Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law 2026-10-02T10:51:39Z https://www.lesaklegal.com/feed/atom/ WordPress /wp-content/uploads/sites/1405156/2025/03/cropped-LOGO_LHCP-32x32.png On Behalf of Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[Why do CAM charges become commercial lease disputes in Florida?]]> https://www.lesaklegal.com/?p=49430 2026-09-25T11:22:03Z 2026-09-30T11:21:22Z

If you lease commercial space in Florida, you probably pay common area maintenance (CAM) charges every month. These fees cover shared costs like landscaping, parking lot repairs, security and property management. Most tenants accept them without a second thought. However, when the annual reconciliation lands on your desk, the numbers don't always add up. That's when a routine bill can turn into a real dispute.

How CAM reconciliation works

Landlords usually collect estimated CAM payments each month, then reconcile the actual expenses at year's end. They compare what you paid against what they spent and send an invoice for any shortfall. Sounds simple, right? In practice, though, many leases don't clearly define which costs count as CAM. Some landlords fold in capital improvements or extra management fees that push the bill higher than expected. Since Florida law gives wide latitude to lease terms, the actual language in your contract controls what you owe.

Where the disputes start

Disagreements usually center on a handful of issues. Tenants often question inflated management fees, unexplained tax increases or insurance premiums that jumped without warning. Sometimes landlords include costs for areas the tenant never uses or repairs that should count as capital expenses rather than routine maintenance. Because these charges accumulate over months, a small error early on can snowball into a large, disputed balance by the time reconciliation happens.

Why audit rights help

Many commercial leases give tenants the right to review the landlord's books and records within a set window after receiving the reconciliation statement. This is where audit rights become important. An audit lets you verify that charges match actual expenses and that nothing violates the lease terms. Without this right, tenants have little leverage to challenge questionable billing. Reviewing your lease before a dispute happens is often more useful than reacting after the fact. Working with someone who understands Florida commercial lease language can help you spot vague CAM provisions early and negotiate clearer terms. A little guidance at the right time can save both money and stress down the road.]]> by Austin Calhoun <![CDATA[Terminating a Subcontractor: Cause, Convenience, and the Cost of Getting It Wrong]]> https://www.lesaklegal.com/?p=49454 2026-09-29T05:29:51Z 2026-09-29T05:18:12Z

Updated September 2026 Your subcontractor has missed its crew plan again. The owner wants a completion date, and another crew can start Friday. Before issuing a termination notice, ask two questions: Does the record establish a default under the signed subcontract? If not, does that subcontract independently permit termination for convenience? The replacement bid is only one part of the decision.

Start with the contract and the job record

A delay is not automatically grounds to terminate. Identify the precise default provision, the performance it requires, and any notice and opportunity to correct. Compare the clause against dated schedules, daily reports, crew counts, testing, photos, correspondence, and prior warnings. Account for late drawings, changes, restricted access, or conduct by the owner or contractor that may have contributed to the delay. Do not confuse a contractual right to supplement or correct a subcontractor’s work with a right to terminate the subcontract. Those remedies can have different prerequisites and financial consequences. Use the executed subcontract and incorporated documents, not an assumed cure period. Standard forms may have been amended.

Identify which termination route actually exists

The owner’s right to terminate the prime contract for convenience does not, by itself, give the general contractor an independent right to remove a subcontractor for convenience while the project continues. Check the subcontract’s express termination provisions, amendments, and any prime-contract terms incorporated into it. Determine whether incorporation creates a right at the subcontract tier and how conflicts between documents are resolved. An unmodified AIA A401–2017 subcontract distinguishes a contractor’s termination for cause under § 7.2.1 from the subcontract consequences of an owner’s termination of the prime contract for convenience under § 7.2.2. The latter is not a general license for a contractor-initiated replacement while the prime contract remains in force. An unmodified AIA A201–2017 addresses the owner–contractor relationship separately in §§ 14.2 and 14.4. Do not assume those prime-contract remedies or payment rules automatically apply to a subcontractor. A written convenience clause can materially change the result. In Vila & Son Landscaping Corp. v. Posen Construction, Inc., 99 So. 3d 563 (Fla. 2d DCA 2012), a Florida appellate court enforced a private subcontract’s express convenience provision when the contractor gave the required written notice and replaced the subcontractor at a better price. The decision turns on that contract’s language and procedure; it does not insert a convenience right into a contract that lacks one. Nor is it safe to assume that an unsuccessful termination for cause will later be treated as a termination for convenience. In McKinney v. Portico LLC, No. 23-11398 (11th Cir. Jan. 22, 2025) (unpublished), an architect-agreement case, the court found no identified Florida authority resolving that conversion issue and reinstated a plausible breach claim at the pleading stage. It did not establish a categorical Florida rule for construction subcontracts. Look for an express conversion provision, and comply with its terms if one exists.

Map every notice and bond condition

Before sending anything, make a notice map: the default alleged, required recipients, delivery method, when notice is effective, what correction must begin or be completed, and whether a separate final termination notice is required. Preserve proof of delivery and the subcontractor’s response. Check any owner-notice or consent requirement under the prime contract. A standard-form cure period is not a statewide rule. The AIA and ConsensusDocs forms differ, and their editions and negotiated revisions matter. Do not borrow a ten-day period from A401 or a staged notice procedure from a ConsensusDocs 750 when the executed agreement says something else. Similarly, do not assume email satisfies a formal notice provision merely because project participants routinely communicate by email. If the subcontractor furnished a performance bond, read the actual bond before declaring default or hiring the replacement. An AIA A312–2010 performance bond has conditions governing the surety’s obligations and potential completion options. The particular obligee, notice, termination, and contract-balance requirements matter; a lapse in one preliminary notice is not necessarily treated the same as failure to meet other conditions. AIA’s discussion of A312–2010 default procedures underscores the importance of terminating in accordance with the bond before expecting the surety to perform. Florida lien law uses similar-sounding language for a different task: a recorded “notice of termination” under Fla. Stat. § 713.132 concerns the effectiveness of a notice of commencement. It is not a substitute for a contractual notice terminating a subcontract.

Document the handoff before the replacement begins

If feasible, conduct a joint site walk—or make a detailed, dated record—of work in place, defects, stored materials, items already paid for, open purchase orders, tools, access credentials, and drawings. Protect exposed work. Define the remaining scope consistently in the termination record and replacement bid so later completion costs can be evaluated against the actual work left. Check ownership and use rights before taking possession of tools, materials, or design documents. If a performance surety has rights to investigate or arrange completion, do not inadvertently impair those rights by treating the replacement as a foregone conclusion.

Compare the final account at both contract tiers

Prepare separate cause and convenience estimates before notice, then update them as costs become known. Account for earned but unpaid work, retainage, approved and disputed changes, reasonable termination or closeout costs, replacement costs, and provable damages. Read the actual payment, offset, waiver, and claims provisions rather than assuming the cheaper replacement bid establishes a net recovery. The two contract tiers may not match. Under the unmodified A201–2017 convenience provision, the owner’s payment obligation to the contractor includes properly executed work, termination-related costs, and a termination fee if the owner–contractor agreement provides one. The A401–2017 provision triggered by an owner’s convenience termination addresses the subcontractor’s compensation separately. Neither provision, standing alone, establishes what the contractor may recover upstream for a contractor-initiated subcontractor switch while the prime contract continues. See the AIA A201–2017 preview, § 14.4. Track preexisting claims, contractual submission deadlines, releases, and final-payment language independently of the termination. A Florida payment bond under Fla. Stat. § 713.23 can protect qualifying payment claimants, subject to statutory notice and suit requirements; it is not the same as the subcontractor’s performance bond. On a public project, determine the applicable bond statute and actual bond rather than assuming § 713.23 governs. Before the letter goes out, assemble the executed prime and subcontract, amendments, proposed notices, dated default record, cost estimates, and any bonds. Lesak, Hamilton, Calhoun & Pontieri’s construction team can review the available route, its required steps, and the likely payment dispute while there is still time to choose.

About the author

Austin B. Calhoun is a partner at Lesak, Hamilton, Calhoun & Pontieri. His practice includes construction contracts and disputes. Before practicing law, he managed construction projects.]]> by Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[A Contractor Offered to Fix a Defect. Have You Satisfied Florida’s Chapter 558 Requirements?]]> https://www.lesaklegal.com/?p=49452 2026-09-29T05:27:24Z 2026-09-29T05:12:13Z

Last updated September 2026 You told the contractor that water was coming through a window. The contractor inspected it and offered to caulk the window—if you sign a release. Can you reject the offer and sue? Do you have to let the contractor try the repair first? Before answering either question, ask an earlier one: Did you serve a proper Chapter 558 notice of claim? Florida’s Chapter 558 establishes a pre-suit notice and opportunity-to-resolve process for covered construction-defect claims. A conversation, service request, or email saying “the window leaks—please fix it” should not be assumed to satisfy that process. The owner’s notice is the event that starts it. Fla. Stat. § 558.003; Fla. Stat. § 558.004

First: Was your notice actually a Chapter 558 notice?

For a covered claim, the owner generally must serve a written notice at least 60 days before filing an action; the period is 120 days for an action involving an association representing more than 20 parcels. Certain responses can permit an earlier action. The notice must refer to Chapter 558. If the defect claim arises from work under a contract, it must be served on the person with whom the claimant contracted. Fla. Stat. § 558.004(1)(a), (1)(c) The reference to Chapter 558 matters, but there is no requirement to recite a particular incantation beyond what the statute requires. The notice must also describe each alleged defect in reasonable detail, identify its location well enough for the recipient to find it without undue burden based on at least a visual inspection, and identify resulting damage or loss if known. You need not establish the underlying cause or conduct destructive testing before giving notice. A description of water appearing below a particular window during rain, with its location and known damage, may do more work than an unsupported diagnosis of why it leaks. Fla. Stat. § 558.004(1)(a)–(b) Delivery also counts. The statute defines service as certified mail with a USPS record of delivery or attempted delivery, hand delivery, or courier delivery with written evidence of delivery. An ordinary email alone is not one of those methods. Keep the notice and proof of service. Fla. Stat. § 558.002(9) If you sent your own notice, have its contents, recipient, and service checked before treating a later contractor response as proof you complied. A contractor’s willingness to inspect or negotiate does not itself establish that your earlier communication met the statutory requirements. If you sue on a covered claim without complying, the court must, on a timely motion, stay the action without prejudice until you comply; the statute does not prescribe automatic dismissal. Fla. Stat. § 558.003

Then: What does the contractor’s response mean?

After proper notice, the recipient has an opportunity to inspect and must serve a written response within the applicable statutory period—ordinarily 45 days after service of the notice, with a longer period for a qualifying association claim. The response may offer a no-cost repair with a detailed repair description and timetable; offer money and a payment timetable; propose both; dispute the claim; or invoke the statutory insurer-determination option. A contractor’s offer to repair or pay is not an admission of liability. Fla. Stat. § 558.004(2), (5), (9) Is the offer binding on you? Must you accept it? No. Chapter 558 gives the owner a chance to resolve a covered claim before suit; it does not require acceptance of a repair or settlement offer. But a claimant who receives a timely settlement offer must serve written acceptance or rejection on the offeror within 45 days after receiving it. Do not confuse the right to reject with a right to ignore the offer. If the claimant files suit without first accepting or rejecting it, the court must stay the action on a timely motion until the claimant responds. Fla. Stat. § 558.004(7) What if you reject it? Rejection does not, by itself, make you accept the proposed repair or release, nor does it necessarily mean suit can be filed that day. The owner must still satisfy the applicable Chapter 558 pre-suit requirements and assess filing deadlines. If the recipient expressly disputes the claim or does not respond within its statutory response period, the owner may proceed without further notice on the claim described in the notice. The statute also permits suit on unresolved portions after a partial settlement agreed to by the parties. Fla. Stat. § 558.004(1), (6)–(7) Can you accept only part of an offer? Do not assume that marking up an offer or saying “I accept the repair but not the release” creates an agreement. Chapter 558 permits a partial settlement or compromise as agreed to by the parties; it does not give the owner a unilateral right to impose different terms. Specify which defects, work, payment, and claims the parties agree to resolve, and obtain the contractor’s agreement to that narrower resolution. Otherwise, make your acceptance or rejection clear and timely. Fla. Stat. § 558.004(6)–(8) Can you counteroffer? Yes, you can propose different terms. A counterproposal is a negotiation, however—not an automatic extension of the statutory 45-day period or an acceptance of the original offer. Serve a clear written response to any timely settlement offer by the deadline, and document any agreement changing the Chapter 558 notice procedure in writing. Fla. Stat. § 558.004(7); Fla. Stat. § 558.005(4)

What if the repair requires a release?

