Transaction Dispute - Representation and Warranties

The buyer in an approximately $1 billion acquisition of a large, privately held multinational business filed a claim pertaining to representations and warranties insurance policies in place for the transaction. The claims put forth by the buyer included alleged financial, tax, and other breaches, however, a substantial portion of the claims related to the alleged breaches of the financial representations. The financial claims related to allegations that inventory and related reserves, accounts receivable and related bad debt reserves, and prepaid assets, among other items, were not recorded properly by the seller in accordance with Generally Accepted Accounting Principles (“GAAP”). The buyer’s claims were in excess of $130 million, which far exceeded the representations and warranties insurance policy tower’s coverage and limits. We understand this to be the largest representation and warranties insurance claim filed to date in the United States.

Stout was retained by counsel for one of the two representation and warranties insurers to evaluate the buyer’s claim on the insurer’s behalf. Our involvement began early in the claim assessment process and we were involved in requesting numerous documents relating to the financial based claims from the insured. Upon receipt of the documents, we performed various analyses, interviewed the buyer’s representatives, requested additional documentation and conducted a site visit. Further complicating issues was the fact that two different large international accounting firms audited the acquired company both prior to and after the transaction date, reaching different conclusions, and extremely limited audit-related information was available. An additional challenge to our assessment of the claim was the fact that the buyer combined the acquired company with another of its divisions, and took the combined company public. Our analyses included assessments as to whether there was a breach related to non-compliance with GAAP and the related potential financial impact on the purchase price of the company due to the alleged breach put forth by the buyer, if any. These analyses included, but were not limited to, using multiple years of historical inventory and sales records to assess the appropriateness of recorded inventory valuation reserves, evaluation of historical aged accounts receivable balances and write-offs to assess the appropriateness of bad debt reserves, and the evaluation of the accounting treatment of various other asset and liability accounts. Based on the results of our analysis, we provided the insurer with detailed report containing our findings, detailing each claimed adjustment put forth by the buyer, our conclusions and analysis of each adjustment, and the financial impact of the adjustments on the purchase price/value of the acquired company.

Over the course of the engagement, Stout provided the insurer with multiple periodic reports and analyses to assist with its evaluation of the claim. Ultimately, Stout determined that the buyer’s loss was significantly less than that initially claimed. Our findings were presented to the buyer and its representatives. Following the presentation, our client reached a settlement with the buyer.

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