Why the client needed our help
A dispute arose following the staged sale of a majority shareholding in a UK manufacturing company. Under the terms of the transaction, an initial majority stake transferred at completion, with the remaining minority shareholding to be acquired over time. Part of the purchase price was deferred and linked to the company’s financial performance over two accounting periods after completion.
A mechanism had been agreed for calculating the further sums due, including the preparation of a completion certificate. However, when that certificate was produced, the seller challenged its contents and alleged that a number of accounting judgements had materially reduced the amount payable for the second and third tranche of shares.
The issues in dispute were substantial.
- They included disagreements over the treatment of earnings and over certain aspects of working capital, cash and stock.
- The buyer maintained that the certificate had been prepared properly and in accordance with the agreed contractual framework and relevant accounting standards.
- The seller disputed that position and argued that the figures had been prepared in a way which unfairly reduced value.
What began as an accounting dispute then widened into a broader disagreement about governance, reporting and minority shareholder treatment. Wider concerns were raised about operational and reporting decisions taken after completion, together with allegations that aspects of the company’s management and conduct amounted to breaches of the shareholders’ agreement and unfairly prejudicial treatment of the remaining minority shareholder.
At that point, the matter carried significant legal and commercial risk. Resolving the accounting issues alone would likely have required detailed expert evidence and close analysis of the company’s trading position and financial records. If matters escalated further, there was also the prospect of shareholder litigation, including a potential unfair prejudice claim.
The client needed clear strategic advice on how to assess the accounting and shareholder issues together, protect their position, and find a route to resolution without allowing the dispute to become more expensive, disruptive and entrenched.
How we helped
We advised on the legal and strategic issues arising from the dispute, including the interaction between the share purchase agreement, the agreed completion and deferred consideration mechanisms, and the ongoing shareholder relationship between the parties.
Our work involved helping the client assess the strength of the competing positions being advanced on the accounting treatment and the wider risks associated with continued escalation. In disputes of this kind, technical accounting points often cannot be viewed in isolation. They frequently sit alongside broader governance, control and shareholder rights issues, all of which can materially affect the shape and value of the dispute.
We worked with the client to identify the core issues that were likely to drive the outcome, distinguish the matters of real commercial importance from those that were becoming unnecessarily entrenched, and support a strategy focused on achieving a practical result.
As the dispute developed, we helped guide negotiations aimed at resolving all live issues together rather than allowing the matter to fragment into separate accounting, contractual and shareholder proceedings. That approach was important in reducing the risk of prolonged expert processes, escalating legal spend and further damage to the parties’ working relationship.
Throughout, the emphasis was on securing a commercially sensible outcome while preserving leverage and keeping litigation options under review if settlement could not be achieved.
The outcome
Following negotiations, the parties reached a confidential settlement resolving the dispute in full.
The settlement avoided the need for expert determination, detailed accounting evidence, or court proceedings. It also removed the immediate risk of wider shareholder litigation and allowed both parties to move on with certainty.
By resolving the matter at that stage, the parties were able to avoid the cost, delay and disruption that often arise where post-acquisition disputes become more entrenched over time.
This matter highlights the challenges that often arise in staged acquisitions and earnout-style share structures. Where deferred consideration depends on future financial performance, accounting judgements can quickly become contentious, particularly where one party remains involved in the business as a minority shareholder after completion.
It also illustrates how financial disputes under a share purchase agreement can overlap with governance and shareholder issues in ways that significantly increase complexity and litigation risk. In the right case, an early negotiated settlement can be the most efficient and commercially pragmatic way forward.
