Background
Viasat sold its Link-16 Tactical Data Links business to L3Harris for approximately $2 billion under an asset purchase agreement that provided for a post-closing working-capital adjustment. The agreement established a three-tier hierarchy of accounting principles: the specific policies in a reference statement took precedence over generally accepted accounting principles, which in turn took precedence over Viasat’s historical accounting practices.
After closing, the parties disputed several proposed adjustments and submitted them to Grant Thornton as an independent accounting expert. Grant Thornton resolved most issues for L3Harris. Viasat sued, alleging that the expert exceeded its contractual authority, and the parties filed cross-motions for summary judgment concerning adjustments to estimates at completion and two inventory reserves.
The Court’s Holding
The court held that Grant Thornton exceeded its authority on the estimates-at-completion issue. The reference statement expressly prohibited adjustments unless made in the ordinary course and consistently with Viasat’s past practice. After finding that Viasat complied with that controlling first-tier requirement, the expert could not apply GAAP to alter labor-hour assumptions, create a loss-contract position, and use that result to justify the adjustment. The court therefore granted Viasat summary judgment on that issue.
The court reached the opposite result for the excess-and-obsolescence and work-in-progress inventory reserves. For those items, the reference statement prescribed procedures for reviewing and adjusting reserves but did not supply a substantive valuation method. Grant Thornton therefore acted consistently with the agreement by proceeding to the second tier and applying GAAP. The court granted L3Harris summary judgment on those two issues.
Key Takeaways
- An accounting expert’s resolution of factual accounting questions may be final and binding, but courts independently review legal questions of contract interpretation.
- A contractual precedence clause means that a definitive higher-tier accounting rule controls over a conflicting lower-tier rule.
- When a higher-tier provision supplies only a procedure and leaves the substantive accounting question unresolved, an expert may consult the agreement’s next tier.
Why It Matters
The decision underscores that detailed accounting hierarchies in acquisition agreements allocate post-closing risk and will be enforced according to their text. Parties cannot use GAAP to override a bespoke, controlling accounting rule merely because GAAP would produce a different result.
At the same time, compliance with a procedural requirement does not necessarily end the inquiry. If the priority-tier language does not provide a substantive valuation standard, an accounting expert may apply a lower-tier standard without exceeding the expert’s contractual mandate.