What are completion accounts?
The parties may in a share purchase transaction adopt a consideration structure whereby the purchase price is not fixed before completion and instead the transaction proceeds on the basis of a price which is adjusted after completion, on the basis of a set of completion accounts relating to the target company drawn up to the completion date.
Central to any completion accounts mechanism are the accounting standards and methodology that will be applied when drawing up the accounts. The standards and methodology chosen can have a significant bearing on the matters included in the completion accounts and the values attributed to them.
The share purchase agreement will also specify the process for preparing and agreeing the completion accounts. Frequently, this will involve a first draft of the accounts being drawn up by one party, with the other party having a specified period following their receipt in which to review and either agree the draft accounts, or to raise any objections concerning the basis of their preparation or any of the figures included in the draft accounts. If any objections are raised by the reviewing party and the parties fail to reach agreement during a specified period of time, the completion accounts mechanism will commonly provide for the outstanding issues to be referred to an expert for determination.
Construction of applicable accounting policies
The Court of Appeal in Shafi v Rutherford  considered the construction of a clause in a share purchase agreement setting out the accounting policies to be applied when preparing completion accounts for the transaction.
The accounting policies and practices to be applied when drawing up completion accounts is an area that can potentially lead to post-completion disputes. This case serves to emphasise the importance of taking particular care when drafting the related accounting policies provisions within a share purchase agreement.
Whilst each case will turn on individual facts and circumstances, the case does point towards that if the parties expect the completion accounts for their transaction to be prepared on a basis that is consistent with target's last annual accounts, regardless of whether the policies and practices actually applied, express wording to that effect should be used in the share purchase agreement.