Chapter 558 does not say an owner must sign every release a contractor attaches to an offer. Nor does it prohibit the parties from negotiating a release as part of a settlement. Read the actual offer and release together. If the contractor expressly conditions its work on a full release, do not assume you can accept the work while rejecting that condition. Negotiate a narrower agreement or reject the offer in writing within the applicable response period. The release matters because Chapter 558 already gives an accepted and properly performed offer important consequences: if the offeror pays or repairs within the agreed time and manner, the claimant is barred from suing on the claim described in the notice or as otherwise provided in the accepted settlement offer. A proposed release may therefore broaden the claims being surrendered beyond the particular repair. Check whether it encompasses other locations, unknown damage, later recurrence, other parties, or an insurer’s interests before signing. If an accepted offeror fails to pay or repair in the agreed time and manner, the statute generally permits suit on the noticed claim without another notice, subject to reasonable delays beyond the offeror’s control. Fla. Stat. § 558.004(8)

Do not lose the filing deadline while negotiating

Serving a qualifying Chapter 558 notice tolls the applicable statute of limitations for the period specified in section 558.004(10). It does not toll the statute of repose. Neither discussions about a revised repair scope nor unanswered questions about a release should be assumed to extend a deadline. Have the notice, proof of service, offer, contract, and applicable limitations and repose dates reviewed before deciding how to respond or when to file. Fla. Stat. § 558.004(1)(d), (10) The practical sequence is straightforward: first determine whether Chapter 558 applies and whether the owner served a compliant notice; next calendar the contractor’s response and any timely offer; then decide, in writing and on time, whether to accept, reject, or negotiate a mutually agreed narrower settlement. The offer is a choice—not a substitute for the formal notice that starts the statutory process. Have you sent a defect notice or received a contractor’s offer? Lesak, Hamilton, Calhoun & Pontieri’s construction-law team can review whether the notice satisfies Chapter 558 and what rights an offer or proposed release would affect. Contact the firm to schedule a meeting. About the author: Austin B. Calhoun is a partner at Lesak, Hamilton, Calhoun & Pontieri. Before practicing law, he managed commercial construction projects.]]> On Behalf of Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[Your Qualifying Agent Is Leaving: What Should a Florida Contractor Do Next?]]> https://www.lesaklegal.com/?p=49447 2026-09-24T20:54:31Z 2026-09-24T20:53:09Z

By Austin B. Calhoun | Lesak, Hamilton, Calhoun & Pontieri | Jacksonville, Florida Last checked September 23, 2026 When your company's only qualifying contractor leaves, the immediate question is not how fast you can hire someone. It is whether the business has authority to keep contracting in the meantime. Florida provides a 60-day replacement period, but that deadline is not an automatic license to keep operating. Without a properly affiliated replacement, continued contracting requires a granted temporary authorization, limited to eligible incomplete contracts. [1] Notify the Department of Business and Professional Regulation (DBPR), establish the company's actual qualification status, and pursue replacement and any necessary temporary authority at the same time. A submitted request is not approval. Do not promise customers uninterrupted performance before resolving that distinction. This article addresses resignation, termination and retirement affecting construction businesses regulated by the Construction Industry Licensing Board (CILB) under Chapter 489, Part I. Electrical and alarm contractors follow a separate licensing regime. A qualifier's death also has a distinct statutory procedure. [8]

First, establish what is ending and when

Pull the DBPR qualification record, the qualifier's agreement, the departure notice, and any primary/secondary designation. Identify the legal entity, license category, actual cessation date, and other qualifiers still affiliated with the business. An employee's last payroll date and the date qualifying responsibilities end should not be assumed to be identical. Under section 489.119(3)(a), a departing qualifying agent must inform DBPR. If that person is the business's only certified or registered contractor, the business must also notify DBPR and has 60 days from the termination of that affiliation to employ another qualifying agent. Rule 61G4-15.007(1) separately requires the certificate holder or registrant to notify the Board Office within 30 days after the qualifying person ceases affiliation. Give notice promptly; neither period is permission to operate without the necessary authority. [1][3]

More than one qualifier changes the analysis.

When a board-approved joint agreement designates a sole primary qualifier, section 489.1195 imposes a separate notice and succession process. That designated status ends when a new primary is designated or 60 days after satisfactory notice reaches the board, whichever occurs first. If no new primary is designated within 60 days, secondary qualifiers become primary unless the joint agreement specifies which of them will assume that role. Review that agreement, the required notices and remaining license coverage. Do not borrow that rule to extend the replacement period for a business losing its only qualifier. [2] For a planned departure, work backward from effective replacement approval and arrange a genuine overlap in supervision where feasible. A promise to leave a license number on paperwork is not a substitute for the responsibilities the qualifier actually must perform. [2]

Obtain temporary authority; do not assume it exists

Section 489.119(3)(a) permits the board's executive director or chair to grant a temporary, nonrenewable certificate or registration to the financially responsible officer, president, partner, or a limited partnership's general partner. That person assumes all responsibilities of a primary qualifying agent. A financially responsible officer does not automatically replace the construction qualifier simply by holding that financial role. [1][2] DBPR directs businesses to request temporary authority in writing from the CILB executive director. Its published guidance describes temporary authority after resignation or termination as lasting up to 60 days and not extendable. Confirm the eligible applicant, effective date, expiration date and authorized work in the actual grant. Do not assume that filing late buys another 60 days. [4] Prepare the request around the jobs that need attention: the contracting entity, departure date, existing awards, remaining scope and proposed responsible person. Have counsel confirm what DBPR requires for the particular request. Meanwhile, identify a lawful plan for protecting sites and handling scheduled inspections rather than treating the application as permission to proceed.

Sort the backlog by contract status, not mobilization

The statute limits temporary authority to incomplete contracts. That includes contracts awarded to or entered into by the business before the qualifier's affiliation ceased, even if no actual work had started. It also includes the statutory low-bid situation in which the business was the low bidder and the contract is subsequently awarded. Preserve the bid and award records rather than assuming every unsigned opportunity qualifies. [1] Hypothetical: A warehouse contract awarded before departure may qualify even though mobilization is scheduled for next month. A fresh invitation to bid arriving after departure is different. Temporary authority is not a general authorization to replenish the backlog. Florida's definition of contracting reaches attempted sales, negotiations and bids for services requiring licensure, not just labor performed on site. [5] Even an eligible contract requires the temporary grant and compliance with applicable permitting requirements. Before directing a superintendent to proceed, organize a short job-by-job schedule:

Authority: entity, license category, responsible qualifier or temporary authorization, and its expiration.
Eligibility: signed contract, award or qualifying low-bid record, with the relevant dates.
Field status: permit holder, open inspections, remaining work and immediate site-protection needs.
Commitments: completion milestones, pending changes, payment exposure and notices to evaluate under the actual project documents.

Compare each job's remaining duration with the temporary authorization's expiration. Permission to perform completion work is not a promise that every job can be finished within that period. Establish the replacement or another lawful completion plan before authority expires. Keep pending change work visible. Do not assume that calling an entirely new undertaking a change order brings it within the temporary grant. Present uncertain scope to counsel and DBPR before making a new commitment.

Replace the qualifier, not just the name on the form

Hiring a licensed person and obtaining effective qualification of your business are different events. Verify that the replacement's license is active, covers the company's work, and is properly affiliated with the contracting entity through the applicable DBPR process. A license used for another company is not, by itself, authority for yours. [1] Choose the application for the actual transaction. For example, despite its broad title, DBPR's CILB 24 form is for businesses with multiple qualifiers designating primary and secondary roles. It is not a universal substitute for the application needed to qualify a new or additional business. DBPR also identifies categories of applications requiring board review. Do not schedule around an assumed instant approval. [6][4] The agreement with the replacement should match the legal role: actual supervisory authority, access to project information, responsibility allocation, and a workable exit process. Plan notice, cooperation, file turnover and continuity before the next departure. The statutory responsibilities are substantive, not merely permission to use someone's number. [2] Our guide to preparing a professional-license application addresses application preparation more generally. Here, the operational gap deserves attention while that application is being processed.

Manage the project consequences separately

A licensing transition does not answer what the owner, general contractor, surety or insurer may require. Review the actual contracts, bonds and policies for relevant licensing representations, notice provisions, default procedures and continuity requirements. Do not assume the administrative replacement period extends a contractual completion date or excuses delay. Communicate facts, not hoped-for approvals. Distinguish a request submitted from an authorization granted, and identify the work actually covered. An owner may reasonably want evidence of lawful performance and a realistic completion plan. Providing that information can address uncertainty without volunteering unsupported admissions or promising a schedule the company cannot deliver. Keep the departure dispute separate from the licensing response. A disagreement over compensation, ownership or turnover may require its own strategy. It should not prevent the company from establishing the dates, records and responsibility arrangements needed to address the projects.

Do not assume every unpaid contract is lost

Unlicensed contracting creates serious payment risk. Section 489.128 can make a contract unenforceable by the unlicensed contractor and, when it does, bar that contractor's lien or bond claim. But the statute uses a specific timing test: the original contract's stated effective date; otherwise its stated last-execution date; otherwise the first date labor, services or materials were provided. It does not simply ask whether the company is qualified today. [7] Preserve the original contracts, dated execution records, qualification history and evidence of first performance. A later departure is not, by itself, a sound basis for declaring every existing receivable forfeited. Conversely, preserving a payment argument does not authorize continued contracting. Whether a particular claim survives requires its own factual and legal review. [7]

Resolve the authority question before making the next promise

The useful first result is a job-by-job operating decision, a replacement timetable and an accurate communication plan. Those decisions require matching licensing records to the work already promised, not merely finding a new license holder. If your qualifier is leaving, contact Lesak, Hamilton, Calhoun & Pontieri to discuss the departure date, current qualification status and affected projects. The review should establish what may proceed now, what approval is still missing, and which project commitments require action while the replacement is being qualified. Our construction-law practice addresses the contract and business consequences alongside the licensing issue. Sources for the legal summaries [1] Fla. Stat. section 489.119(2), (3)(a)-(b): business qualification, departure and temporary authority. [2] Fla. Stat. section 489.1195(1)-(3): responsibilities, primary/secondary designation and succession. [3] Fla. Admin. Code r. 61G4-15.007(1): departure reporting; rule text reproduced by Cornell LII. [4] DBPR Construction Industry FAQs: Loss of a Qualifying Agent and License Application Assistance. [5] Fla. Stat. section 489.105(4)-(6): qualifying-agent duties and the definition of contracting. [6] DBPR CILB 24 application description: multiple-qualifier primary/secondary designation. [7] Fla. Stat. section 489.128(1)-(3): enforceability, licensure timing and lien/bond consequences. [8] Fla. Stat. section 489.121: separate emergency-registration procedure following death. About the author Austin B. Calhoun is a partner at Lesak, Hamilton, Calhoun & Pontieri in Jacksonville, Florida. His practice includes construction disputes and contract negotiation. Before practicing law, he managed commercial construction projects. This article provides general information, not advice for a particular matter. Applicable law, contracts and facts may change the analysis. Contact alone does not create an attorney-client relationship. Do not send confidential information until an attorney-client relationship has been established. See the firm's website disclaimer.]]> On Behalf of Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[Obsolete Inventory in M&A: Who Bears the Risk at Closing?]]> https://www.lesaklegal.com/?p=49431 2026-09-03T15:59:03Z 2026-09-03T15:59:03Z

Why Is Obsolete Inventory Usually an Overvalued Asset Rather Than a Liability? Obsolete inventory is inventory whose recorded amount exceeds the amount the Company can recover through an ordinary sale because of age, deterioration, expiration, reduced demand, excess quantities, discontinued products, or similar conditions. Obsolete inventory generally reduces the value of an asset already included in Working Capital. A separate liability may arise if the Company also must pay storage, transportation, destruction, or disposal costs, and the Acquisition Agreement should prevent the inventory write-down and a separate disposal obligation from capturing the same economic exposure twice.

