M&A activity in Ireland is growing, but post-transaction disputes continue to be a risk. Clear SPA drafting, due diligence and dispute resolution mechanisms are key to safeguarding deal value, writes Simon Rattigan
Currently, there is a sense of positivity surrounding mergers and acquisitions (M&A) activity in Ireland. We saw an increase in private equity-backed transaction activity in 2024 and this is expected to continue this year.
The lowering of interest rates will make financing deals more affordable, and Ireland will remain an attractive location for foreign direct investment (FDI).
Increased deal activity is encouraging for the economy, but transactions are not without risk, and post-transaction disputes remain a persistent factor in the M&A landscape.
Disputes
Buyers and sellers generally have different financial incentives, often leading to disputes when expectations set during the deal-making process are not met in the post-closing phase.
To help safeguard deal value, it is important to understand the main types of disputes that can arise, including completion account disputes, earn-out disputes and breach of warranty claims.
Completion account disputes
When completion accounts are used for a transaction, they are typically prepared by the buyer, incorporating adjustments to working capital and other balance sheet items, as specified in the sales and purchase agreement (SPA).
While this mechanism adds complexity, it is generally favoured by the buyer because it provides an opportunity to test the balance sheet, which is appropriate where performance and/or working capital is volatile.
Working capital disputes commonly arise when there is a lack of clarity regarding the accounting hierarchy in the SPA, which typically outlines the order of precedence.
Issues can arise when:
- The SPA prescribes a valuation approach for inventory that is not in accordance with Generally Accepted Accounting Principles (GAAP).
- The SPA states that bad debts should be fully provided for but does not clarify how they will be identified.
- The SPA requires the application of certain accounting policies but does not specify how judgment under those policies should be applied.
- The SPA is contradictory – for example, it requires completion accounts to be prepared consistently with historical accounts and practices, as well as in accordance with GAAP. This causes a challenge if historical accounts are not in accordance with GAAP.
If the accounting hierarchy in the SPA is unclear, the scope for interpretation and, therefore, disagreement between the buyer and seller increases.
Earnout disputes
Earnouts are increasingly common features of purchase agreements, where part of the consideration paid to the seller is contingent on measurable, post-closing financial performance targets, such as earnings before interest, taxes, depreciation and amortisation (EBITDA).
Earnouts are tailored to each deal and are generally favoured by buyers as they reduce uncertainty and offer cash flow benefits. However, disputes can arise when there is ambiguity in the SPA language regarding calculation methodology or the order of precedence of the accounting hierarchy.
This can give rise to issues if there are changes in accounting polices during the earnout period or if the earnout calculation departs from specific accounting policies adopted for other reasons (i.e. preparing accounts for audit).
Breach of warranty claims
During a transaction, the seller will typically make representations to the buyer about the company regarding material financial, operational, legal, and compliance matters.
Disputes can arise from factual misstatements made by the seller, which only come to light post-closing, caused by, for example:
- Material undisclosed liabilities;
- Status of key customer relationships and contracts;
- Compliance of financial statements with GAAP;
- Undisclosed legal or employment issues; and
- Fraudulent activity by management or employees.
Where factual misstatements are identified post-closing, the buyer may seek to recover losses from the seller if it has suffered financial and/or reputational damage.
As post-transaction disputes look to be on the rise, it is important to consider both prevention and cure.
Mitigation
Avoiding disputes is always preferable, and the risk of earnout disputes and completion account disputes can be mitigated with robust drafting of the SPA:
- that avoids flexibility/judgement in calculation methodologies;
- is specific in terms of accounting policies and assumptions; and
- establishes a clear accounting hierarchy.
While misrepresentations may not be preventable, a robust due diligence process can help mitigate certain risks associated with a transaction. However, buyers often only gain full access to the financial and operational information when they take ownership.
Post-closing reviews can help buyers identify issues at an early stage, minimise the disruption to the business, quantify the financial impact, and understand legal remedies available.
Dispute resolution
Disputes can still arise even with a well-drafted SPA, which is why dispute resolution clauses should introduce a level of certainty to the determination process. In most cases, the SPA will refer the matter for independent expert determination, but it is important that these clauses:
- Establish a clear expert selection mechanism;
- Preferably, identify the expert, not just the firm. Alternatively, they should be as specific as possible in identifying the required expertise;
- Clearly establish and limit which items can be disputed;
- Ensure the role of the expert is clearly defined, and the scope is within their area of expertise – i.e. an accounting expert cannot determine a point of law; and
- Clearly outline the dispute resolution procedure, including specific timelines.
As deal activity in Ireland is expected to grow, post-transaction disputes remain a significant risk. To protect against these risks, businesses should prioritise the robust drafting of SPAs and ensure that clear dispute resolution mechanisms are in place to minimise business disruption. Buyers should also consider conducting post-transaction reviews at an early stage to investigate areas of risk or concern following the deal closing.
Simon Rattigan is Director of Forensic and Investigation Services at RSM Ireland
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