Preparation of Completion Accounts – Applicable Accounting Policies’

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Posted in:Banking and Finance, Corporate and Commercial|September 29, 2014 | Join the mailing list

Upon completion it is common practice for up to date and accurate accounts to be prepared for the target company. This is usually used as a basis for establishing the final purchase price. Owing to the finality and importance of the completion accounts
they are an area which is particularly susceptible to disputes.

In a recent case, Shafi v Rutherford, the Court of Appeal considered the construction of a provision contained within the share purchase agreement which purported to govern the accounting policies that were to be applied to prepare the completion accounts.

The provision provided for the accounting policies, principles, practices and procedures that the target company used in preparing its last annual accounts to be applied to the preparation of the completion accounts.

Whist preparing the completion accounts, it became apparent that in the last annual accounts of the target company, certain equipment leases had been treated in a way in which did not comply with the applicable accounting standards, and resulted in a lower
liability. A dispute arose as to whether the completion accounts should ignore the applicable accounting standard and maintain the error contained within the last annual accounts of the target company, or, to correct the error so that the accounts met the
applicable accounting standard.

As with all well drafted contracts, a mechanism for resolution of disputes was provided for within the share purchase agreement. Accordingly, an expert was appointed by the parties to make a determination. The expert determined that although the treatment of
the leases was not in accordance with the applicable accounting standard, he was bound by the share purchase agreement to prepare the completion accounts with the same method as the last annual accounts had been prepared, as such maintaining the error. The
expert determined that to deviate for the specific practice of the target company would be outside of his instructions.

The respondent refused to be bound by the expert determination, submitting that the determination was not enforceable, and the Claimant consequently issued proceedings seeking a judgment that the respondent was bound by the terms of the determination, which
would have resulted in a further £70,000 being due to the Claimant.

The High Court found that the conclusions of the expert were wrong and, as such, the determination was not valid or enforceable. Although the leases had been treated incorrectly in the target company’s last annual accounts, the accounts had been prepared on
the basis of the applicable accounting standard. As such, The Court instead constructed the relevant provision in the share purchase agreement as requiring the completion accounts to be prepared in accordance with the correct accounting policy supplemented,
if necessary, with reference to the practices adopted by the target company.

The claimant appealed and The Court of Appeal dismissed the appeal.

In this matter, the price had been calculated and negotiated upon the last annual accounts of the target company. The net result of the Court’s construction of the provision setting out the basis by which the completion accounts would be calculated resulted
in a dramatically different final purchase price than either party had envisaged, or perhaps intended. While the Court will base its construction of the meaning of a particular provision in an agreement on its particular language and context, this judgment
suggests that if the parties expect the completion accounts for their transaction to be prepared on a basis that is consistent with target’s last annual accounts, regardless of whether the policies and practices actually applied by the target company comply
with applicable accounting standards, express wording to that effect should be used in the share purchase agreement.

Should you have any queries regarding the subject matter of this article or completion accounts generally, please contact
Keith Kennedy, Partner in the Corporate and Commercial Department, at, or by telephoning 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.

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