Does GAAP Determine Inventory Value at Closing?

Historical cost does not establish the amount that should count toward Closing Working Capital. For inventory measured using FIFO or average cost, FASB Accounting Standards Codification Topic 330 generally requires measurement at the lower of cost and net realizable value. Net realizable value is the estimated ordinary-course selling price less reasonably predictable completion, disposal, and transportation costs. Inventory measured using LIFO or the retail inventory method remains subject to the separate lower-of-cost-or-market model. GAAP does not independently determine the purchase price. GAAP affects the transaction only to the extent the Acquisition Agreement incorporates GAAP into the Working Capital calculation, and the parties may adopt transaction-specific aging rules, reserve formulas, exclusions, historical-practice requirements, or an illustrative Closing calculation. The Acquisition Agreement should therefore establish an accounting hierarchy. If the express inventory rules, an illustrative calculation, historical accounting practices, and GAAP could produce different reserve amounts, the Acquisition Agreement should state which source controls. In Northern Data AG v. Riot Platforms, Inc., the Delaware Court of Chancery enforced the accounting hierarchy selected in the purchase agreement, requiring GAAP compliance while using the illustrative closing statement to narrow choices when GAAP permitted more than one acceptable treatment. For obsolete inventory, the Acquisition Agreement should likewise determine before Closing whether transaction-specific reserve rules, historical practices, an illustrative calculation, or GAAP controls the inventory reserve.

Does an Asset Sale or Equity Sale Determine Who Bears the Risk?

No. Transaction structure determines what property transfers, but the Acquisition Agreement determines how obsolete inventory affects the economics between Buyer and Seller. In an equity sale, the Buyer acquires the entity that owns the inventory, so obsolete inventory ordinarily remains inside the acquired Company. The Seller may nevertheless bear the economic cost if the inventory reserve reduces Closing Working Capital or if an inaccurate inventory representation creates a separate contractual claim. In an asset sale, the Acquisition Agreement may transfer all inventory, only saleable inventory, or specified categories at negotiated values, while excluded inventory remains with the Seller. The Acquisition Agreement should also allocate storage, removal, and disposal responsibility for inventory the Buyer does not acquire. The federal tax allocation for an applicable asset acquisition is a different calculation. Section 1060 and Form 8594 allocate consideration among transferred asset classes for federal tax purposes, and inventory generally falls within Class IV. The Section 1060 allocation does not determine the contractual amount credited for inventory in Working Capital or who bears an obsolescence reserve under the Acquisition Agreement.

How Can the Inventory Reserve Change Seller Proceeds?

Assume a furniture manufacturer carries $400,000 of discontinued finished goods at cost. Recent sales indicate the goods can be sold for $180,000, and the Company expects $30,000 of commissions, freight, and liquidation costs. Net realizable value is therefore $150,000, producing a potential $250,000 inventory write-down. If the Company recorded no reserve and the Acquisition Agreement includes inventory in Working Capital, a $250,000 Closing reserve can reduce Seller proceeds by $250,000 when the Working Capital adjustment operates dollar for dollar. The result changes if the Working Capital target already reflects a normalized obsolescence reserve. Assume the target was established using a historical reserve of $100,000 and the Closing reserve is $250,000. All else equal, the reserve change reduces Closing Working Capital by an additional $150,000 relative to the target, not $250,000. The Seller may properly bear the additional $150,000 if pre-Closing deterioration caused the decline. The Buyer should not obtain the same $150,000 reduction merely because the Buyer adopts a more conservative reserve policy after Closing or decides after Closing to discontinue a product line that the Company had continued to sell. Because inventory reserves require judgment, the Acquisition Agreement should identify the reserve methodology and restrict post-Closing changes inconsistent with the agreed methodology.

What Should the Acquisition Agreement Say About Obsolete Inventory?

The inventory provisions, Working Capital formula, accounting hierarchy, and remedies should be drafted together.

Define included and excluded inventory. Address expired or near-expiration goods, damaged goods, discontinued products, customer returns, excess quantities, goods beyond a stated aging period, and inventory that cannot be sold in the ordinary course without unusual discounts.
Establish the reserve methodology. The Acquisition Agreement may use SKU-level aging, expiration dates, trailing sales, forecast demand, historical markdowns, identified disposal costs, or another transaction-specific formula. The methodology should apply consistently when establishing the Working Capital target and calculating Closing Working Capital.
Specify the measurement date and count procedures. Address goods in transit, consigned goods, returns, damaged goods, cutoff rules for receipts and shipments, and any physical inventory count or observation rights.
Provide information rights. The Seller should receive the inventory detail reasonably necessary to test the Closing calculation, including SKU reports, aging schedules, sales history, reserve workpapers, and disposal records relevant to disputed items.
Prevent duplicate recovery. If a $250,000 inventory reserve already reduces Closing Working Capital, the Buyer should not recover the same $250,000 again under an inventory representation or indemnification claim. A separate indemnification claim may remain appropriate for a different loss, such as concealed spoilage, falsified inventory records, or disposal costs not captured in Working Capital.

How Should Inventory Disputes Be Resolved?

The Acquisition Agreement should distinguish a technical reserve calculation from a contractual breach. An independent accountant may determine whether the agreed aging formula, net realizable value methodology, or reserve calculation was applied correctly. A court or arbitrator should generally decide whether the Buyer changed the agreed methodology, whether inventory was intentionally concealed or misrepresented, or whether the Buyer is seeking duplicate recovery through both Working Capital and indemnification. The Acquisition Agreement should also identify which party must support a proposed reserve adjustment, what records must be produced, whether the accounting expert is limited to the parties' submitted positions, and when the final Working Capital payment becomes due.

Conclusion

Obsolete inventory can reduce Seller proceeds because the Acquisition Agreement determines how much inventory value counts toward Closing Working Capital. The Buyer should not pay full Working Capital value for inventory that cannot generate the expected cash, while the Seller should not lose purchase price because the Buyer changes reserve methodology or operating strategy after Closing. The Acquisition Agreement should define which inventory counts, establish the reserve methodology and accounting hierarchy, apply the same methodology to the Working Capital target and Closing calculation, provide access to supporting records, and prohibit duplicate recovery. A completed inventory example in the Acquisition Agreement can show exactly how an obsolescence reserve changes Seller proceeds before the parties reach Closing. By Joseph R. Luna

Primary Authorities

FASB Accounting Standards Codification Topic 330, Inventory. FASB Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. 26 U.S.C. § 1060. Treas. Reg. § 1.1060-1. Internal Revenue Service, Form 8594 and Instructions for Applicable Asset Acquisitions. Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023-0650-LWW (Del. Ch. June 2, 2025).]]> On Behalf of Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[5 costly mistakes landlords should avoid in commercial leases]]> https://www.lesaklegal.com/?p=49432 2026-09-02T12:57:08Z 2026-09-02T12:57:08Z

Leaving repair duties unclear Broad language such as “tenant maintains the premises” often creates uncertainty. Your lease should state who handles the roof, structure, plumbing, HVAC system and code upgrades. If an aging air conditioner fails, distinguish routine service from full replacement. That detail may tell you which party must pay.

Using vague common area maintenance charges

Undefined common area maintenance (CAM) charges can cause collection disputes and budget shortfalls. List each covered expense, your tenant’s share and the reconciliation schedule. Address management fees, capital improvements, taxes and insurance separately. Clear categories can make an unexpected annual assessment less likely.

Overlooking protection from construction liens

Tenant improvements made under an agreement with you may expose your ownership interest to construction liens. In Florida, your lease must expressly state that your interest will not be subject to liens for tenant improvements. You must also record the lease restriction or a qualifying statutory notice before anyone files a notice of commencement. A contractor or other lienor can demand a verified copy of the lease provision. You then have 30 days to provide it. If you miss that deadline, the requesting party may place a lien on your interest after satisfying the statute’s other requirements.

Resorting to self-help after default

Unpaid rent does not permit you to change the locks or shut off utilities to force your tenant out. State law generally allows you to regain possession through a court action or after your tenant surrenders or abandons the space. Ignoring those limits can create liability and delay your recovery of the property.

Serving a defective three-day notice

A flawed rent demand can derail your eviction before it begins. For an eviction based on unpaid rent, your written notice must demand payment or possession and allow the required three-day period. It should also identify the correct parties and premises. An incorrect amount or improper delivery method may require you to restart the case.

How careful terms can support a stronger tenancy

Thorough drafting may give you and your tenant a reference when expenses or improvements arise. That clarity can limit disruption and preserve your relationship during difficult discussions. Precise, enforceable terms often provide the foundation for both outcomes. Before you sign a lease or pursue a remedy, an attorney can identify terms that may not suit your property, transaction or Florida law. Counsel can also review a default notice before an error delays possession or increases your losses.]]> by Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[Drafting Earnouts When the Buyer Controls the Business After Closing]]> https://www.lesaklegal.com/?p=49433 2026-09-02T09:14:38Z 2026-09-02T09:14:38Z

Why Does Buyer Control Change the Value of an Earnout? After Closing, the Buyer may control pricing, staffing, customer relationships, budgets, product priorities, accounting practices, and contract timing. The Buyer has a legitimate interest in integrating the Company, changing unprofitable practices, reallocating personnel, and pursuing opportunities that benefit the combined business. The Seller, however, remains economically exposed to Buyer-controlled operating and accounting decisions because the Seller receives additional purchase price only if the Company satisfies the negotiated earnout target. The Acquisition Agreement therefore must allocate the tension between Buyer operating control and Seller earnout protection. A Buyer-favorable provision may preserve broad operating discretion except for actions taken in bad faith or primarily to avoid the Earnout Payment. A more Seller-protective provision may restrict specified actions, require defined efforts, preserve specified resources, or require operation consistent with an agreed business plan. Failure to achieve the Revenue, EBITDA, or other earnout target should not, by itself, establish a Buyer breach because ordinary business risks may prevent achievement even when the Buyer complies with the Acquisition Agreement. Delaware decisions generally enforce the operating allocation the parties negotiate. STX Business Solutions, LLC v. Financial-Information-Technologies, LLC enforced broad Buyer discretion despite the effect on the earnout, while Georgia Security Solutions LLC v. NewCBN, LLC allowed express covenant, calculation, and information-access claims to proceed where the Acquisition Agreement imposed specific operating covenants and information-access obligations. STX and Georgia Security show that the Revenue or EBITDA target and the earnout operating covenants perform different functions. The Revenue or EBITDA target determines when contingent purchase price becomes payable, while the earnout operating covenants determine whether Buyer-controlled decisions may lawfully change the performance used to calculate the Earnout Payment. A Seller therefore should not rely on the Revenue or EBITDA target itself as protection against Buyer-controlled conduct after Closing.

