Delaware Law Alert: What to Keep in Mind for Your Next Purchase Price Adjustment Provision

Deal parties often opt to delegate purchase price adjustment (“PPA”) disputes to an accounting expert in the belief that such private proceedings will avoid the involvement of courts and related expenses. A recent Delaware Chancery Court decision provides important guidance on commonly used accounting principles for post-closing PPA disputes and the interplay between PPA mechanisms and indemnification provisions. It also demonstrates that an expert determination of PPA disputes, as typically formulated in M&A agreements, can be subject to more court oversight than the parties might anticipate, adding considerable time and expense to the process. The court’s ruling underscores the importance of clear contractual drafting and careful navigation of post-closing dispute processes.

The Case

The Stock Purchase Agreement

In Northern Data AG v. Riot Platforms, Inc., et al.¹ the Delaware Chancery Court both affirmed and vacated portions of an accounting expert’s determination of PPA disputes. The opinion offers important guidance on how PPA provisions are interpreted and on the types of questions courts will allow accounting experts to address and those that a court must resolve.

In 2021, Riot Platforms, Inc. agreed to acquire from Northern Data AG all the outstanding stock of a data center company. The purchase price included a combination of stock and $80 million in cash, with the cash component subject to post-closing adjustments for net working capital, indebtedness, final closing cash, and transaction expenses.

The Stock Purchase Agreement (the “Agreement”) provided that PPA disputes would be addressed through an expert determination process and that the buyer’s exclusive remedy for breaches of the seller’s representations and warranties would be indemnification by the seller. The PPA provisions had fairly typical features:

• Closing Statement: The seller was required to provide an estimated closing statement to the buyer prior to closing, and shortly after closing, the buyer was required to deliver a proposed final closing statement. The seller could then review the proposed final closing statement and deliver a statement of objections. After a period to resolve any disputes through good-faith negotiations, either party could submit the unresolved matters to an accounting expert (the “Accounting Expert”) for resolution.
• Accounting Principles: The closing statement was to be prepared “in accordance with [Generally Accepted Accounting Principles (“GAAP”)], in a manner in accordance and consistent with” an illustrative closing statement attached to the Agreement. That illustrative closing statement reflected the target company’s historical accounting practices.
• Scope of the Accounting Expert’s Authority: The Accounting Expert, “acting as an expert and not as an arbitrator,” was to limit its review to unresolved matters that were properly included in the seller’s statement of objections and to make any corresponding adjustments to the proposed final closing statement, in each case in accordance with the specified accounting principles. The Accounting Expert’s determination “would be final and binding . . . , absent manifest error of the Accounting Expert.”

Likewise, the indemnification provisions in the Agreement were fairly typical:

• Exclusive Remedy: Indemnification was the exclusive remedy for breaches of the seller’s representations and warranties under the Agreement. The exclusive remedy provision expressly carved out PPA adjustments, along with fraud and certain other specified matters.
• Cap: The damages recoverable through indemnification were capped at a specified amount.
• PPA Adjustments: To avoid double recoveries, any adjustments accounted for under the PPA process could not be subject to indemnification claims or counted against any indemnification threshold or limitation.

The PPA Dispute 

Shortly before closing, the seller delivered an estimated closing statement setting out its good-faith estimate of each component of the cash consideration. The buyer timely delivered its proposed final closing statement, and the seller delivered its statement of objections. The parties submitted four disputed items to the Accounting Expert, who ruled in the buyer’s favor on all four items. The seller then initiated litigation in the Delaware Chancery Court, in which it sought to vacate the Accounting Expert’s determination. The seller claimed that the Accounting Expert (1) misapplied the applicable accounting principles because he analyzed two disputed items only under GAAP without considering the target company’s historical accounting practices and (2) exceeded his authority by addressing indemnification issues in connection with the two remaining disputed items.

Key Issues and the Court’s Analysis

Standard of Review and Scope of the Accounting Expert’s Authority

The Court first considered the applicable standard of review. In doing so, it cited the Agreement’s mandate that the Accounting Expert was to serve “as an expert and not as an arbitrator” and that the Accounting Expert’s resolution of the disputed matters “would be final and binding . . . , absent manifest error of the Accounting Expert.”

