Delaware Supreme Court: the purchase price adjustment must be “correctly” if not “systematically” applied

In a recent case examining the purchase price adjustment provision after a purchase contract closes, the Delaware Supreme Court ruled that the agreement required that the provision be applied correctly when determining the price. final purchase, even if this application is incompatible with previous practice.

Golden Rule Financial Corp. vs. Shareholder Representative Services, LLC concerned a dispute between a buyer and a seller regarding the final purchase price of the business in question. The parties’ purchase contract included a mechanism that provided for the purchase price to be adjusted upward or downward after closing, depending on whether certain metrics were below or above the targets set by the parties at signing. To determine whether the adjustment would result in an additional payment to the seller or a refund to the buyer, the agreement stipulated in the relevant part that the adjustment to the purchase price would reflect a specified accounting standard – ASC 606 – which was already incorporated. in the objective of the company’s financial statements. Regarding the dispute between the parties, the purchase contract also stated that the purchase price adjustment would be prepared using “applied consistently” accounting principles.

When calculating the post-closing purchase price adjustment, the buyer determined that the company consistently but incorrectly applied ASC 606 in its pre-closing financial statements. By correctly applying ASC 606, the buyer calculated that the final purchase price would be to augment of several million dollars. By using the incorrect app that the company used previously, the purchase price would be to diminish of several million dollars. The seller felt that the correct application should be used. The buyer disagreed and sought redress, asking the Delaware Chancery Court to find that the purchase contract required a consistent, but incorrect, application of ASC 606.

The Chancellery Court disagreed, and on December 3, 2021, the Delaware Supreme Court upheld. Given the clear language of the purchase contract and the specific reference to the application of ASC 606, as opposed to the more general reference to the consistent application of accounting principles, the Supreme Court agreed with the decision of the Court of Chancellery that the emphasis on the term “” consistently “ignored both the parties’ agreement to use ASC 606 and the fact that agreed accounting principles must also be” applied. ” asserting, the Supreme Court explained that the blessing of an incorrect application of ASC 606 would result in this standard “not being applied, despite the parties’ express agreement to apply ASC 606.” In essence, allowing the parties to continue to apply ASC 606 incorrectly, even if it is consistent with the previous treatment, would result in its non-application at all, contrary to the purchase contract.

In light of the decision of the Delaware Supreme Court, parties to purchase contracts governed by Delaware law should pay particular attention to the clarity of the wording of the purchase price adjustment provisions and the calculation precise of these adjustments. Buyers, in particular, should take steps to ensure during the due diligence process that they understand how the target company prepares its financial statements.

Eleanor C. William