Which Post-Closing Operating Covenants Matter Most?

If the Acquisition Agreement conditions additional purchase price on the Company achieving a Revenue target, the earnout provisions should address the Buyer-controlled decisions most likely to move Revenue into, out of, or beyond the measurement period. Pricing, discounts, customer allocation, bundled sales, affiliate transactions, sales staffing, contract timing, returns, acquisitions, divestitures, and Revenue generated through another Buyer entity can all change the Revenue credited toward the Earnout Payment without changing the underlying commercial value of the customer relationship. If the Acquisition Agreement conditions additional purchase price on the Company achieving an EBITDA target, the earnout provisions also must determine which Buyer-controlled expenses reduce EBITDA. Assume the Company generates $2.3 million of EBITDA before Buyer integration charges and the Acquisition Agreement requires $2 million of EBITDA for a $500,000 Earnout Payment. If the Buyer allocates $700,000 of integration costs, corporate overhead, or management fees to the Company, reported EBITDA falls to $1.6 million and the Seller loses the entire $500,000 Earnout Payment. The Acquisition Agreement should state whether integration costs, corporate allocations, management fees, financing costs, restructuring expenses, transaction expenses, and post-Closing accounting changes reduce EBITDA. The Acquisition Agreement also should address conduct that can alter the earnout outside the financial formula, including diversion of customers or opportunities to Buyer affiliates, acceleration of expenses, delay of contracts or Revenue beyond the measurement date, discontinuation of identified products, or reallocation of key personnel. The Buyer should retain flexibility for bona fide business decisions, but the Seller should know which decisions may change the contingent purchase price.

Is a Commercially Reasonable Efforts Covenant Enough?

A commercially reasonable efforts covenant can limit Buyer discretion, but the Acquisition Agreement should state what the Buyer must use efforts to accomplish and how performance will be measured. The parties can use the Buyer's treatment of comparable businesses or products, an objective industry standard, an agreed business plan, or specific obligations such as maintaining identified personnel or funding an agreed marketing budget. Johnson & Johnson v. Fortis Advisors LLC affirmed breach findings for the remaining regulatory milestones under an efforts standard tied to the Buyer's usual practices for comparable priority medical devices. By contrast, Meyers v. Zimmer Biomet Holdings, Inc. dismissed an efforts claim where the agreement did not define commercially reasonable efforts and the plaintiff failed to identify an adequate contractual or industry benchmark. A commercially reasonable efforts covenant therefore should identify both the contractual objective and the standard for measuring the Buyer's conduct. Without a defined Buyer-practice, industry, business-plan, or other benchmark, the Seller may be unable to show that reduced staffing, budgets, marketing support, or other Buyer decisions violated the Acquisition Agreement rather than merely producing an unsuccessful business result.

Does Keeping the Seller Employed Solve the Control Problem?

Continued employment can preserve customer relationships, operating knowledge, and visibility into the Company, but employment does not necessarily give the Seller control over budgets, pricing, personnel, contracts, accounting, or strategy. The Buyer may retain all material operating authority, and the Seller may be terminated before the earnout period ends. If the Seller's continued service is expected to contribute materially to the earnout, the Acquisition Agreement and employment agreement should address termination without cause, resignation for good reason, and a material reduction in authority. The parties may provide for continued measurement, deemed achievement, acceleration of a specified amount, or another negotiated consequence so that termination of the Seller's employment does not unintentionally eliminate or accelerate contingent purchase price.

How Should the Earnout Be Calculated and Verified?

Because the Acquisition Agreement determines the Earnout Payment by applying an agreed formula to post-Closing performance, the earnout provisions should define exactly how Revenue, EBITDA, or another performance measure is calculated. The Acquisition Agreement should address Revenue recognition timing, cash collection versus Revenue recognition, affiliate transactions, bundled sales, acquisitions and divestitures, integration expenses, corporate allocations, and transaction-specific exclusions that could materially affect the Earnout Payment. The Acquisition Agreement also should establish the accounting hierarchy. If transaction-specific rules, an illustrative schedule, historical practices, and GAAP can produce different Earnout Payments, the Acquisition Agreement should state which source controls. The Buyer should not be able to change an accounting policy after Closing solely to reduce the Earnout Payment. No integration cost, corporate allocation, reserve, or other item should reduce the earnout calculation more than once unless the Acquisition Agreement expressly requires multiple effects. Because the Buyer controls the Company's books after Closing, the Seller needs contractual access to the information used to prepare the earnout calculation. The Acquisition Agreement should require the earnout statement and supporting records reasonably necessary to test the calculation, including relevant general ledger detail, customer and sales reports, allocation schedules, and workpapers. The Seller also should have a defined objection period and receive any undisputed Earnout Payment while disputed items are resolved.

How Should Earnout Disputes and Remedies Be Structured?

The Acquisition Agreement should distinguish technical calculation disputes from disputes over Buyer conduct or contract interpretation. An independent accountant may determine whether Revenue or EBITDA was calculated correctly under the agreed methodology, while a court or arbitrator should generally decide whether the Buyer breached an operating covenant, diverted Revenue, changed agreed accounting rules, or failed to provide required records. If the accounting calculation depends on a threshold contractual ruling, the Acquisition Agreement should establish which decision maker acts first. The Acquisition Agreement also should specify what happens if the Buyer breaches an earnout operating covenant, calculation rule, information-access obligation, or other earnout provision. A calculation error may require payment of the corrected Earnout Payment with interest, while Buyer conduct that prevents the Revenue, EBITDA, or other earnout target from being measured as agreed may justify deemed achievement, extension of the earnout period, acceleration of an agreed amount, or expectation damages. Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc. illustrates the potential exposure: after finding a breach of an express commercially reasonable efforts obligation tied to milestone payments, the Court of Chancery awarded approximately $180.9 million in expectation damages. The Acquisition Agreement should therefore state how contingent consideration will be valued or deemed achieved when Buyer conduct prevents the parties from directly observing whether the earnout target would have been satisfied. A Seller should not be left to prove an unknowable performance result after a Buyer breach has made the contractual performance path impossible to reconstruct.

Conclusion

An earnout makes part of the Seller's purchase price depend on results produced while the Buyer controls the Company. The Acquisition Agreement therefore should identify the Buyer-controlled decisions that may affect the Revenue, EBITDA, or other earnout target and establish the operating covenants, calculation rules, accounting hierarchy, information rights, dispute procedures, and remedies governing the Earnout Payment. For the Buyer, the objective is legitimate operating flexibility without turning every missed target into a contractual claim. For the Seller, the objective is preventing Buyer-controlled decisions or calculations from changing the contingent purchase price without an enforceable contractual standard. The Acquisition Agreement must allocate Buyer operating discretion, Seller earnout protection, calculation authority, information access, dispute resolution, and remedies before the Seller gives up control. By Joseph R. Luna

Primary Authorities

STX Business Solutions, LLC v. Financial-Information-Technologies, LLC, C.A. No. 2024-0038-JTL (Del. Ch. Oct. 31, 2024), aff'd, No. 494, 2024 (Del. June 25, 2025). Georgia Security Solutions LLC v. NewCBN, LLC, C.A. No. 2025-0798-JTL (Del. Ch. Aug. 3, 2026). Johnson & Johnson v. Fortis Advisors LLC, 352 A.3d 229 (Del. 2026). Meyers v. Zimmer Biomet Holdings, Inc., C.A. No. 2025-0732-BWD (Del. Ch. May 1, 2026). Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., 341 A.3d 513 (Del. Ch. 2025).]]> by Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[Buying the Dodgers: Deferred Compensation, Tax, and Ownership Risks]]> https://www.lesaklegal.com/?p=49434 2026-09-02T09:08:28Z 2026-09-02T09:08:28Z

There has been no shortage of discussion concerning the use of deferred player contracts by the Los Angeles Dodgers to build a championship roster. After the Dodgers’ signing of Kyle Tucker last offseason, reports suggest that approximately $1.0945 billion of nominal deferred compensation was outstanding to 10 Dodgers players, with payments extending from 2028 through 2047, including $680 million for Shohei Ohtani, $120 million for Mookie Betts, $66 million for Blake Snell, $57 million for Freddie Freeman, and $30 million for Kyle Tucker. Although the Dodgers reportedly owe approximately $1.0945 billion of deferred player compensation through 2047, the amount does not represent a $1.0945 billion unfunded liability that a buyer should automatically deduct from the purchase price. Article XVI of the 2022–2026 Major League Baseball Basic Agreement (“2022–2026 MLB CBA”) requires the Dodgers to maintain assets funding the present value of covered deferred compensation before the future player payments become due. A hypothetical sale of the Los Angeles Dodgers would require a buyer to look beyond the Club’s headline valuation and determine how its existing obligations, funding assets, and other transaction risks affect equity value. For purposes of determining equity value, the more relevant calculation is the present value at Closing of deferred compensation attributable to player services performed before Closing, reduced by the value of qualifying Article XVI funding assets that remain with the Club and are available to satisfy those obligations. Separately, Buyer would need to evaluate whether the remaining compensation obligations under each player contract exceed the expected economic value of the player services Buyer will receive after Closing, including where a player’s production has declined, the player is no longer expected to contribute meaningfully to the roster, or the Club otherwise remains obligated to pay substantial compensation for limited expected post-Closing production. The combined effect of the Dodgers’ net pre-Closing deferred compensation exposure and the economics of the remaining player contracts could materially affect the valuation of the Club and, ultimately, the price Buyer is willing to pay Seller by hundreds of millions of dollars. Adjusting the equity value to account for deferred compensation would be only one part of the transaction analysis. A buyer also would need to determine how the Club’s existing contracts and payroll history affect its competitive balance tax exposure, whether ownership-related financing or creditor risks could reach the Club or the assets being acquired, and how the potential expiration of the 2022–2026 MLB CBA could affect valuation, financing, MLB approval, transaction timing, and the economic risks assumed at Closing. Together, these issues would determine how the Dodgers’ reported enterprise value should be converted into the equity value payable to the Seller.

How Would Deferred Salary Affect a Dodgers Sale?

