Viacom Int'l, Inc. v. Winshall: Delaware Supreme Court Reinforces Accounting Experts' Authority To Decide Purchase Price Disputes, Restricting Collateral Attack By Disgruntled Parties

On July 16, the Delaware Supreme Court1 published an opinion that confirms and clarifies the scope of an accounting expert's authority to resolve post-closing financial disputes that parties have agreed to submit for resolution under the terms of a definitive business acquisition agreement. This decision reaffirms alternative dispute resolution as the procedure of choice for quickly resolving complicated, technical financial issues that sometimes arise in the context of purchase price adjustments.

Post-closing purchase price adjustments are almost universally present in definitive agreements for the sale of a business.2 These provisions—which include earn-out clauses, working capital adjustments, and debt/net debt true-ups—require an adjustment to the purchase price paid at closing, based on calculations relative to pre-closing targets, standards, or formulas. Such provisions set forth not only the methodology for determining the amount of the adjustment, but also a resolution process in the event the parties disagree on the amounts to be paid. These processes typically include (i) an exchange of the relevant financial calculations and access to work papers and supporting documentation, (ii) submission by the recipient party of objections to the calculation, (iii) a period of time within which the parties will attempt to resolve the dispute in good faith, and (iv) submission of the unresolved issues to a neutral accounting firm for ultimate resolution.3

Resolution dispute provisions sometimes refer to the financial arbitrator as an "expert and not as an arbitrator." Frequently, such provisions state that the resolution of the dispute by the independent accountant shall be "final, binding on and not appealable by the parties." These dispute resolution provisions otherwise take a variety of forms, including stating the basis upon which a party may bring a claim to dispute the final determination (such as fraud or manifest error). Importantly, however, if the provision is intended as a binding agreement to arbitrate in contracts involving interstate commerce, the Federal Arbitration Act ("FAA") applies to resolution of the dispute. The FAA limits the bases upon which a party can avoid the arbitrator's decision through litigation. It was this approach that the plaintiff pursued in disputing the determination of the independent accountant in the Viacom case.

The Viacom dispute concerned an earn-out provision based on gross profit from the sales...