Joshua G. Galante

In merger and acquisition (M&A) transactions, parties commonly include a post-closing mechanism to adjust the purchase price to accurately reflect the agreed value of the acquired asset. Many of these mechanisms are accounting-related and require specific calculations. While practitioners typically describe detailed methods for these calculations in the purchase agreement, disputes may still arise, making it crucial for the parties to include clear provisions on how such disputes should be resolved. In some cases, parties opt for arbitration, while in others, they choose to have accounting-related disputes handled by an expert. A recent Delaware Superior Court opinion emphasizes the importance of clarity and precision in drafting these dispute resolution provisions, particularly regarding the scope and authority of the decision-maker and the availability of judicial review.

In Pazos v. AdaptHealth, plaintiff Cynthia Pazos, founder and former CEO of Diabetes Management and Supplies LLC, sold her company to the defendant, AdaptHealth LLC, an operator of a network of medical equipment companies providing products and services to outside-hospital patients. The membership interest purchase agreement (MIPA) included post-closing purchase price adjustment calculations, specifically to account for the closing working capital of the company. The MIPA also contained dispute resolution provisions for disagreements about the closing date statement, stating that if the parties failed to agree, any disputed amounts would be submitted to independent public accountants for determination. The accountant’s determination would be deemed final and binding, subject to review only in the case of a “manifest error.” Notably, the MIPA explicitly stated that the accountant would act as an expert, not an arbitrator. In this case, after the accountant made its determination, the plaintiff, dissatisfied with the result, filed a complaint in Delaware court, alleging that the accountant had committed several manifest errors.

In response, AdaptHealth argued that the Federal Arbitration Act should apply to the court’s review, contending that the dispute resolution provision functioned as an arbitration clause. The court disagreed, clarifying the difference between arbitration and expert determination provisions. Using the “authority test,” the court concluded that the provision in question was an expert determination one because its scope was limited to resolving cost adjustment disputes. Additionally, the use of the term “expert” rather than “arbitrator” signaled the parties’ clear intent. Through this ruling, the court clarified that practitioners must be deliberate and cautious when drafting dispute resolution clauses, ensuring the parties’ intentions are explicitly reflected.

Having established that the accountant’s role was to act as an expert and confirming the court’s limited oversight role based on the clear language of the MIPA, the court also examined the definition of “manifest error” in the context of expert determinations. The plaintiff objected to the accountant’s exclusion of certain receivables from the working capital calculation, arguing that these exclusions constituted manifest errors. The court disagreed, concluding that a manifest error would exist only where the expert made a plain and obvious error and the record demonstrated a strong reliance on that error. The court also determined that an expert’s decisions, such as which documents to credit or discredit, fall within that expert’s contracted-for authority. As such, the manifest-error standard sets a high bar for overturning an expert’s determination.

This case serves as a reminder that precision in drafting dispute resolution provisions is critical in M&A transactions. Parties must clearly define the roles, scope and authority of the individuals resolving accounting-related disputes, whether they choose arbitration or expert determination. The failure to do so can be detrimental to one’s ability to bring a claim in court. Furthermore, practitioners should be aware of the high threshold for establishing “manifest error” in expert determinations, as courts are unlikely to intervene in decisions that fall within the expert’s contractual authority.