Presenting a live 90-minute webinar with interactive Q&A M&A Post-Closing Disputes: Minimizing and Resolving Disputes Over Working Capital Adjustments and Earnouts THURSDAY, SEPTEMBER 15, 2016 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Gregory S. Brow, Partner, Dentons US, Atlanta Frank A. Lazzara, Managing Director, FTI Consulting, New York I. Bobby Majumder, Partner, Perkins Coie, Dallas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Forensic & Litigation Consulting Post-Acquisition Dispute Advisory Services Services Services Highlights Professionals with financial and industry expertise in business valuation, accounting, economics, real estate finance and dispute resolution Post-acquisition purchase price analysis and business value assessment Global arbitration and mediation services, and expert witness testimony FTI Consulting has Advised and Testified in Cases Involving: Working capital disputes Balance sheet disputes Income statement disputes Earn-out/contingent purchase price disputes EBITDA and EBIT calculation disputes Financial statement misrepresentation claims Generally Accepted Accounting Principles and consistency disputes Subsequent events and hindsight disputes Changes in accounting policies or practice disputes Estimation technique disputes Thresholds and baskets disputes Breach of representations and warranties A post-acquisition dispute can be disruptive, time consuming and costly. With proven expertise in complex accounting issues and financial valuation matters, the professionals at FTI Consulting provide effective, expedient conflict resolution consulting services. FTI Consulting has the resources to help companies navigate complicated post-acquisition disputes. We possess a depth of experience in analyzing post-acquisition purchase price issues, from assessing the value of businesses to facilitating dispute resolution. We understand the technical aspects of determining a purchase price adjustment and quantifying damages. We work hand in hand with attorneys and financial executives, tackling a broad range of issues from shareholder disputes to independent purchase or sale transactions. Our professionals offer innovative solutions to resolve disputes from the point of view of the buyer, the seller or as an independent arbitrator/mediator. We can assist with such critical issues as: Due diligence Risk exposure for a purchase price adjustment Working capital adjustments Closing data balance sheet claims Resolution of earn-out issues Assessment of benefit of the bargain damages, lost profits or diminution in value A Broad Scope of Advisory Services The FTI Consulting team of post-acquisition advisors has the right qualifications our professionals are well versed in accounting, business valuation, economics, finance, real estate and litigation. Many hold doctorates or advanced degrees in their field or have attained professional designations such as Chartered Financial Analyst, Certified Fraud Examiner, Certified Public Accountant, Chartered Accountant and Accredited Senior Appraiser in business valuation. Financial Expertise in All Facets of Dispute Process The skilled advisors at FTI Consulting deliver expert opinions on damages, as well as evaluations of damage estimates given by other experts. We assess the adequacy of the due diligence performed by the purchaser from either the seller s or the purchaser s point of view. When a company files a claim for lost profits or diminution-in-value damages after an acquisition, we help determine an appropriate purchase price adjustment. Effective Arbitration and Mediation Support If a dispute centers upon accounting practices, we can provide arbitration and mediation assistance to both parties at a cost that is normally substantially lower than the cost of litigation. We offer international arbitration services in global disputes that are usually conducted in New York, Stockholm, London, Paris or The Hague under international arbitration rules. Often these cases involve large capital/construction projects, postacquisition disputes and joint ventures. CRITICAL THINKING AT THE CRITICAL TIME
Forensic & Litigation Consulting Post-acquisition Dispute Advisory Services Material adverse change disputes Benefit-of-the bargain valuation, diminution-in-value and lostprofits damages Contractual valuation formula disputes Fair market value, fair value and investment value Valuation fractional-interest discounts for minority position and lack of marketability Fraud allegations Construction dispute resolution Expert Witness Testimony In the courtroom, persuasive testimony requires a combination of superb credentials and successful delivery. Drawing from our extensive professional network, we assemble a team of innovative thinkers with deep knowledge of the given industry. We also work to make complex issues understandable, supporting our testimony with compelling graphics and exhibits. We have experience testifying on matters ranging from liability to economic damages, including lost profits, diminution in value and other technical accounting issues. Thorough Analysis of Business and Real Estate Valuation Our professionals undertake a complete analysis of multiple factors, including past financial performance, ability to penetrate future markets and management proficiency to determine the fair market value of closely held businesses. Purchase price disputes often arise from discrepancies in the documents during the course of due diligence and during the true-up or working capital process, as outlined in the purchase agreement. We analyze the difference between sellers and buyers accounting practices and determine which complies with GAAP consistently applied in accordance with the usual provisions of the purchase agreement. When a company claims diminution of value as a result of a stock acquisition, we evaluate stock prices, possible misrepresentations of earnings capability by the seller, and possible losses which may be due to the buyer, as a result of not receiving the benefit of its bargain. When needed, we offer supplemental, industry-specific expertise, as well as experience in electronic evidence collection, complex data analysis, financial reporting and securities investigations. The Right Resources at the Right Time The multidisciplinary nature of FTI Consulting allows us to tap into a broad range of expertise. Our core functional specialties include complex accounting issue analysis, financial valuation, damages quantification, financial investigations, complex data analysis and fraud risk avoidance, as well as litigation support services. Combined with our in-depth industry expertise that spans healthcare, pharmaceuticals, energy and utilities, telecom and retail, as well as many others, we can supplement our team to meet the changing needs of your case. Frank Lazzara 212 841 9336 frank.lazzara@fticonsulting.com CRITICAL THINKING AT THE CRITICAL TIME About FTI Consulting FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. www.fticonsulting.com 2015 FTI Consulting, Inc. All rights reserved.
Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY 10003 www.law360.com Phone: +1 646 783 7100 Fax: +1 646 783 7161 customerservice@law360.com When Hindsight Is Not 20/20 In Purchase Price Disputes Law360, New York (May 13, 2015, 4:12 PM ET) -- Hindsight, renowned for perfect clarity or being 20/20 when one looks back at a forecasted event with the benefit of knowing its outcome, was the subject of our analysis, and our quantitative findings were found to yield results that were closer to 40 percent/60 percent[1]. Though not interpreted as being determinative in the context of resolving post-closing purchase price disputes, we found that the consideration of evidence learned in hindsight and introduced into closing working capital arbitration proceedings by the parties was indicated as being considered in about 40 percent of the matters/claims we analyzed. This should be somewhat of a surprise to other accounting experts as it was to us who practice this specialty. But more importantly, it may suggest some very useful planning insight for party advisers. The Analysis Frank Lazzara Our data set consisted of 22 nonstatistically selected post-closing purchase price disputes that produced a population of approximately 150 working capital claims, which were the subject of 13[2] proceedings that resulted in the issuance of an arbitrator s reasoned report. We then analyzed each individual claim s determined finding as reported by the empanelled arbitrator, along with the underlying arguments and evidence put forth by the parties. We sought to identify instances of the use of events occurring after the preparation date of the subject financial statements for indications that the working capital arbitration considered the hindsight data. Our analysis was undertaken because we often observe the introduction and use of hindsight information into post-closing arbitrations. As practitioners who regularly advise on and adjudicate working capital disputes, we recognize the impropriety of basing claims on such data. Namely, proposing the use of data that didn t yet exist as of the date of the preparation of the closing financial statements is effectively, impossible. Because financial statement preparation requires a significant amount of applied judgment and financial forecasting, pointing to an eventual outcome as evidence that a working capital asset or liability estimate was flawed, is plainly improper.
The Rules of the Road The AICPA Forensic and Valuation Services Section practice aid on mergers and acquisition disputes focuses on the theoretical, legal and accounting basis of M&A dispute consulting and captures the essence of the guidelines applied by practitioners who regularly advise on and adjudicate working capital disputes. The M&A practice aid does not establish generally accepted accounting principles (GAAP) and as indicated within the Notice To Readers, it is designed to provide illustrative information with respect to the subject matter covered. It does not establish standards or preferred practices. It does, however, refer to the Subsequent Events guidance found in GAAP, which is commonly applied for purposes of identifying the post-closing time period for which information can be considered in the preparation of the financial statements that are used to derive closing working capital. This cut-off point for allowable information used to derive estimates to be included in the subject financial statements is sourced in ASC 855, Subsequent Events[3], which is a component of U.S. GAAP. The implementation guidance to ASC 855-10-25-1, which addresses subsequent events that are to be recognized in the subject financial statements (i.e., Type I Subsequent Events ), provides examples in ASC 855-10-55-1 that illustrate the concept of using all available information to refine balance sheet estimates about conditions that existed at the balance sheet date. Another element of U.S. GAAP worthy of mention in the context of the use of all available information to establish and refine financial statement estimates is ASC 250 Accounting Changes and Error Corrections. ASC 250 defines an accounting change a change in accounting principle, an accounting estimate or the reporting entity and with respect to a change in an accounting estimate, which is often at the heart of working capital disputes that utilize hindsight, provides: A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. From the perspective of practitioners and financial statement auditors, this makes intuitive sense as the alternative to a prospective treatment of changes in estimates would entail a never-ending cycle of restating prior estimates and associated financial statements as actual results become known and vary from accrual-based estimates. In short, GAAP requires the consideration of all available information regarding events that affect conditions existing at the relevant financial statement dates through either their issuance, or delivery to the respective party. ASC 855 is the de facto guide to information that is in play for the preparation of the balance sheet that will be used to derive the final working capital figure and requires the preparer to consider all information available through the date of preparation, or the date financial statements are available to be issued, but not beyond. The Results Based on our analysis, we found that in approximately one-third of the claims arbitrated[4], at least one of the parties made reference to information learned after the date of the preparation of the final balance sheet. This tactic, often intended to appeal to the arbitrator s sense of fair play and equity, ran the gamut from merely corroborating a proposed account balance derived with available information to serving as the basis for a submitted adjustment. Working-capital disputes are commonly arbitrated from 12 to 24 months or longer after the preparation of the subject balance sheet. Accordingly, parties will become aware of information that develops during this passage of time and often contradicts estimates
