Share purchase price after a court decision
April 2022 – The Accounting Standards Committee (CNC/CBN) recently issued a statement on the accounting for an adjustment of the purchase price of shares in the context of a court decision. Is this an income or does it require a revision of the purchase price?
The facts
Company A acquires a group of companies B. As is customary in this type of transaction, due diligence is carried out. The due diligence report is unqualified and concludes that Group B complies with all applicable laws and regulations. After some time, however, it turns out that there is a problem. A finds major legal violations and serious irregularities in the acquired companies. It appears that the reality does not correspond at all to the image given by the due diligence carried out and that the companies taken over are in fact worth less than the price paid.
A and B therefore negotiate and conclude a transaction. A waives its claims in exchange for a reduction in the purchase price by the seller. All of the seller's guarantees are settled in the transaction agreement. A also calls on the lawyer who carried out the due diligence to obtain compensation for the damage resulting from his fault. The lawyer had failed to identify the serious shortcomings and had made an incorrect estimate of the acquisition price of the companies taken over.
The court rules in favour of A, so that the lawyer must compensate A.
A considers that the payment of damages by the lawyer consists of compensation for the excessive price paid for the acquisition of the shares. A considers that, from an accounting point of view, this is an indemnity to be treated as a revision of the acquisition price originally paid.
The decision of the Board
A turns to the CNC/CBN, but the CNC/CBN clearly takes a different view. The board decides that the indemnity cannot be considered as a revision of the purchase price of the shares. The indemnity should therefore be included as income in the profit and loss account.
The main reason seems to be that the indemnity was not paid by the seller of the shares on the basis of the share transfer agreement, but by the lawyer by virtue of his responsibility as an advisor to the buyer.
