United States: Retaining Neutral Accounting Experts In M&A Working Capital Disputes

Last Updated: March 24 2016
Article by Stephen M. Fields

A typical provision in a purchase and sale agreement requires the buyer, post-closing, to provide a "true-up" of the target's net working capital agreed upon by the parties at closing. If the seller disagrees with the contents of the true-up (items or amounts) it is normally required to send the buyer a Notice of Objection to such calculation and, if the parties cannot thereafter amicably resolve their differences, such dispute is typically referred to an accounting firm designated in the purchase agreement as an independent expert to render a "final, conclusive and binding" decision resolving such dispute.

What is involved in retaining the independent expert? First, note that this is a joint retention by buyer and seller. So, notwithstanding that a certain Big 4 or other accounting firm has been designated to so act in the purchase agreement, the parties, unless otherwise specified, have the ability to agree, or not, to the terms set forth in the engagement letter as proposed by the independent expert. Thus, each side has leverage to either expedite, delay or derail the arbitration process and thwart the original selection of the independent expert. Such tactics can take the form of objecting to the terms of the engagement letter or to the selection of the individuals at the accounting firm proposed to make the final determination. Second, the parties must agree upon the terms of the independent expert's engagement. The standard independent expert engagement letter usually contains two attachments: Attachment "A," which typically sets forth three columns, i.e., "Items in Dispute," "Buyer's Position" and "Seller's Position," and Attachment B, which sets forth timeframes and events. When the decision letter is ultimately rendered by the independent expert at the end of this process, a fourth column will be added by the independent expert which will reflect such final determination and either increase or decrease the target working capital established by the parties at closing. Notwithstanding the contents of the true-up and the Notice of Objection, the parties usually have the ability to mutually add additional items and amounts in dispute to Attachment "A." Often, the parties cannot agree as to the characterization of the items in dispute. Some independent experts allow the conflicting points of view to each be set forth in the applicable "Items in Dispute" column. Others refuse to act until the parties are in agreement.

One item in dispute that often generates considerable controversy is whether the refund to the seller of taxes with respect to pre-closing periods and loss carrybacks not yet received should be determined and/or paid only after the buyer receives same from the IRS, or whether an estimate of such refund should be included in the working capital calculation determined by the independent expert. The standard net working capital adjustment provision in most purchase agreements provides that any such refunds received by the buyer post-closing must be transmitted to the seller only upon receipt thereof by the buyer from the IRS. As we all know, waiting for the IRS to act could result in a significant delay in the seller receiving such payment. That language, however, by itself, is not necessarily dispositive as to the timing of transmission of refunds because typical purchase agreements also provide that the parties can, if they so desire, treat such refunds as part of the working capital computation. That would allow the independent expert to include such refunds within its final determination, if they are based upon reasonable estimates, which is what GAAP requires in order to do so.

To illustrate the point, in a recent dispute the independent expert stated that GAAP requires tax assets to be recognized in the period when it is more likely than not that an entity is entitled to the economic benefits of those tax assets. So, for example, if transaction bonuses in a leveraged buyout are payable and become a liability and an expense at the time of closing, then the related benefits of the net operating loss (NOL) tax asset created by the transaction bonuses also become more likely than not and should be recognized at the time of closing. As a result, such NOL tax asset was determined by the independent expert to be included in the working capital computation at the time of closing and the payment thereof was not required to be held in abeyance pending the buyer's receipt of the refund from IRS.

Many purchase agreements are silent on when tax refunds shall be payable, or leave it to the parties to mutually agree. If sellers wish to expedite matters, they should negotiate for the independent expert to award such refunds as part of its mandate in the absence and in advance of remittance from IRS. This will allow the seller to expeditiously receive these refunds absent being subject to intentional or other delays caused by tardy filing by the buyer of amended tax returns seeking such refunds. Including this item in the appropriate column of Attachment "A" to the engagement letter should be helpful in conferring such authority upon the independent expert even if the purchase agreement is silent or permissive (but not mandatory) with respect to the scope of authority so granted to the accounting firm so engaged. An interesting question arises as to what the disposition should be if, when the ultimate IRS refund is received years later, such refund is in an amount significantly different than the "reasonable" estimate upon which the independent expert rendered its working capital decision. That discussion is beyond the scope of this article.