included in the working capital calculation, such as liability estimates for loss contingencies, obsolescence adjustments for inventory and contra-asset calculations for potentially uncollectible customer accounts. For example, although a customer account that is part of an arbitration dispute appeared fully collectible at the date of financial statement preparation, parties may find it difficult to resist tempting the arbitrator with a lingering, uncollected and outstanding balance 12 months later. With regard to those claims in our analysis that did endeavor to utilize information developed after the preparation of the closing balance sheet, we were surprised to find that arbitrators cited their consideration of such information in about 40 percent of the matters where such information was introduced. Perhaps most significantly, we noted that when an accountant was the empaneled arbitrator, GAAP guidance was nearly always the rule and evidence that was time-barred by GAAP s Subsequent Events rules was not considered. Further and as to the matters that the authors have analyzed, there was one case that strayed from the norm where the arbitrator, who was an accountant or auditor but not a regular practitioner in the purchase-price disputes discipline, specifically identified the subsequent events date as not equal to that prescribed by ASC 855 but rather as the date on which the arbitration concluded prior to issuance of the report of their findings. Accordingly, removing this matter s results from our findings yields a rate of 23 percent[5] wherein arbitrators indicated some consideration was given to evidence learned in hindsight. Opportunities In the recent near record-setting merger and acquisition climate of 2014 and 2015, to date, we view our findings as planning opportunities for advisers to consider in both structuring the arbitration provisions in purchase agreements, and in developing their submissions should they be called upon to assist in an arbitration. Choose Wisely While recognizing that our experience is merely that, it nonetheless provides a common thread in that accountants who regularly practice as arbitrators are much more likely to adhere to the tenets of Subsequent Events and GAAP. Accordingly, if there is an absence of accounting rigor in the subject company s recurring preparation of financial statements, party advisers who find their client in a working-capital dispute are wise to consider the professional biographies and experience of the arbitrator options carefully. Write Your Own Ending In light of the likelihood that a working capital arbitration may be unavoidable or even expected in your subject transaction, take care to specify the timeline through which desired information will be permitted to enter into the arbitration proceeding. Namely, if the subject company is traditionally late in identifying relevant data and preparing its financial statements, buyers should endeavor to negotiate for additional time to allow necessary information to surface especially if you expect closing working-capital calculations to require extensive informationgathering efforts.
Alternatively, if you re on the sell-side of a target that requires an inordinate amount of additional time to firm up their financial estimates, seek to limit the extent of time permitted for financial statement preparation, specify a limited degree of variation from an agreed-to target component of working capital, or use the opportunity to negotiate some type of concession. Give One Away If you find yourself in an arbitration proceeding and you identify an opportunity to illustrate your knowledge of the rules of Subsequent Events and a sense of fair play, show the arbitrator that you are willing to give one away that you may have won, technically. For example: Subsequent Collections: A receivable that was collected despite a supportable reserve at closing... But Don t Give Away Too Much Inevitably, the party tasked with preparing the final balance sheet that will drive working capital (usually the buyer) may need additional time. It is incumbent on the grantor of this extension (usually the seller) to specify parameters, if they so choose, to limit the subsequent events information window to that which would have resulted from the originally agreed-to purchase agreement. Accordingly, when accommodating the delayed submission of working capital balance sheets, be specific about the date through which relevant information will be permitted to impact the judgment surrounding accounting estimates. Conclusion Our view is that parties are limited in the extent of hindsight data they can apply in a purchase price dispute but our analysis indicates that there are alternative interpretations. Accordingly, we encourage our readers to take advantage of our hindsight observations summarized herein and work to structure agreement provisions or select arbitrators to maximize your chances of prevailing in a working-capital purchase price dispute arbitration. By Frank Lazzara, Clara Chin and Stephanie Brown, FTI Consulting Frank Lazzara is a managing director, Clara Chin is a senior director, and Stephanie Brown is a senior consultant with the forensic and litigation practice of FTI Consulting. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] In analyzing reports of findings, we noted that arbitrators made reference to party-introduced hindsight evidence in 39 percent of the matters (5/13), representing 36 percent of such claims (18/50), while approximating 61 percent of the dollars disputed ($32 million/$53 million). [2] We excluded nine of the matters in our original sample due to either their settlement prior to the
issuance of an arbitrator s report of findings or due to an overarching focus of the dispute on earnout achievement. [3] Historically, Subsequent Events were prescribed by the auditing guidance, specifically "Subsequent Events" as provided in AU 560 AICPA Auditing Standards (SAS) Codification AU Section 500: The Fourth Standard of Reporting AU Section 560: Subsequent Events, or AU 560. Effective with the issuance of SFAS 165 (Subsequent Events) in May 2009, the standard became the subject of GAAP, which in July 2009, were codified into ASC 855. [4] Fifty of the 154 claims analyzed, representing $53 million of the $122 million arbitrated differences, or 43 percent in terms of dollars. [5] Removing the claims associated with the indicated outlier results in nine claims out of 40 where an arbitrator s reasoned report considered hindsight evidence versus the complete populations findings of 18 out of 50. All Content 2003-2015, Portfolio Media, Inc.