2022–2026 Major League Baseball Basic Agreement, Art. XVI “Deferred compensation obligations incurred in a Contract executed on or after September 30, 2002 must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned. For purposes of this Article XVI, full funding of the present value of deferred compensation obligations shall mean that the Club must have funded, for the duration of and without interruption in each year, the current present value of the then outstanding deferred payments, discounted by 5% annually.” The timing of deferred compensation funding under Article XVI of the 2022–2026 MLB CBA is critical to the M&A analysis because it determines when a Major League Baseball organization (“Club”) must fund compensation that may not be paid to the player until years later. Article XVI permits Clubs to defer player compensation without limiting the amount or percentage that may be deferred. A Club is not required to fund the deferred compensation when the player contract is signed or even when the compensation is earned. Instead, the Club must fully fund the present value of the deferred compensation on or before the second July 1 following the season in which the compensation was earned and thereafter continuously maintain the current present value of the outstanding payments until they are paid. The required funding amount is calculated using the CBA’s 5% annual discount rate (although Article XVI permits MLB and the MLB Players Association to revisit the rate for a succeeding July 1 if the J.P. Morgan Chase Bank prime rate on the preceding November 1 is 7% or higher). Accordingly, compensation earned during the 2024 season had to be fully funded by July 1, 2026, while compensation earned during the 2025 season must be fully funded by July 1, 2027. Applying Article XVI’s 5% present-value methodology to the Dodgers’ publicly reported deferred-compensation terms, the following schedule estimates the present value of deferred compensation that first becomes subject to the CBA’s funding requirement on each July 1:

July 1 Funding Deadline	Estimated New Funding Obligation
2026	$64.7 million
2027	$77.8 million
2028	$87.3 million
2029	$94.0 million
2030	$79.6 million
2031	$74.4 million
2032	$56.2 million
2033	$56.2 million
2034	$56.2 million
2035	$49.4 million

For a potential Buyer, the more important issue is the cumulative Article XVI funding exposure at Closing, not any single annual funding amount required thereafter. The Buyer would need the actual Uniform Player Contracts, compensation earning dates, payment dates, applicable Article XVI discount rates, quarterly funding certifications, custodial statements, and investment records to determine the required funding balance at Closing and to identify compensation earned before Closing whose second-July-1 funding deadline occurs afterward. Additionally, any Article XVI funding analysis must account for the relationship between the deferred payments and the player services that produced the obligation. Buyer’s assumption of the Club’s outstanding deferred compensation obligations at Closing will result in Buyer inheriting substantial future payment and funding obligations that may come due after a player’s peak performance years have passed, when the player is expected to provide declining production, or after the player is no longer on the roster. At the same time, the player’s pre-Closing services may already have increased attendance, sponsorship revenue, media value, postseason success, and overall franchise value, benefits that may be reflected in the enterprise value Buyer is paying for the Club. The transaction analysis therefore must determine not only when the deferred compensation must be funded and paid, but also whether the related player services were provided before or after Closing and which party receives the economic value of those services. Therefore, any M&A transaction should distinguish between (1) deferred compensation already earned and already required to be funded, (2) deferred compensation already earned but not yet subject to the Article XVI funding deadline, and (3) deferred compensation attributable to post-Closing player services. For each category, the parties should consider both the future funding burden and whether Buyer will receive the corresponding player services or is already paying through enterprise value for benefits generated before Closing. Separating deferred compensation by funding status and service period allows the parties to determine what portion of the exposure should reduce Seller’s equity value, what portion accompanies future services received by Buyer, and what qualifying funding assets should be credited in the purchase price calculation.

What Assets Must the Dodgers Maintain for Deferred Compensation?

2022–2026 Major League Baseball Basic Agreement, Art. XVI “Unless the Uniform Player’s Contract provides otherwise, a Club may fund deferred compensation obligations in such manner as it elects, provided that: (a) the funding method used by the Club must be such that the amount(s) funded are exclusively for the uses and purposes of satisfying the deferred compensation obligation(s) being funded; (b) the amount(s) funded are maintained in the form of unencumbered assets comprising cash or cash equivalents and/or registered and unrestricted readily marketable securities, unless a Club obtains the Parties’ prior written authorization of an alternative form; and (c) such amount(s) funded are subject to the claims of the Club’s general creditors.” The composition and legal status of Article XVI funding assets are also critical to the M&A analysis because they determine whether Buyer can rely on those assets to satisfy the deferred compensation obligations assumed at Closing and how much of their value should be credited in the purchase price calculation. Article XVI of the 2022–2026 MLB CBA does not require the Club to place deferred compensation into a specific escrow or trust. Instead, the Club may determine how to fund the obligation so long as the funding assets satisfy the CBA’s requirements concerning use, liquidity, marketability, and encumbrances. Moreover, because the funded amounts remain “subject to the claims of the Club’s general creditors,” the Article XVI funding pool is not equivalent to cash held in a bankruptcy-remote third-party escrow for the exclusive benefit of the players. Buyer will acquire both the existing funding assets and the obligation to maintain or increase the required funding after Closing. Pre-Closing creditor claims that remain enforceable against the Club after Closing could impair Buyer’s ability to rely on the funding pool because a creditor with an enforceable lien or other right against the funding assets may be able to reach them notwithstanding their designation for deferred compensation obligations. Closing the transaction would not, by itself, eliminate those creditor rights. Buyer therefore needs to determine what assets comprise the funding pool, who owns and controls them, where they are maintained, and whether they remain qualifying assets under Article XVI. Buyer also must determine whether any lien, encumbrance, affiliate claim, existing or potential Club liability, or insolvency proceeding could impair the assets’ availability after Closing and make their economic value to Buyer materially less than their stated balance.

How Will the Competitive Balance Tax Affect a Dodgers Sale?

The Dodgers’ competitive balance tax exposure is also a fundamental part of the M&A analysis because deferred compensation can reduce current cash salary without removing the compensation from MLB’s competitive balance tax calculation, leaving Buyer with a separate post-Closing economic burden arising from the Club’s existing player contracts and prior payroll history. Article XXIII of the 2022–2026 MLB CBA establishes the competitive balance tax, which imposes increasing tax rates on Clubs whose Actual Club Payroll exceeds specified annual thresholds. The applicable tax depends on both the amount by which the Club exceeds the thresholds and the number of consecutive years the Club has exceeded the base threshold. For 2026, the base threshold is $244 million and the third surcharge threshold is $304 million. Under Article XXIII(B), a third-time or later competitive balance tax payor faces a 50% base tax rate, plus a 60% surcharge on payroll above the third surcharge threshold, resulting in a 110% marginal tax rate on payroll in the highest tier. Deferred compensation does not avoid the competitive balance tax merely because the cash will be paid in a later year. Article XXIII generally attributes deferred compensation to the service seasons covered by the player contract and includes the compensation at stated value or present value when calculating the Club’s Actual Club Payroll. Deferred compensation therefore may reduce the Club’s current cash salary obligations without producing a corresponding reduction in its competitive balance tax payroll. The competitive balance tax consequences become particularly significant at the Dodgers’ current payroll level. As of August 26, 2026, estimates placed the payroll at approximately $338.1 million, competitive balance tax payroll at approximately $428.1 million, and projected competitive balance tax liability at approximately $177.9 million. The Dodgers therefore incur approximately $21 million of incremental cost from an additional $10 million of payroll above the third surcharge threshold ($304 million), consisting of the $10 million salary obligation plus approximately $11 million of additional competitive balance tax. Accordingly, Buyer should consider how the player contracts assumed at Closing and the Club’s inherited repeat-payor status will affect future CBT payroll and limit Buyer’s flexibility to add or retain players. Buyer may incur materially higher post-Closing roster costs even though Seller received the revenue and franchise-value increases generated by the pre-Closing payroll decisions that created those commitments and elevated tax rates. The purchase price analysis therefore should address both any accrued CBT liability and the economic burden of operating the Club under its existing payroll commitments and repeat-payor status after Closing.

How Should Deferred Compensation and Competitive Balance Tax Liability Affect the Purchase Price?

Forbes currently estimates the Dodgers at $7.8 billion of enterprise value, based on approximately $850 million of 2025 revenue and negative $20 million of operating income. However, the $7.8 billion enterprise value is not the amount Buyer would ultimately pay Seller. Buyer must still determine equity value by adjusting for debt, cash, deferred compensation exposure, competitive balance tax liabilities, and other negotiated purchase price adjustments. Deferred compensation complicates the enterprise-to-equity calculation because the future payment obligations, the Article XVI funding assets, and the player services that generated franchise value may fall into different ownership periods. Buyer should not deduct the Club’s entire nominal deferred payment schedule dollar for dollar because Article XVI requires qualifying assets to be maintained against covered deferred compensation. Conversely, the existence of Article XVI funding assets does not eliminate Buyer’s economic exposure if the assets are insufficient, unavailable, subject to creditor claims, or required to satisfy obligations attributable to player services performed before Closing. A more useful measure for determining equity value is “Net Deferred Compensation Exposure” at Closing. “Net Deferred Compensation Exposure” should be calculated at Closing as the present value of the deferred compensation obligations Buyer will be required to fund or pay after Closing, reduced by (A) qualifying Article XVI funding assets that remain with the Club and are available to satisfy the corresponding obligations and (B) the value of the remaining player services Buyer is expected to receive. Applying a Net Deferred Compensation Exposure formula in this manner avoids overstating or understating equity value by giving Buyer credit for deferred obligations associated with benefits realized before Closing while giving Seller credit for the qualifying funding assets and remaining player services Buyer receives. Competitive balance tax requires a separate enterprise-to-equity analysis. Buyer may inherit both an accrued tax liability attributable to pre-Closing payroll and the consequences of the Club’s prior payroll history. Because the applicable CBT rates depend in part on how many consecutive seasons the Club has exceeded the threshold, Buyer could acquire the Dodgers subject to repeat-payor rates and incur substantially higher taxes on payroll added after Closing as a result of payroll decisions made before the acquisition. Seller may have received the revenue and franchise-value increases generated by those decisions, while Buyer bears the resulting post-Closing tax burden and reduced flexibility to add or retain players. The equity value analysis therefore should separately address (1) Net Deferred Compensation Exposure calculated at Closing, (2) any accrued competitive balance tax liability attributable to pre-Closing payroll, and (3) the economic effect of inheriting the Club’s repeat-payor status after Closing. Separating the deferred compensation and competitive balance tax adjustments is essential to ensure that the purchase price reflects the economic burdens Buyer inherits from pre-Closing payroll and compensation decisions while preserving Seller’s credit for qualifying funding assets and future player services that remain with the Club after Closing.

How Could the Mark Walter Investigation Affect a Sale?

The investigation involving Mark Walter creates a separate category of transaction risk from the Dodgers’ player obligations and operating liabilities. Reuters reported in August 2026 that federal prosecutors and the SEC were investigating whether Mark Walter or affiliated businesses concealed financial connections while borrowing from insurance companies under common control. Public reporting has not established wrongdoing by the Dodgers, and Dodgers president Stan Kasten has stated that the investigation is not expected to affect the Club and that no sale process has begun. TWG Global similarly stated on August 26, 2026 that the Dodgers are not for sale and that the Club’s player obligations remain funded. For M&A purposes, the investigation matters only to the extent a Walter-related obligation, creditor claim, or regulatory proceeding could reach the Dodgers’ ownership interests, Club assets, transaction proceeds, financing, or Article XVI funding assets, or could delay MLB approval or Closing. Buyer therefore would need to review Walter-related loans, guarantees, liens, equity pledges, intercompany obligations, and related-party financing to determine whether any identified exposure has a direct connection to the Dodgers or the transaction. Diligence should focus on the Club’s ownership chain, pledges of ownership interests, liens on Club assets, intercompany loans and guarantees, and the ownership and custody of Article XVI funding assets. Any identified exposure should be addressed through targeted protections in the transaction documents, such as lien releases, Closing conditions, specific representations and warranties, or a specific indemnity supported by a third-party escrow, rather than through a general purchase price reduction based merely on the existence of the investigation.

How Could a Work Stoppage Affect Signing and Closing?

