Arbitration Provisions and Post Closing Disputes

Corporate Attorney Joseph MarrowBy: Joseph Marrow

Many business acquisition agreements provide that post-closing disputes relating to earn-outs, working capital adjustments and other purchase price adjustments are to be submitted to an independent third party (i.e., an accounting firm) for resolution. A recent decision of the Delaware Supreme Court, Viacom Int’l, Inc. v. Winshall, No. 513, 2012, 2013 WL 367878786 (Del. July 16, 2013) (“Viacom”), reaffirms the enforceability and binding nature of the alternative dispute resolutions procedures chosen in these agreements. In Viacom, the parties to a merger agreement agreed to submit a dispute regarding an earn-out issue to arbitration subject to resolution by an independent accounting firm which decision would be final, binding and conclusive. The accounting firm made a determination adverse to Viacom and Viacom filed an action in state court seeking a declaration that the arbitration award was erroneous.

The Delaware Supreme Court upheld the arbitration award. The Court noted that the challenge to the arbitration award was governed by the Federal Arbitration Act. Absent a determination that the decision “was procured by fraud” or was subject to “manifest error”, the Court could not vacate the award. The Court rejected Viacom’s arguments of fraud or manifest error.

The Viacom decision lends support to the ability of parties to rely on the enforceability of alternative dispute resolution provisions in business acquisition agreements to resolve post-closing disputes as long as such disputes fall within the scope of the independent arbitrator’s scope of review.

For more information on this topic, please feel free to contact Joe.

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