Shareholder disputes [Part 2]: post-acquisition surprises (the kind you won’t like)

03 March 2022 by Paul Croft

Post-acquisition disputes often emerge at the time that completion accounts are prepared after an acquisition or where a buyer discovers new things about the business that weren’t disclosed during the due diligence process. Disputes may also arise over the computation of earn-out clauses and where there is an alleged breach of warranty or indemnity given in the Sale & Purchase Agreement (SPA).

Post-acquisition accounting disputes

Post-acquisition accounting disputes generally centre on the “completion mechanisms” applied in preparing the completion accounts (or subsequent accounts for calculation of earnouts), accounting definitions or the manner in which accounting standards or practices written into the SPA are applied.

Accounting loopholes arise where the SPA does not adequately and accurately describe the accounting standards, policies and practices that apply in preparing the completion accounts, leaving the buyer / seller exposed to “price chipping”. Similar issues can also arise when the seller disputes the accounts prepared by the buyer for the purpose of meeting any earnout obligations.

How can I proactively manage the risk of a post-acquisition accounting dispute?

Here are some tips to remember when drafting the SPA that assist in reducing the scope for post-acquisition accounting disputes, including earnouts:

  • The terms “financial statements” or “accounts” can mean different things - be specific about the type of accounts referred to in the SPA;
  • Avoid using the term “management accounts” and/or simply attaching balance sheet and P&L extracts. That is because management accounts, or extracts therefrom, haven’t necessarily been prepared in accordance with accounting standards, are not accompanied by stated accounting policies and will likely not include accounting adjustments often made only at year end for the purpose of preparing financial statements;
  • A buyer may often seek to apply Generally Accepted Accounting Principles (GAAP) as the primary basis for preparing the completion accounts as they may be better aligned with its own accounting, and may give the buyer more wriggle room to extract value;
  • On the other hand, if you’re the seller, it’s in your interests to ensure that the SPA states that the completion accounts will be prepared in line with the following hierarchy:
    1. The seller’s accounting policies and practices (ensuring these are accurately and appropriately described in the SPA); then
    2. On a consistent basis with the seller’s audited or unaudited accounts (and attach a complete copy of the financial statements to the SPA); then
    3. In accordance with GAAP.

Caveat emptor: warranties and indemnities

As mechanisms for disclosing information, warranties and indemnities assist in allocating risk between the buyer and seller. However, because the protection they afford the buyer may be restricted by the fundamental principle of caveat emptor (buyer beware), warranties and indemnities generally provide the weakest level of protection to the buyer in the SPA.


In lay terms, a warranty given by a seller is a statement of fact on a subject (such as the profitability or performance of the target business) given to the buyer about known problems that relate to the subject. As such, the subject of a warranty often stems from information provided by the seller to the buyer during the period of due diligence and, therefore, should not be viewed by the buyer as a backstop for failing to conduct proper and thorough due diligence.

As warranties are only true at the time they are given, they may not hold true where there is a delay between exchange and completion. Accordingly, buyers should seek to ensure that the warranties are repeated through to completion.

The remedy for a breach of warranty will be to place the buyer in the same position but for the breach, subject to the usual rules of mitigation and remoteness. That is, the loss will be measured as the difference between the market value of the target business “as warranted”, and the “as is” value of the target business, given the breach of warranty.[1]

Understandably, the buyer’s opening gambit will likely be that the “as warranted” value of the target business should be at least equal to the actual price paid. However, there is no certainty that the buyer will be successful in that claim. Retrospectively litigating the value of the target business carries numerous valuation-related risks, including the risk that the seller may be able to reduce the damages payable by successfully arguing that the buyer overpaid for the target business and that the “true” market value was less than the price paid. Conversely, the buyer may successfully demonstrate that it did, in fact, strike a good bargain, and that the “true” market value was greater than the price paid.[2]


Indemnities are given in respect of specific and known matters that clearly fall outside the responsibility of the buyer (such as environmental risks, product liability and tax matters). As indemnities operate to provide for dollar-for-dollar compensation related to the relevant risk, they generally afford the buyer the opportunity to litigate a claim in debt, rather than in breach of contract and avoid many (but not all) of the difficulties associated with litigating breach of warranty claims.

As with warranties, indemnities are useful to the extent that the seller will be able to pay, or around to pay, them out should a breach arise.

Need advice?

Early forensic accounting input offers a simple, effective way for you to proactively manage the costs and risks associated with litigation. Engaging early will help to narrow the material financial and/or accounting issues in dispute, and identify the critical evidence required to develop and support the optimum legal strategy. This will help you lay the groundwork for building robust, defensible claims.

Contact one of our forensic accounting experts to discuss the problems at hand and discover why our services are right for you.

[1] South Australia Asset Management Corporation v York Montague [1997] AC 191 at 216.

[2]  UDP Holdings Pty Ltd (subject to Deed of Company Arrangement) (Receiver & Manager Appointed) v Ironshore Corporate Capital Ltd (No 2) [2019] VSC 645 (9 October 2019) at 136.