The status of the next MLB collective bargaining agreement is a critical component to the M&A analysis because Buyer could agree to purchase the Dodgers under the current economic rules but acquire the Club under materially different rules. The 2022–2026 MLB CBA expires at 11:59 p.m. Eastern on December 1, 2026, and no successor agreement has been announced as of August 27, 2026. Collective bargaining is underway between the MLB and the MLB Players Association, with MLB proposing a 2027 salary cap of $245.3 million and a salary floor of $171.2 million and the MLB Players Association opposing the proposed salary-cap system. The unresolved labor dispute creates uncertainty concerning both a potential work stoppage and the economic framework that will govern the Club after Closing. The potential effect on a Dodgers acquisition extends beyond whether games are ultimately lost. The Dodgers currently operate at payroll levels materially above the proposed $245.3 million cap, so Buyer would be underwriting the Club without knowing whether the rules governing roster construction, competitive balance taxes, deferred compensation, revenue sharing, and player contracts will remain substantially the same. A successor CBA containing a hard salary cap, materially different competitive balance tax rules, or restrictions on future deferred compensation could alter the operating model that helped produce the Dodgers’ current revenue and franchise value. Conversely, a successor collective bargaining agreement that increases competitive balance tax thresholds or otherwise permits continued high payroll spending could preserve more of the existing model. For a Dodgers sale signed before completion of a successor CBA, the acquisition agreement should allocate both the risk of a work stoppage and the risk that the governing economic rules change between signing and Closing. The parties should specify whether Buyer must close during a league-wide labor stoppage, whether a work stoppage or material change in the rules governing the Club affects closing obligations or liability allocations, and who bears any lost revenue or increased operating costs arising before Closing. The equity value analysis also should consider the effect of any new tax, deferred compensation, or revenue-sharing rules on equity value..

Conclusion

The Dodgers’ reported $7.8 billion enterprise value would be the starting point for a potential sale, not the amount ultimately payable to Seller. Equity value should not be calculated by deducting the Club’s approximately $1.0945 billion of deferred compensation dollar for dollar or by automatically crediting the Article XVI funding assets at face value. Instead, Net Deferred Compensation Exposure at Closing should reflect the deferred obligations Buyer assumes, the qualifying funding assets that remain available to satisfy them, and the remaining player services Buyer receives. Deferred compensation is only part of the equity value analysis. Buyer will also likely inherit accrued competitive balance tax liabilities, elevated repeat-payor rates resulting from pre-Closing payroll decisions, and reduced flexibility to construct the roster after Closing. Walter-related obligations or regulatory proceedings could create additional exposure if they reach the Dodgers’ ownership interests, Club assets, transaction financing, or Article XVI funding assets. A successor CBA or work stoppage could further alter the economic and operating assumptions underlying the transaction. The ultimate transaction question is not whether the Dodgers possess extraordinary value, but how much of that value should be reflected in Seller’s equity proceeds after giving Seller credit for the qualifying funding assets and the value of the remaining player services Buyer receives, while accounting for the deferred compensation, competitive balance tax, ownership, and labor risks Buyer inherits at Closing. By Joseph R. Luna.

Associated Press, “Los Angeles Dodgers’ Deferred Payment Obligations” (Jan. 21, 2026), https://apnews.com/article/dodgers-deferred-payments-6ed8b6a0807492b2f6f017a62a856965. The schedule reports $1.0945 billion of nominal deferrals to 10 players from 2028 through 2047.
2022–2026 Major League Baseball Basic Agreement, art. XVI, pp. 89–90, available through the MLB Players Association, https://www.mlbplayers.com/resources/major-league-cba
2022–2026 Major League Baseball Basic Agreement, art. XVI, p. 89.
The table estimates only the present value of deferred compensation reaching its initial Article XVI funding deadline during each listed year and does not show the Dodgers’ total Article XVI funding balance or cash actually paid to players in any particular year. The figures are author estimates derived from the Associated Press deferred-payment schedule using the Article XVI 5% methodology. Because the publicly reported schedule does not contain all contract terms necessary to reproduce the required funding calculations, the estimates are not official Dodgers or MLB certifications and cannot be independently verified without the actual contracts, compensation earning dates, payment dates, applicable opt-out provisions, and operative Article XVI discount rate.
2022–2026 Major League Baseball Basic Agreement, art. XVI, p. 90. Article XVI requires qualifying unencumbered assets, subjects the funded amounts to claims of Club general creditors, and requires quarterly certifications and supporting records.
2022–2026 Major League Baseball Basic Agreement, art. XXIII(A)(11), (B)(1)–(5), pp. 116–121. The 2026 base threshold is $244 million, the third surcharge threshold is $304 million, the highest marginal rate for a third-time or later payor is 110%, final Actual Club Payroll is calculated on December 2, and tax is due by January 21 of the next calendar year.
2022–2026 Major League Baseball Basic Agreement, art. XXIII(E)(6), pp. 135–136. Deferred compensation is attributed to the applicable service seasons and included at stated value or present value under the Article XXIII methodology.
MLB Trade Rumors, “Dodgers Payroll — 2026” (figures stated as of Aug. 26, 2026), https://www.mlbtraderumors.com/payrolltracker/dodgers.
Justin Teitelbaum & Brett Knight, “Baseball’s Most Valuable Teams 2026,” Forbes (Mar. 20, 2026, updated Apr. 15, 2026), https://www.forbes.com/mlb-valuations/list/. Forbes describes the valuation as enterprise value, meaning equity plus net debt, and reports $850 million of 2025 revenue and negative $20 million of operating income.
Reuters, “U.S. Prosecutors Focus on Four Businesses Tied to Billionaire Mark Walter, WSJ Reports” (Aug. 17, 2026), https://www.investing.com/news/stock-market-news/us-prosecutors-focus-on-four-businesses-tied-to-billionaire-mark-walter-wsj-reports-4863059.
Sonja Chen, “Lakers Sale ‘Really Has Nothing to Do With the Dodgers,’ per Team President,” MLB.com (Aug. 13, 2026), https://www.mlb.com/news/sale-of-lakers-has-no-impact-on-dodgers; Sonja Chen, “Team President Reaffirms Stance: ‘Dodgers Are Not Being Sold,’” MLB.com (Aug. 22, 2026), https://www.mlb.com/news/stan-kasten-discusses-mark-walter-dodgers.
Bill Shaikin, “Mark Walter’s TWG Global Defends Dodgers Financing and Lakers Sale,” Los Angeles Times (Aug. 26, 2026), https://www.latimes.com/sports/story/2026-08-26/mark-walter-twg-global-defends-dodgers-financing-lakers-sale
2022–2026 Major League Baseball Basic Agreement, art. XXVI, p. 169, available through the MLB Players Association, https://www.mlbplayers.com/resources/major-league-cba
Associated Press, “MLB Owners Propose a Salary Cap for the First Time Since Baseball’s 1994–95 Strike” (May 28, 2026), https://apnews.com/article/96cc8ac5ee5328f3d5c904c55d7cc60f.

]]> by Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[The M&A Definitions That Quietly Rewrite the Purchase Price]]> https://www.lesaklegal.com/?p=49435 2026-09-02T08:58:14Z 2026-09-02T08:58:14Z

A negotiated enterprise value is only the starting point for determining what a seller actually receives at Closing. In an acquisition or purchase agreement, the definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” convert the headline valuation or purchase price into the final amount the seller receives at Closing. Small changes to the definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” can shift hundreds of thousands or millions of dollars between Buyer and Seller even when the agreed enterprise value and the target’s underlying financial position remain unchanged. Assume the parties agree on a $30 million enterprise value and the target pays a $400,000 transaction advisory fee to its investment banker one day before Closing. Payment of the fee reduces the target’s bank balance and therefore reduces the “Cash” delivered at Closing. If “Transaction Expenses” also includes transaction fees paid before Closing, the Buyer may seek an additional $400,000 purchase price deduction. If “Transaction Expenses” includes only transaction fees remaining unpaid at Closing, the $400,000 fee reduces seller proceeds once through lower “Cash” rather than a second time as a “Transaction Expense.” The Seller’s proceeds from the sale therefore depend not only on the $30 million enterprise value, but also on where the acquisition agreement places the $400,000 fee within the purchase price formula. The definitions of “Indebtedness” and “Working Capital” can produce equally significant differences by determining which liabilities reduce the purchase price as debt-like obligations and which operating assets and liabilities enter the working capital adjustment. Purchase price definitions are not merely accounting labels. The negotiated language determines which amounts increase or reduce seller proceeds, whether one amount affects more than one purchase price component, and how much of the agreed enterprise value the Seller ultimately receives.

Why Do Purchase Price Definitions Control the M&A Economics?

Most private company acquisitions begin with an agreed enterprise value and then adjust the enterprise value for specified balance sheet and transaction items. A simplified formula might provide: Purchase Price = Enterprise Value + Cash − Indebtedness − Transaction Expenses ± Working Capital Adjustment The definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” determine whether particular assets, liabilities, operating accounts, and transaction costs increase or reduce seller proceeds. A $40 million enterprise value therefore does not establish the amount payable to the Seller unless the acquisition agreement also establishes what qualifies as “Cash,” which obligations constitute “Indebtedness,” which operating assets and liabilities enter “Working Capital,” and which sale-related costs constitute “Transaction Expenses.” The parties generally can negotiate transaction-specific meanings for “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses.” A liability classified one way for accounting purposes may receive different purchase price treatment if the acquisition agreement expressly assigns the liability to a different purchase price category. The acquisition agreement also can establish how the definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” interact with GAAP, historical accounting practices, and an illustrative closing statement. The purchase price formula therefore must be read as a coordinated economic system. The negotiated treatment of each asset, liability, accrual, and transaction cost determines where the amount enters the formula and whether the amount increases or decreases what the Seller receives at Closing.

How Does the Definition of Cash Change Seller Proceeds?

“Cash” generally increases seller proceeds, but the amount reported as cash on the target’s balance sheet does not necessarily equal the amount credited to the Seller under the purchase price formula. Assume the target has $2 million in its bank accounts at Closing, including $500,000 of customer funds that must be remitted to third parties and $200,000 that is restricted under a regulatory requirement. If “Cash” includes every amount held in the target’s bank accounts, the Seller may receive a $2 million purchase price credit. If “Cash” includes only funds freely available to the Buyer after Closing, the Seller may receive only a $1.3 million credit. The target has the same $2 million bank balance whether “Cash” includes customer funds and restricted cash or excludes customer funds and restricted cash. The $700,000 difference in seller proceeds results entirely from whether the definition of “Cash” includes the $500,000 of customer funds and the $200,000 of restricted cash. The definition of “Cash” should also address outstanding checks, deposits in transit, security deposits, and other amounts that may appear within cash accounts but may not be freely available after Closing. The acquisition agreement should coordinate the treatment of outstanding checks and deposits in transit between “Cash” and “Working Capital” so that the same operating cash movement does not increase or reduce the purchase price through both “Cash” and “Working Capital.”

How Broadly Should Indebtedness Be Defined?

“Indebtedness” generally reduces seller proceeds, but acquisition agreements often define “Indebtedness” more broadly than conventional borrowed money. Depending on the negotiated language, “Indebtedness” may include accrued interest, finance leases, guarantees, unpaid earnouts from prior acquisitions, deferred compensation, deferred acquisition consideration, and other debt-like obligations. Whether an obligation receives debt-like treatment therefore depends on the acquisition agreement, not merely on GAAP or the obligation’s balance sheet classification. Assume the target owes $1 million of deferred purchase price from an acquisition completed two years before the current transaction. If “Indebtedness” includes deferred acquisition consideration, the $1 million obligation reduces seller proceeds dollar for dollar. If “Indebtedness” includes only borrowed money and similar funded debt, the $1 million deferred purchase price obligation may fall outside “Indebtedness” and reduce seller proceeds only if “Working Capital,” “Transaction Expenses,” or another expressly identified purchase price adjustment captures the deferred acquisition consideration. The target owes the same $1 million whether “Indebtedness” includes deferred acquisition consideration or is limited to borrowed money and similar funded debt. The difference in seller proceeds results entirely from whether the definition of “Indebtedness” treats the $1 million deferred acquisition consideration as a debt-like purchase price deduction. The definition of “Indebtedness” should identify whether contingent obligations are included, how contingent obligations are valued, whether an obligation must remain unpaid at Closing, and whether “Working Capital” or “Transaction Expenses” already accounts for the same obligation. An amount deducted as “Indebtedness” should not reduce seller proceeds again through “Working Capital” or “Transaction Expenses” unless the acquisition agreement expressly requires the same amount to affect more than one purchase price component.

