In mediation, an innovative solution is available to help resolve post-M&A transaction accounting, business valuation, and damages disputes: an independent accountant or business valuator can be jointly retained by the parties to be the neutral expert adviser to a mediator. Accounting and valuation expertise are often particularly helpful in mediation of postclosing accounting adjustments to purchase price such as working capital or earn-outs; indemnifications such as breach of representations and warranties; and fraud claims, damages, and claims of material adverse effect (or change).
Increasing Timeliness of Accounting and Valuation Expertise in Resolving M&A Disputes
The option to use an independent accountant or business valuator can be especially timely considering the increasing use of alternative dispute resolution (ADR), including mediation and arbitration, in the United States during the COVID-19 pandemic and its aftermath. In fact, a new American Bar Association study comments that, for many civil cases, “[j]udges, plaintiff attorneys and defense attorneys agree that mediation is the fairest way to resolve cases.” Am. Bar Ass’n, New ABA Study Explains Why Civil and Criminal Jury Trials Are Disappearing, YourABA (Jan. 11, 2021).
Furthermore, global M&A activity has begun its postpandemic recovery. A recent M&A activity outlook study noted:
The pandemic is not over, but the global economy is showing signs of recovery, and so is the M&A landscape. In all, 8,753 deals worth a combined $917.7 billion were closed in the first quarter of 2021. The total includes some of last year’s headline-grabbing deals . . . , but it is also an indication that confidence is returning in 2021. . . . With a quick vaccine rollout in the US, uncertainty is continuing to subside. . . . Combined [in the US], announced and recently completed deal counts are near record levels.
Global M&A Report Q1 2021, Pitchbook (May 5, 2021). Therefore, in M&A dispute situations where the issues to be decided are primarily grounded in accounting, financial, or valuation principals, this option may streamline and expedite the resolution process.
A mediation is a nonbinding dispute-resolution method, in which the parties agreed to participate, that is often facilitated by a neutral mediator who tries to help the disputing parties attain a mutually agreeable solution. When appointed as an adviser to the mediator, the independent accountant or valuator is expected to be an impartial neutral adviser who complies with the applicable ethical and competency requirements of accounting or valuation.
Potential Independent Accountant or Business Valuator Adviser Services to the Mediator
As the mediator-facilitator helps the parties work through the issues related to the dispute, there are a wide range of potential independent accountant or business valuator adviser services that could be selected and custom-tailored to the needs of the process:
- Assessment of the accounting, financial, valuation, or damages facts and circumstances
- Feedback regarding potential
- Accounting, financial, valuation, or damages issues that may be governed by underlying documents, such as the terms of a sale and purchase agreement between the companies
- Applicable accounting, financial, or valuation standards
- Selection of accounting, financial analysis, valuation, or damages methodologies
- Effects of standards of value, levels of value, or premises of value
- Accounting, financial, business valuation, or damages analysis of the subject ownership interests or company, as of a specified date or dates
- Consideration of information provided by both parties
- Incorporation of assumptions regarding disputed accounting, financial, or business valuation issues or damages quantification issues from each of the parties, and preparation of scenario analyses quantifying hypothetical results
- Observations regarding each of the party’s proposed analyses (if the parties have submitted asserted accounting, financial, valuation, or damages analyses)
- Assessment of financial performance, comparative peer trends, and forecasts
- COVID-19-related impacts on the earnings, balance sheet, projections and forecasts, and/or value of the business
- Development of a comparison of and observations regarding the key drivers, strengths, and weaknesses of each of the party’s proposed accounting, such as
- Selection of accounting principle and method
- Factual foundation
- Development of a comparison of and observations regarding the key drivers, strengths, and weaknesses of each of the party’s proposed valuations or damages calculations, such as
- Assertions regarding whether an accounting adjustment item is a one-time or recurring adjustment for damages calculation purposes
- Normalization adjustments
- Projected future cash flows
- Terminal value calculations at the end of the cash flow projection period
- Weighted average cost of capital
- Comparable companies
- Weighting of valuation factors
- Stakeholder-level discounts
Potential Advantages of Using an Independent Accountant or Business Valuator
Using an independent accountant or business valuator in this capacity can offer the following advantages:
- Incorporation of the specialized and focused technical expertise of the accounting or valuation expert as neutral adviser with the facilitative skills of the appointed mediator
- A customized, nonbinding accounting, financial, valuation, or damages evaluation of the specified issues submitted
- Non-public-record confidentiality
- An expedient option, especially when courts are closed or have reduced access
- Maintenance of the ability of each of the parties to consult with legal counsel throughout the process
Increasing emphasis on ADR has led to a timely, attractive option: the use of accounting and valuation expertise in resolving M&A transaction disputes, providing a variety of potential independent accountant or business valuator adviser services. This innovative option—which is helpful to the mediator and advantageous to the parties—may streamline and expedite the resolution process where the issues to be decided are primarily grounded in accounting, financial, or valuation principals.
John Levitske¸ CPA, ABV, CFF, CGMA, ASA, CFA, CFLC, CIRA, is a senior managing director with the Chicago, Illinois, office of Ankura Consulting Group, LLC.
|Ankura is the Litigation Advisory Services Sponsor of the ABA Litigation Section. This article should be not construed as an endorsement by the ABA or ABA Entities.|
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