual Gross Profit for the 2016 Earnout Statement, which it later corrected to be. Purchaser contends that it for Training WIP when calculating Actual Gross Profit for the period ending February 29, 2016. Although Purchaser s response leaves uncertain the amounts relating to Training WIP for that were in the calculation of Actual Gross Profit in particular Earnout Statements, the Sellers Representative understands that the Training WIP has ultimately been over the course of the Five Earnout Statements and objects to Purchaser s calculation for the reasons set forth above. 9
for its proposed reduction to Actual Gross Profit are internally inconsistent, conclusory and lacking sufficient competent evidential matter to support management s supposed judgments that. Moreover, Purchaser has failed to show that, in, it employed a method consistent with past practices of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. Accordingly, the in Actual Gross Profit is improper. H. 6 Training WIP The Sellers Representative disagrees with the from the calculation of Actual Gross Profit arising from the recognition of a WIP training incurred in connection with on the grounds that such a is not in accordance with applicable accounting requirements nor consistent with past practice of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. That is because of the following: a. Purchaser has failed to show that a is appropriate because it has failed to supply any competent evidential matter demonstrating that an equivalent amount of the training WIP, in whole or part. Moreover, Purchaser has failed to show that, in, it employed a method consistent with past practices of the Company and its Subsidiaries, as required by Section 5(a) of the Agreement. Accordingly, the proposed in Actual Gross Profit is improper. I. The Sellers Representative disagrees with the reduction of from the calculation of Actual Gross Profit in connection with the on the grounds that Purchaser has failed, despite multiple requests by the Sellers Representative, to supply documents or other information sufficient to show that Purchaser has diligently and in good faith sought to obtain recovery of the, in full or part. III. OBJECTIONS TO PURCHASER S PERFORMANCE OF ITS OBLIGATIONS UNDER 5 AND RESERVATION OF RIGHTS A. Purchaser Has Failed To Comply With 5(d)(ii) The Sellers Representative objects to Purchaser s failure to comply with its obligations under 5(d)(ii) of the Agreement. Among other things, Purchaser has failed to fully and timely produce documents and other information requested by the Sellers Representative concerning Purchaser s calculation of the Actual Gross Profit and Earnout 6 The Sellers Representative understands that the at issue was first recognized in the monthly period ending April 30, 2016. Accordingly, this disagreement only relates to Purchaser s calculation of the Earnout Amount in the Earnout Statements for each of the periods ending April 30, 2016 and May 31, 2016. 10
Amount in each of the Five Earnout Statements. Moreover, Purchaser has improperly limited or explicitly denied access by the Sellers Representative to personnel and the Representatives of Purchaser and its Affiliates (including their respective accountants) with knowledge relevant to Purchaser s calculation of the Actual Gross Profit and Earnout Amount in each of the Five Earnout Statements. Purchaser s conduct constitutes a breach of its duties under the Agreement that has substantially prejudiced the Sellers Representative s ability to review, evaluate and object to Purchaser s calculation of the Actual Gross Profit and Earnout Amount in each of the Five Earnout Statements. The Sellers Representative reserves the right to seek appropriate relief and/or remedies for Purchaser s violation of its contractual obligations in the appropriate forum. B. Reservation of Rights by the Sellers Representative Due to Purchaser s violation of its obligations under 5(d)(ii) of the Agreement, the Sellers Representative hereby reserves its right to amend, modify, supplement or add to the disagreements set forth in this Earnout Dispute Notice. 2. The Sellers Representative s statement of his disagreements with Purchaser s calculation of the Actual Gross Profit and Earnout Amounts in each of the Five Earnout Statements is set forth in the alternative. The assertion of one disagreement is without prejudice to the assertion of any other disagreement, whether on the same or a different topic. 3. The Sellers Representative, by stating his disagreements with Purchaser s calculation of the Actual Gross Profit and Earnout Amounts in each of the Five Earnout Statements, does not waive, but instead expressly preserves, his right to seek resolution of, and any appropriate relief in connection with, his disagreement with Purchaser s calculation and objection to Purchaser s conduct in such appropriate forums as are set forth in 5(d)(iv) of the Agreement. 11