What Belongs in Working Capital?

“Working Capital” generally measures the ordinary operating assets and liabilities delivered with the business against an agreed working capital target. The Working Capital adjustment is intended to determine whether the Buyer receives the agreed level of operating working capital at Closing, rather than to include every asset and liability classified as current under GAAP. Assume the parties establish a $3 million working capital target. At Closing, the target has $5 million of current assets included in “Working Capital” and $2.5 million of current liabilities included in “Working Capital.” Closing Working Capital therefore equals $2.5 million, producing a $500,000 downward purchase price adjustment. Assume, however, that the $2.5 million of current liabilities includes $600,000 of customer deposits. If the definition of “Working Capital” includes the $600,000 of customer deposits, Closing Working Capital remains $2.5 million and the Seller receives a $500,000 downward purchase price adjustment. If the definition of “Working Capital” excludes the $600,000 of customer deposits, Closing Working Capital increases to $3.1 million and the Seller instead receives a $100,000 upward purchase price adjustment. The target has the same assets, liabilities, and $600,000 of customer deposits under both calculations. The $600,000 difference in purchase price results entirely from whether the definition of “Working Capital” includes or excludes the customer deposits. The acquisition agreement should therefore identify the specific accounts included in “Working Capital” and apply the same account inclusions, exclusions, and accounting methodology when establishing the working capital target and calculating Closing Working Capital. If customer deposits, deferred revenue, payroll accruals, reserves, prepaid expenses, or other accounts are excluded when establishing the working capital target but included when calculating Closing Working Capital, the Buyer may receive a purchase price reduction for liabilities that were not reflected in the working capital target used to negotiate the transaction.

When Is an Expense a Transaction Expense?

“Transaction Expenses” generally reduce seller proceeds by allocating specified sale-related costs to the Seller through the purchase price calculation. Depending on the negotiated language, “Transaction Expenses” may include legal fees, investment banking fees, accounting fees, sale bonuses, change-in-control payments, and other costs incurred because of the transaction. Whether a cost reduces seller proceeds as a “Transaction Expense” therefore depends on the acquisition agreement, not merely on whether the expense relates generally to the sale. Assume the target owes a $400,000 investment banking fee for advising the Seller on the transaction. If the target pays the $400,000 fee before Closing, the payment reduces the target’s bank balance and therefore reduces “Cash.” If “Transaction Expenses” includes only transaction fees remaining unpaid at Closing, the $400,000 investment banking fee reduces seller proceeds once through lower “Cash.” If “Transaction Expenses” also includes transaction fees paid before Closing, the Buyer may seek an additional $400,000 purchase price deduction unless the acquisition agreement prevents the $400,000 investment banking fee from reducing seller proceeds through both “Cash” and “Transaction Expenses.” The target incurs the same $400,000 investment banking fee whether the fee is paid before Closing or remains unpaid at Closing. The difference in seller proceeds results entirely from whether the definition of “Transaction Expenses” includes fees already paid by the target and whether the acquisition agreement coordinates the treatment of the $400,000 investment banking fee between “Cash” and “Transaction Expenses.” The definition of “Transaction Expenses” should identify which Seller transaction costs are included, whose expenses qualify, what connection each expense must have to the transaction, and whether each expense must remain unpaid at Closing. The acquisition agreement should also distinguish Seller transaction costs from ordinary operating expenses, employee retention costs, Buyer integration expenses, and professional fees incurred primarily for the Buyer’s post-closing benefit. An expense that reduces “Cash” before Closing should not reduce seller proceeds again as a “Transaction Expense” unless the acquisition agreement expressly requires both purchase price adjustments.

Why Must the Definitions Be Tested Together?

The definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” operate together to convert enterprise value into seller proceeds. Overlap among the four definitions can cause the same asset or liability to affect the purchase price more than once, while inconsistent accounting rules can change the amount assigned to a particular purchase price category. Northern Data AG v. Riot Platforms, Inc. illustrates both risks. Riot acquired Whinstone for stock plus $80 million of base cash consideration, adjusted for “Final Net Working Capital,” “Final Closing Indebtedness,” “Final Closing Cash,” and “Final Transaction Expenses.” The stock purchase agreement excluded from “Final Closing Indebtedness” amounts already included in Net Working Capital or Transaction Expenses, preventing duplicate purchase price deductions. Northern Data calculated approximately $52.8 million of cash consideration at Closing, while Riot later proposed approximately $30 million of additional downward adjustments, including a $28.7 million increase to “Final Closing Indebtedness.” Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023-0650-LWW, at 5–6 (Del. Ch. June 2, 2025). Northern Data also shows why the acquisition agreement should establish an accounting hierarchy. The stock purchase agreement required the Accounting Expert to apply GAAP consistently with the Illustrative Closing Statement and the stock purchase agreement. The Court of Chancery held that GAAP controlled, while the Illustrative Closing Statement guided the calculation when GAAP permitted more than one acceptable accounting method. The acquisition agreement should therefore identify where each material asset, liability, accrual, or transaction cost enters the purchase price formula and which accounting methodology determines the amount. “Working Capital” and “Indebtedness” should exclude amounts already captured through another purchase price category when Buyer and Seller intend only one deduction, and the acquisition agreement should establish whether transaction-specific accounting principles, the illustrative closing statement, historical accounting practices, or GAAP controls the calculation. An express anti-duplication provision can provide: “No amount included in Closing Working Capital shall also be included in Indebtedness or Transaction Expenses, and no amount shall otherwise reduce the Purchase Price more than once.” Coordinating “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” therefore determines where each amount enters the purchase price formula, which party bears the economic cost, and how much the Seller ultimately receives.

How Should the Purchase Price Definitions Be Drafted?

The definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” should be drafted and tested as parts of a single purchase price calculation rather than negotiated separately.

Build the purchase price model using the target’s actual accounts. Apply “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” to realistic Closing amounts before signing so Buyer and Seller can see how each definition increases or reduces seller proceeds.
State the specific inclusions and exclusions for “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses.” Identify how the acquisition agreement treats restricted cash, customer funds, deferred purchase price obligations, customer deposits, payroll accruals, reserves, transaction bonuses, professional fees, and other accounts expected to affect the Closing purchase price.
Use the same account perimeter and accounting methodology for the working capital target and Closing Working Capital. The accounts and accounting principles used to establish the working capital target should correspond to the accounts and accounting principles used to calculate Closing Working Capital.
Establish the accounting hierarchy. State whether the express definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses,” transaction-specific accounting principles, the illustrative closing statement, historical accounting practices, or GAAP controls when two accounting sources produce different treatment for the same account.
Address timing and prohibit duplicate deductions. State whether an asset, liability, accrual, or transaction cost must be unpaid, accrued, due, incurred, or triggered as of Closing. The acquisition agreement should also prohibit an amount deducted as “Indebtedness,” “Working Capital,” or “Transaction Expenses” from reducing seller proceeds again through another purchase price category unless Buyer and Seller expressly intend multiple adjustments.
Include an illustrative calculation using actual account names. An illustrative closing statement should show how customer deposits, restricted cash, deferred consideration, payroll accruals, transaction fees, and other specifically identified accounts enter “Cash,” “Indebtedness,” “Working Capital,” or “Transaction Expenses” before the Closing calculation becomes a post-closing dispute.

Conclusion

The negotiated enterprise value is only the starting point for determining seller proceeds. The definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” determine which assets increase the purchase price, which liabilities reduce the purchase price, which operating accounts affect the working capital adjustment, and which transaction costs remain the Seller’s responsibility. Buyer and Seller should test the definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” against realistic Closing amounts before signing. The acquisition agreement should identify where each material account enters the purchase price formula, prevent the same asset, liability, or transaction cost from affecting seller proceeds more than once, and establish whether transaction-specific accounting principles, the illustrative closing statement, historical accounting practices, or GAAP controls the calculation. A few words in the purchase price definitions can move hundreds of thousands or millions of dollars while the agreed enterprise value stays fixed. By Joseph R. Luna

Primary Authorities

Northern Data AG v. Riot Platforms, Inc., C.A. No. 2023-0650-LWW (Del. Ch. June 2, 2025)]]> by Lesak, Hamilton, Calhoun & Pontieri, Attorneys at Law <![CDATA[How Defined Terms Change Rights and Liability in M&A Agreements]]> https://www.lesaklegal.com/?p=49436 2026-09-02T08:55:45Z 2026-09-02T08:55:45Z

In an acquisition or purchase agreement for an M&A deal, defined terms allow the parties to give ordinary words their own contractual meanings. Transactional attorneys often begin with definitions borrowed from prior transactions or similar agreements, but even a small change to familiar language can materially change the economics of the deal. A few added or removed words from an otherwise standard definition of “Indebtedness,” “Working Capital,” “Losses,” “Knowledge,” or “Affiliate” can change the purchase price, expand or narrow indemnification exposure, determine whether a closing condition is satisfied, or alter which liabilities remain with the seller. The significance of a defined term lies not in the label, but in what the parties decide the label includes and excludes. Two acquisition agreements can use the same defined term while producing different results from the same underlying facts. Defined terms are therefore not merely drafting conveniences. Defined terms establish the transaction-specific rules that determine who and what the agreement covers, what facts create liability, and when contractual rights become operative.

What Happens When the Agreement Does Not Define a Term?

When a material term is left undefined in the acquisition or purchase agreement, the parties lose the ability to control precisely how the agreement will apply that term to the transaction. A court will not supply a transaction-specific definition simply because one side later argues that its preferred meaning better reflects the economics of the deal. Instead, courts will review the agreement objectively, read the disputed language together with the surrounding provisions, and apply the ordinary meaning that best fits the contract as a whole. A term becomes ambiguous only when the contractual language supports more than one reasonable interpretation. Weinberg v. Waystar, Inc. shows how much can turn on language that ordinarily would not appear to require a definition. The Delaware Supreme Court had to determine whether the word “and” in a stock repurchase provision required both stated conditions to occur before the company could exercise its repurchase right, or whether the provision permitted repurchase upon either condition. The dispute therefore affected whether the company had a contractual right to repurchase the stock at all. 294 A.3d 1039, 1043–45 (Del. 2023). The drafting lesson is not that every word in an acquisition agreement should be defined. Defined terms are most important when ordinary usage does not establish the transaction rule the parties actually intend. If competing meanings could change the purchase price, determine whether a representation is breached, expand the persons or liabilities covered by an indemnity, or affect whether a closing condition has been satisfied, the agreement should state the intended meaning rather than leave the economic consequence to later interpretation.

Which M&A Definitions Require the Most Attention?

Defined terms generally perform four different functions. Some determine the purchase price. Others establish the scope of the acquired business, allocate knowledge or liability, or identify the event that activates a right or obligation. Each function creates a different drafting risk. Economic definitions determine what gets paid. Scope definitions determine who and what the agreement covers. Knowledge and liability definitions determine when contractual exposure exists and what may be recovered. Trigger definitions determine when a closing, consent, payment, termination, or other contractual right becomes operative.