As noted above, Attachment "B" to the independent expert engagement letter usually sets forth a schedule of events and time frames which the parties are required to adhere to. The first meaningful event is the submission of each party's "Statement of Position" to the independent expert. When each side has submitted its Statement of Position, the independent expert provides copies thereof to the opponent and time is then provided for each party to reply to the other party's "Statement of Position." The independent expert typically reserves the right, during specified time periods, to send interrogatories to one or both parties requesting a written response thereto within additional time frames. A frequently asked question from the independent expert might be: "If there is a conflict between GAAP and the Purchase Agreement, which shall govern?" Answering that question is not always simple when the purchase agreement says its accounting terms are governed by US GAAP, consistently applied. Failing to receive responsive, satisfactory or clarifying answers, the independent expert may issue supplemental interrogatories or, in some cases, request a telephone conference or, rarely, in-person meetings with both sides. Depending upon the wishes of the parties as reflected in the content of the engagement letter itself, the independent expert may be asked to render a long form reasoned decision or a short form conclusion-oriented decision. In either case the engagement letter generally provides that either party may only contest arithmetical calculations, and all additional substantive arguments and materials received after the initial decision letter is issued will be disregarded or discarded. Note that the decision of the independent expert will not generally award interest, attorney fees or other costs unless specifically articulated in the purchase agreement. Given the paucity of precedent in this area, the best practice is probably to also provide for recovery of such items in the engagement letter if that is what is intended.

How is the independent expert's determination enforced? Once the engagement letter is executed, the independent expert should be the final authority as to matters within its purview. Courts and arbitration panels such as the American Arbitration Association appear to have given deference to the decisions of these independent experts absent fraud or conflicts of interest, the latter of which is usually initially addressed in the engagement letter. However, even though the decision letter is "final, binding and conclusive," the quoted language by itself may or may not be sufficient to confirm the working capital decision of the independent expert so as to have a judgment entered thereon similar to the confirmation and entering of a judgment based upon a commercial arbitrator's award. Litigators generally recommend that the parties add language to the purchase agreement and the independent expert's engagement letter to the effect that such award may be entered and reduced to judgment in a court of competent jurisdiction so as to enable the prevailing party to enforce the terms thereof if payment is not made when required. The terms of the typical independent expert's engagement letter are required by the independent expert to be "confidential," so any public disclosure thereof, even converting the award to a judgment which is publicly filed, may require a carve-out to the terms of such letter.

What strategic considerations should parties to working capital disputes be mindful? Given the above process, which is the modus operandi of the Big 4 accounting firms, several questions arise in how to strategically position the arguments on both sides. First, will the independent expert review the true-up and the "Notice of Objection" or only the Statements of Position and replies? If so, how detailed should those documents be? Do the parties want to state their full positions in the true-up and Notice of Objection documents, or, should they save some ammunition for the Statements of Position in the event no resolution can be achieved before having to utilize the services of the independent expert?

Other issues related to the net working capital adjustment may also arise that are outside the purview of the independent expert. For example, what happens if the buyer delivers its true-up significantly later than required under the terms of the purchase agreement? Or, what happens if one party refuses to agree to the terms of the engagement letter? The independent expert cannot resolve these issues because it has not been engaged to do so, and thus the parties will be relegated to the other dispute mechanisms set forth in the purchase agreement.

One thing is for certain. No careful lawyer or private equity executive should go down this dispute resolution path (or sign a purchase agreement) absent guidance from an expert well versed in GAAP and the nuances of such a potential dispute, especially if large sums are involved.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
24 Oct 2017, Seminar, Washington, DC, United States

The Dentons Forum for Women Executives invites you to join us for a luncheon featuring guest speaker Liza Mundy, journalist and author. Ms. Mundy recently released her latest book, Code Girls, the riveting untold story of more than 10,000 spirited young American women who cracked German and Japanese codes to help win World War II.

27 Oct 2017, Seminar, New York, United States

Please join us for a milestone event, our 10th annual CLE Seminar for In-House Counsel.

1 Nov 2017, Seminar, Washington, DC, United States

Celebrate the 58th anniversary of Dentons' Government Contracts practice

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.