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In Western Pharmacy (“Claimant”) v. Park Medical et al. (“Respondents”), the Tribunal issued the final award on 28 March 2022 in Claimant’s favour. The Tribunal held that Respondents – the sellers of a chain of pharmacies – committed a negligent misrepresentation towards the Claimant – the purchaser. The Tribunal calculated the damages using the same EBITDA multiple that Claimant used to calculate the purchase price for the pharmacies.

The dispute was governed by California law. The Award is available on Jus Mundi.[1]

Factual Background (simplified)

The dispute concerned a 2017 leveraged buyout transaction in which Claimant, purchased seven of Respondents’ pharmacies for the price of $25 million. For the calculation of the purchase price, Claimant relied on the financial statements prepared by Respondents. Claimant calculated the purchase price at an EBITDA multiple of 6.05 plus inventory and accounts receivable.

What Claimant did not know when it purchased the pharmacies was the following: in the past, Respondents’ management had used so-called Cardinal Inventory Management reports when preparing the inventory in the financial statements. In the Fourth Quarter of 2016, Respondents’ management realized that the values from the Cardinal Inventory Management reports were wrong and could no longer be used. Respondents’ management used estimated inventory numbers and adjusted the assets in the balance sheet. In the First Quarter of 2017, Respondents’ management also had difficulty determining the accounts receivable and had to use an estimate and further adjusted the assets in the balance sheet. Respondents’ management did not tell the Claimant that the financial reporting of inventory and accounts receivable had been erroneous and unreliable.

The Claimant relied on the adjusted financial statements, which were warranted in the Asset Purchase Agreement as being true and correct. The final price of $25 million was a multiple of 6.05 times the incorrect EBITDA, namely $4.133 million. The Respondents were aware that the EBITDA for 2017 would be have been $3.1 million but for the inventory and accounts receivable adjustments, but failed to disclose this to the Claimant.

The Dispute

The Claimant brought claims of deceit against Respondents on the grounds that Respondents falsely represented the EBITDA, which Claimant relied upon for the calculation of the purchase price.

The Decision of the Arbitral Tribunal

The Tribunal held that Respondents committed a negligent misrepresentation. Interestingly, the Tribunal concluded that the financial statements prepared by Respondents’ management comply with Generally Accepted Accounting Principles (“GAAP”), but that the misrepresentation followed from “not telling the whole story“:

Knowing the extent to which the Buyers were relying on precise financial information, it was incumbent on Respondents to speak completely when they did provide information about Park Medical, and this they failed to do. Respondents did not tell Messrs. Grayson and Faris there were problems discerning inventory and receivables in the 4th Quarter of 2016 and the first four-plus months of 2017. The financial statements generated for those periods included management estimations, and there is no evidence this had ever been required before. I do acknowledge Generally Accepted Accounting Principles allow for reasonable estimates by management if there is documentation to support the assumptions underlying the estimations. But when disruptions in business operations require that management use modified source data to generate financial statements, such a change in accounting practice is material information that should be shared with readers to whom those reports are given.

I find it inescapable that every piece of financial information provided to the Buyers showed a progressively improving enterprise (See, e.g, Ex. 3, pp. 332451-332474). There was every reason for Messrs. Grayson and Faris to believe they were purchasing a business on the upswing—an enterprise that would be a solid platform from which they could grow the operation to the ‘next plateaus’

[…] The question is not whether the December 2016 and June 30, 2017 Financial Statements are accurate or compliant with Generally Accepted Accounting Principles. The problem is a failure of those statements to tell the whole story

[…] Failure to disclose the breakdown in financial systems rendered the Profit & Loss Statements a ‘half-truth’.“.

According to the Tribunal it was a combination of three facts that led the Tribunal to conclude a misrepresentation: (i) Respondents knew that Claimant relied on the financial statements, (ii) a dramatic change in accounting practice is material information for a purchaser, and (iii) the financial statements provided to Claimant painted the picture of a growing operation.

On quantum, the Tribunal measured the damages on the basis of the shortfall of the EBITDA times the EBITDA multiple:

The measure of damages in a California claim for deceit is the difference between the “actual value of that with which the defrauded person parted and the actual value of that which he received” (Civ. Code section 3343(a); see CACI 1923).

[…] The most important fact in my valuation of the seven pharmacy stores is the candid, casual statements of Messrs. Robins and Grasela. Theirs’ is the best evidence. No doubt, their comments about EBITDA being $3.1 million were intended as a best estimate rather than a precise calculation, but these estimations come closest to objective truth. Had their best estimate been $200,000 to $400,000 more, I would have expected them to say so.

[…] The murkiness of Park Medical’s financial statements leads me to conclude the candid assessments of Messrs. Grasela and Robins are the most reliable valuation. A multiple of 6.05 times an EBITDA of $3.1 million is the most reasonable methodology for valuing Park Medical. EBITDA of $3.1 million evidences the actual value of the business as $18,755,000, plus inventory and receivables. Claimant paid $25 million-plus, and its damage is $6.245 million.

It does not become clear from the Award whether the multiple of 6.05 was disclosed to Respondents, whether the Parties both calculated with such multiple, or whether the Tribunal arrived at the multiple in the way of back calculation.

As a result, the Tribunal awarded an amount of $6.245 million as damages for the overpaid purchase price / difference between the price that Claimant paid and the value that Claimant received.

[1]   [0]=en.


Dr. Markus Altenkirch LL.M. is a member of Baker McKenzie's Dispute Resolution teams in Düsseldorf and London . Markus focuses on international arbitration and currently represents clients in ICC, DIS, LCIA, and HKIAC arbitrations. Markus primarily advises on Post-M&A as well as construction disputes. Moreover, Markus regularly advises on disputes in the Pharmaceutical industry. In 2021, Markus has started his own podcast series: #zukunft. Markus, and his colleague Lisa Reiser, interview leading arbitration practitioners and in-house lawyers on the future of international arbitration. Markus teaches at the University of Mainz and regularly publishes in the field of international arbitration. He is a contributor and editor for Global Arbitration News. Markus Altenkirch can be reached at and +49 211 311160 and +44 20 7919 1000.


Olena Oliinyk is an intern in the Dispute Resolution Practice Group in the Dusseldorf office. She studied law at Ivan Franko National University of Lviv/Ukraine.