The Court relied on the Delaware Supreme Court’s decision in Terrell v. Kiromic Biopharma, Inc., in which the Court articulated the distinction between an arbitration and an expert determination. There, the Delaware Supreme Court explained that distinction as follows:

[T]he fundamental difference between an expert determination and arbitration can be found in the type and scope of authority that is being delegated by the parties to the decision maker. In the case of a typical expert determination, the authority granted to the expert is limited to deciding a specific factual dispute concerning a matter within the special expertise of the decision maker . . . . The parties agree that the expert’s determination of the disputed factual issue will be final and binding on them. The parties are not, however, normally granting the expert the authority to make binding decisions on issues of law or legal claims, such as legal liability. If the proceeding is an arbitration, this means that the parties have intended to delegate to the decision maker authority to decide all legal and factual issues necessary to resolve the matter.²

Applying Terrell, the Court found that the Accounting Expert’s judgments were subject to the contractual manifest error standard, but only to the extent that he acted within the scope of his authority as an expert and not as an arbitrator.³ To the extent the Accounting Expert made any legal determinations, the Court reviewed such determinations de novo because he lacked “the authority to make binding decisions on issues of law or legal claims, such as legal liability.”

Application of GAAP vs. Historical Accounting Practices

As discussed above, the seller first argued that the Accounting Expert misapplied the applicable accounting principles because he analyzed two disputed items only under GAAP without considering the illustrative closing statement or the target company’s historical accounting practices. The Court found that this argument presented a legal question subject to de novo review because it required the Court to interpret the accounting principles set forth in the Agreement.

In resolving this issue, the Court cited its prior decision in ArchKey Intermediate Holdings Inc. v. Mona,⁴ which involved a purchase agreement with similarly worded accounting principles. In that case, the agreement provided that the accounting expert would resolve a PPA dispute “in accordance with GAAP and consistent with the past practices of the company and a specified historical balance sheet.” The Court in that opinion found that this language set GAAP compliance as the “floor” and explained that the requirement of consistency with the historical balance sheet “narrowed the expert’s available choices under GAAP.” In other words, so long as the company’s historical balance sheet complied with GAAP, the accounting expert was required to follow those practices in resolving the dispute. But if the historical practice was not compliant with GAAP, it could not be used in resolving the dispute.

Applying this reasoning, the Court in Northern Data found that the accounting principles in the Agreement established a hierarchy. First and foremost, the Accounting Expert’s determinations must comply with GAAP. If GAAP allows for multiple approaches, then the Accounting Expert must adopt the approach most consistent with the illustrative closing statement. If, however, the illustrative closing statement and the company’s historical practices did not comply with GAAP, then the Agreement required the Accounting Expert to apply a method that was GAAP-compliant.

Two of the disputed items in Northern Data concerned whether $22 million in upfront payments to the target company from a customer should have been recognized as deferred revenue as of the closing because they concerned services to be provided after closing. Applying its contractual interpretation set forth above, the Court first analyzed whether the applicable GAAP standard (Accounting Standard Codification Topic 606, or “ASC 606”) permitted multiple methods for resolving the deferred revenue question. The Court engaged in a detailed review of ASC 606 and determined that it permitted only one approach. Accordingly, it found that the contractual accounting principles required the Accounting Expert to apply the GAAP-compliant ASC 606 methodology, regardless of whether the illustrative closing statement applied any different approaches.

Having determined that the Agreement required application of the ASC 606 methodology, the Court held that the Accounting Expert’s factual determinations (including its assessment of the economic substance of the contracts in question) and application of ASC 606 were within the scope of his expertise and entitled to “significant deference,” reversable only for manifest error. Finding no manifest error, the Court granted summary judgment in favor of the buyer on the two deferred revenue disputed items.

The PPA vs. Indemnification Dispute Resolution Processes

The two remaining disputed items concerned (1) whether the company’s alleged double-billing of a customer prior to closing was properly included in accounts receivable, and (2) whether an invoice for electricity charges that the company received prior to closing had been paid and thus should not have been included in accounts payable.

The Court first analyzed whether these two disputed items presented indemnity claims or accounting disputes. Because this analysis required an interpretation of the Agreement, the Court found that this was a legal question subject to de novo review. Thus, it gave no deference to the Accounting Expert’s determinations.

The Court found that both disputed items directly implicated representations and warranties that the seller made in the Agreement. More specifically, it found that the disputed item regarding double-billing directly implicated the seller’s representations and warranties that all accounts receivable in the company’s financial statements represented bona fide transactions and, to the company’s knowledge, were current and collectible. The Court found that the disputed item regarding the electricity invoice directly implicated the seller’s separate representations and warranties that it had provided a complete list of all indebtedness, including certain outstanding accounts payable, as of the date of the Agreement.

The Court ruled that, under the Agreement, the indemnification process—including the damages cap applicable to indemnity claims—was the “sole and exclusive” remedy for the alleged breach of these representations and warranties. In so ruling, the Court noted the importance of enforcing a negotiated damages cap for indemnification claims. Indeed, it cited the Delaware Supreme Court’s decision in Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co., which found that permitting parties to characterize claims for breaches of representations and warranties as accounting disputes would “render the indemnification cap meaningless and eviscerate the basic bargain between two sophisticated parties.”⁵

Because the disputed items involving double-billing and the electricity invoice presented legal questions regarding the accuracy of the seller’s representations and warranties and did not involve either a change in the target’s business between signing and closing or reference to accounting methodologies, the Court found that the Accounting Expert lacked authority to resolve such matters. Thus, the Court vacated the Accounting Expert’s determinations on these two disputed items and ruled that these disputes must proceed under the contractual indemnification process.

