On December 3, the Supreme Court of Delaware issued an important decision related to purchase price adjustments and, specifically, how a seller’s misapplication of accounting rules can leave buyer on the hook for tens of millions.
Golden Rule Financial Corporation, a health insurance company, entered into an agreement to buy USHEALTH Group for $750 million, subject to a post-closing purchase price adjustment for tangible net worth. The parties’ agreement attached an annex of “Accounting Principles” and specified that tangible net worth be determined “in accordance with the Accounting Principles, consistently applied.” Following the closing, the buyer discovered that the seller had been consistently misapplying a relatively new Accounting Principle called ASC 606. When the buyer ran the numbers, the gravity of the seller’s error became clear: If the purchase price adjustment were calculated using the seller’s (incorrect) method, tangible net worth would be $35 million. If, however, ASC 606 were correctly applied, tangible net worth would be $73.7 million. In other words, the seller’s accounting error created a $38.7 million swing in the purchase price adjustment.