Economic Definitions Determine What Gets Paid

Definitions such as “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” can directly change the amount payable to the seller. Assume the target has $2 million in its bank accounts at Closing, including $500,000 of customer funds that the target holds for remittance to third parties. If “Cash” includes every amount held in the target’s bank accounts, the Seller may receive a $2 million purchase price credit. If “Cash” excludes funds held for customers or other third parties, the Seller receives only a $1.5 million credit. Nothing about the target’s bank balance changed. The $500,000 difference results entirely from the meaning the parties assigned to “Cash.” Definitions of “Cash,” “Indebtedness,” “Working Capital,” and “Transaction Expenses” therefore must be coordinated rather than negotiated as unrelated provisions. The interaction among important purchase-price definitions presents a separate issue involving accounting classifications, purchase price adjustments, and duplicate deductions, but the broader drafting principle is the same: the label does not control the economic result. The negotiated definition does.

Scope Definitions Determine Who and What the Agreement Covers

Definitions such as “Affiliate,” “Business,” and “Material Contract” determine which people, entities, activities, and contractual relationships are subject to the acquisition agreement. Assume the Seller owns the target company and also owns a separate consulting company. If “Affiliate” includes every entity under common control with the Seller, a restrictive covenant binding the Seller and its Affiliates may also restrict the consulting company after Closing. If “Affiliate” is limited to entities controlled by the target company, the consulting company may fall outside the restriction. Nothing about the Seller’s ownership structure changed. The difference results entirely from the scope the parties assigned to “Affiliate.” The same issue arises with “Business.” A definition limited to the business conducted as of Closing may exclude a product line discontinued before the transaction, while a definition covering activities conducted during the prior three years may bring the discontinued product line within a noncompetition covenant or representations concerning the acquired Business. “Material Contract” can change disclosure obligations in the same way. Assume one customer has 12 separate purchase orders worth $15,000 each and the agreement requires disclosure of Material Contracts exceeding $100,000. If each Contract is tested separately, none exceeds the threshold. If “Material Contract” aggregates related Contracts with the same counterparty, the $180,000 customer relationship must be disclosed. Scope definitions therefore should identify not only what is included, but also whose relationships count, whether related items are aggregated, and when the relevant status is measured. A small change to “Affiliate,” “Business,” or “Material Contract” can determine whether the same entity, activity, or customer relationship falls inside or outside the operative provisions of the agreement.

Knowledge and Liability Definitions Determine When Exposure Exists and What May Be Recovered

Definitions such as “Knowledge” and “Losses” can determine whether a representation has been breached and the amount the Buyer may recover if a breach occurs. Assume the Seller represents that, to Seller’s “Knowledge,” no Material Customer has threatened to terminate or materially reduce its relationship with the Company. The Company’s head of sales received an email from its largest customer stating that the customer intends to move its business to a competitor, but the chief executive officer and chief financial officer have not seen the email. If “Knowledge” means only the actual knowledge of the chief executive officer and chief financial officer, the customer email may not make the representation inaccurate. If “Knowledge” includes information those executives would have discovered after reasonable inquiry of the head of sales, the same customer email may produce the opposite result. Nothing about the customer communication changed. Whether the Seller breached the representation depends on whose knowledge the parties agreed to attribute to the Seller and whether the definition requires any inquiry. The definition should therefore identify the individuals whose knowledge counts, whether actual or constructive knowledge applies, what inquiry is required, and when “Knowledge” is measured. “Losses” can change the financial consequence of a breach in the same way. Assume a representation breach causes the acquired company to lose a customer that historically generated $1 million of annual EBITDA. If “Losses” is limited to direct out-of-pocket costs, the Buyer may be unable to recover the reduction in the value of the acquired business attributable to the lost customer. If “Losses” expressly includes lost profits or diminution in value, the Buyer may assert a substantially larger claim, including a claim that the lost $1 million of annual EBITDA reduced the value of the business by several million dollars. The underlying breach and customer loss remain the same. The definition of “Losses” changes which financial consequences may form part of the Buyer’s claim. Recovery may still be limited by causation requirements, mitigation obligations, baskets, caps, survival periods, and other indemnification provisions. Definitions of “Knowledge” and “Losses” therefore address different parts of the same liability framework. “Knowledge” can determine whether a qualified contractual statement is inaccurate, while “Losses” can determine the categories of damages potentially recoverable from the resulting breach.

Trigger Definitions Determine When Contractual Rights Become Operative

Definitions such as “Change of Control,” “Company Sale,” and “Material Adverse Effect” determine whether a specified event has occurred and whether the contractual rights tied to that event become operative. Assume the Seller is entitled to a $5 million earnout that accelerates upon a “Change of Control” of the acquired Company. Two years after Closing, the Buyer sells substantially all of the Company’s assets to a third party but retains ownership of the Company’s equity. If “Change of Control” is limited to a transfer of more than 50% of the Company’s voting equity, the asset sale may not accelerate the $5 million earnout. If “Change of Control” also includes a sale of all or substantially all of the Company’s assets, the same transaction may require immediate payment. Nothing about the subsequent sale changed. Whether the Seller receives the $5 million acceleration payment depends on the transactions the parties chose to include within “Change of Control.” The definition should therefore identify the transaction structures capable of triggering the contractual right, including equity sales, mergers, asset sales, indirect parent-level transactions, and a series of related transactions that collectively transfer control. “Company Sale” can determine whether sale-related obligations such as drag-along rights, appraisal waivers, or mandatory participation provisions become effective. If “Company Sale” includes a merger, a merger may require stockholders to support the transaction and waive appraisal rights. If “Company Sale” excludes mergers, the same stockholder obligations may not apply. The definition of “Company Sale” should therefore identify the transaction structures that trigger the specific sale-related obligations imposed by the agreement. “Material Adverse Effect” can determine whether deterioration in the target’s business permits the Buyer to refuse to close or terminate the acquisition agreement. The parties therefore negotiate not only what level of deterioration may constitute a “Material Adverse Effect,” but also which causes of deterioration are excluded when determining whether a “Material Adverse Effect” has occurred. Common exclusions may include general economic conditions, industry-wide developments, changes in Law, or other risks the parties agree should remain with the Buyer. Definitions of “Change of Control,” “Company Sale,” and “Material Adverse Effect” therefore should be drafted by identifying both the event covered by each defined term and the specific contractual consequence attached to that event. The definition of “Change of Control” should correspond to the transactions that trigger an earnout acceleration, consent right, or other change-of-control protection. The definition of “Company Sale” should correspond to the transactions that trigger sale-related obligations such as drag-along requirements or appraisal waivers. The definition of “Material Adverse Effect” should correspond to the adverse developments that permit the Buyer to invoke the applicable closing condition or termination right.

Why Must Defined Terms Be Coordinated With the Operative Provisions?

A defined term only matters because an operative provision attaches a payment, disclosure obligation, covenant, closing condition, or remedy to the defined term. The parties therefore must review each material defined term together with every provision that uses the defined term. “Affiliate” provides a simple example. Assume “Affiliate” includes every entity under common control with the Seller. A restrictive covenant applying to the Seller and its Affiliates may restrict the Seller’s other portfolio companies, while an indemnification provision protecting the Buyer and its Affiliates may permit entities acquired by the Buyer after Closing to assert indemnification rights. The meaning assigned to “Affiliate” may be appropriate for one provision but substantially broader than the parties intended for another provision. “Knowledge” presents a similar issue within the representations and warranties. Assume the Seller represents that no litigation is pending or, to Seller’s “Knowledge,” threatened. The “Knowledge” qualifier applies to threatened litigation because the representation expressly incorporates “Knowledge” for threatened claims. The Seller cannot rely on the definition of “Knowledge” to qualify the separate statement that no litigation is pending. The operative language determines which factual statements receive the negotiated knowledge limitation. “Losses” also must be read together with the indemnification provisions. Assume “Losses” expressly includes attorneys’ fees, lost profits, and diminution in value. Inclusion of lost profits and diminution in value within “Losses” establishes the categories of damages the Buyer may seek, but the indemnification article may still prohibit recovery below a $250,000 basket, cap general indemnification claims at $5 million, require claims to be asserted within 18 months after Closing, or exclude damages that are too remote or speculative. Defined terms therefore should never be reviewed as an alphabetical glossary of terms read in isolation. The parties should identify every operative provision using “Affiliate,” “Knowledge,” “Losses,” “Company Sale,” “Change of Control,” or another material defined term and determine whether the negotiated meaning produces the intended result each time the defined term appears.

How Should Defined Terms Be Drafted?

The drafting process for definitions should begin with the commercial consequence the parties intend to create and then work backward to the language necessary to produce the intended result. First, identify every provision that uses the defined term. If “Affiliate” appears in restrictive covenants, confidentiality provisions, releases, and indemnification provisions, the parties should determine whether the same group of related entities should be covered in all four provisions. If “Change of Control” appears in an earnout, consent provision, and employee incentive plan, the parties should identify which transaction structures should trigger each contractual right. Second, specify who or what the defined term includes and when the defined term is measured. Affiliate relationships, ownership, employee status, customer relationships, and individual knowledge can change between signing, Closing, and the date a post-closing claim arises. A definition of “Affiliate” applicable to a post-closing restrictive covenant should establish whether Affiliate status is determined at Closing or throughout the restricted period. A definition of “Knowledge” should identify whose knowledge counts at signing and whose knowledge counts when the representations are repeated at Closing. Third, address aggregation when contractual thresholds depend on multiple related items. Assume the acquisition agreement requires disclosure of every “Material Contract” exceeding $100,000 and one customer has 12 purchase orders worth $15,000 each. The parties can eliminate uncertainty by providing: “For purposes of Section 4.12, ‘Material Contract’ includes any group of related Contracts with the same counterparty that, taken together, requires payments exceeding $100,000 during any 12-month period.” The aggregation language causes the $180,000 customer relationship to qualify as a “Material Contract” even though no individual purchase order exceeds $100,000. Fourth, use section-specific rules when one meaning cannot serve every provision. If the parties want “Affiliate” to include all commonly controlled entities for confidentiality purposes but only specified Seller-controlled entities for a noncompetition covenant, the acquisition agreement should establish different rules expressly. If an exclusion from “Material Adverse Effect” applies only when determining whether the Buyer must close, the acquisition agreement should not leave the parties to argue whether the Material Adverse Effect exclusion also excuses compliance with a separate operating covenant. Finally, test material defined terms against the actual transaction before signing. Apply “Affiliate” to the Seller’s organizational chart. Apply “Business” to the operations the Seller is selling and retaining. Apply “Material Contract” to the actual contract list. Apply “Knowledge” to the executives and employees who possess information relevant to the qualified representations. Apply “Losses” to realistic indemnification claims. Apply “Change of Control” and “Company Sale” to the equity sales, mergers, asset sales, and parent-level transactions that could realistically occur after Closing.

Conclusion

Defined terms allow the parties to an acquisition agreement to assign transaction-specific meanings to words that may otherwise appear ordinary or familiar. Economic definitions such as “Cash” determine what gets paid. Scope definitions such as “Affiliate,” “Business,” and “Material Contract” determine who and what the agreement covers. “Knowledge” and “Losses” determine when contractual exposure exists and what damages may be recoverable. “Change of Control,” “Company Sale,” and “Material Adverse Effect” determine when payment rights, sale obligations, closing conditions, and termination rights become operative. A few words added to or removed from a familiar definition can change who is restricted after Closing, whether a customer contract must be disclosed, whether a representation has been breached, what damages may be recovered, or whether a $5 million earnout becomes immediately payable. Defined terms may look like routine drafting, but the negotiated meaning assigned to each defined term can materially change the deal. By Joseph R. Luna

Primary Authorities

Weinberg v. Waystar, Inc., 294 A.3d 1039 (Del. 2023)]]>