The Court also rejected the buyer’s arguments that the seller had waived its right to object, was estopped, or had released these claims in a prior settlement agreement, finding that none of these defenses applied under the facts at issue.

Implications for Dealmakers

The Northern Data decision reinforces the need for careful drafting and compliance with post-closing adjustment and indemnification processes in M&A agreements. When parties use typical PPA provisions, like those at issue in Northern Data, they should take care in observing the following points:

• Parties should clearly delineate and abide by their post-closing dispute resolution mechanisms. The decision highlights the importance of precisely defining the scope of post-closing dispute resolution mechanisms. Deal parties should understand and consider the limitations of expert determinations, which may be used to resolve factual disputes within the decision-maker’s expertise but may not be used to resolve legal issues or to interpret the purchase agreement. As Northern Data demonstrates, and as further discussed below, mischaracterizing indemnification claims as PPA accounting disputes can result in significant additional time and expense through litigation in court. 
• GAAP methodologies will often take precedence over non-GAAP historical methodologies. When parties agree that closing statements must be prepared in accordance with GAAP consistent with the target company’s historical accounting practices, Delaware courts will interpret such a provision to require consideration of the company’s historical practices only if those practices comply with GAAP. If the historical practices do not comply with GAAP, courts will require a GAAP-compliant approach that is most consistent with the historical practices.
  
  Thus, prior to agreeing to these commonly used accounting principles, sellers should assess whether the target company’s historical practices and any illustrative historical financial statements attached to the agreement in fact comply with GAAP. If they do not, sellers should consider clearly and expressly stating in the purchase agreement that the target company’s historical practices will prevail.

• Even when breaches of representations and warranties involve accounting matters that impact the preparation of the closing statement, they often cannot be resolved through the PPA process. When an agreement includes exclusive remedy provisions and damages caps on indemnification claims, Delaware courts will not permit attempts to recharacterize breaches of representations and warranties as PPA disputes in order to circumvent those provisions. This underscores the importance of negotiating appropriate indemnity caps and understanding their practical effect on post-closing remedies. In raising post-closing disputes, deal parties should also carefully consider whether the dispute is properly brought as an indemnity claim for a breach of a representation and warranty or if the claim truly is an accounting dispute subject to a contractual PPA process. Failure to properly characterize a dispute can result in wasted time and expense.
• Resolving PPA disputes through an accounting expert still leaves many aspects of such disputes subject to court oversight. When parties provide for a typical PPA process with an expert determination similar to the one at issue in Northern Data, they should be aware that Delaware courts may retain a significant role in reviewing the work of the accounting expert. Based on Northern Data and other Delaware opinions, the table below summarizes the aspects of the PPA process over which the courts have exclusive control (giving no deference to the accounting expert’s determination) and the relatively few areas over which accounting experts have exclusive control and for which courts will give “significant deference” to the expert.

Thus, even after parties have committed the time and expense to complete an expert determination process, many elements of the PPA dispute and the expert’s work can become the subject of additional court proceedings. For example, in the Northern Data case, the expert determination process took just over 80 days, but the subsequent litigation in Delaware took almost two years and significant expense, without accounting for the additional time required to resolve the two disputed items the Court found were properly subject to an indemnification (not PPA) process.

In summary, the Northern Data decision provides important guidance for structuring and navigating post-closing dispute mechanisms in M&A transactions and highlights the importance of aligning contractual language with the parties’ commercial objectives.

¹ C.A. No. 2023-0650-LWW (Del. Ch. June 2, 2025, Will, V.C.) (memorandum opinion).

² 297 A.3d 610, 618, No. 299, 2022 (Del. 2023, Traynor, J.) (citing Penton Bus. Media Holdings, LLC v. Informa, PLC, 252 A.3d 445, 464, C.A. No. 2017-0847-JTL (Del. Ch. 2018, Laster, V.C.)).

³ The Court explained that, under Delaware law, manifest error means an “evident material mistake.” For a discussion of what constitutes manifest error in expert determinations, see the Mayer Brown Delaware Law Alert (October 8, 2024) on M&A disputes.

⁴ 302 A.3d 975, C.A. No. 2021-0383-JTL (Del. Ch. 2023, Laster, V.C.) (subsequent internal quotation marks and citations omitted).

⁵ 166 A.3d 912, 932, No. 573, 2016 (Del. 2017, Strine, C.J.) (quoted with Northern Data’s textual modifications; internal brackets omitted).