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"text": ")", "paragraph_id": "para_11" }, { "text": ")", "paragraph_id": "para_12" }, { "text": ")", "paragraph_id": "para_13" }, { "text": ")", "paragraph_id": "para_14" }, { "text": ")", "paragraph_id": "para_15" }, { "text": ")", "paragraph_id": "para_16" }, { "text": ")", "paragraph_id": "para_17" }, { "text": ")", "paragraph_id": "para_18" }, { "text": ")", "paragraph_id": "para_19" }, { "text": ")", "paragraph_id": "para_20" }, { "text": ")", "paragraph_id": "para_21" }, { "text": "C.A. No. 12585-VCL", "paragraph_id": "para_22" }, { "text": "MEMORANDUM OPINION", "paragraph_id": "para_23" }, { "text": "Date Submitted: November 7, 2016", "paragraph_id": "para_24" }, { "text": "Date Decided: December 5, 2016", "paragraph_id": "para_25" }, { "text": "David E. Ross, Garrett B. Moritz, ROSS ARONSTAM & MORITZ LLP, Wilmington,", "paragraph_id": "para_26" }, { "text": "Delaware; Jonathan M. Moses, Kevin S. Schwartz, Andrew J.H. Cheung, Cecilia A. Glass,", "paragraph_id": "para_27" }, { "text": "Bita Assad, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys", "paragraph_id": "para_28" }, { "text": "for Plaintiff Chicago Bridge & Iron Company N.V.", "paragraph_id": "para_29" }, { "text": "Kevin G. Abrams, John M. Seaman, Daniel R. Ciarrocki, April M. Ferraro, ABRAMS &", "paragraph_id": "para_30" }, { "text": "BAYLISS LLP, Wilmington, Delaware; Peter N. Wang, Yonaton Aronoff, Douglas S.", "paragraph_id": "para_31" }, { "text": "Heffer, Alisha L. McCarthy, FOLEY & LARDNER LLP, New York, New York; Attorneys", "paragraph_id": "para_32" }, { "text": "for Defendants Westinghouse Electric Company LLC and WSW Acquisition Co., LLC.", "paragraph_id": "para_33" }, { "text": "LASTER, Vice Chancellor.", "paragraph_id": "para_34" }, { "text": "1", "paragraph_id": "para_35" }, { "text": "Chicago Bridge & Iron Company N.V. (the “Seller”) sold a subsidiary to an", "paragraph_id": "para_36", "court_paragraph": 1 }, { "text": "acquisition vehicle controlled by Westinghouse Electric Company LLC (the “Buyer”). The", "paragraph_id": "para_37" }, { "text": "transaction was governed by a purchase agreement dated October 27, 2015 (the “Purchase", "paragraph_id": "para_38" }, { "text": "Agreement” or “PA”). The purchase price consisted of $0 at closing, subject to (i) a post-", "paragraph_id": "para_39" }, { "text": "closing purchase price adjustment and (ii) potential deferred consideration and earnout", "paragraph_id": "para_40" }, { "text": "payments.", "paragraph_id": "para_41" }, { "text": "The Purchase Agreement contains a dispute resolution mechanism for resolving", "paragraph_id": "para_42" }, { "text": "disagreements over the purchase price adjustment. The Seller started using the dispute", "paragraph_id": "para_43" }, { "text": "resolution mechanism, then shifted course and filed this lawsuit. The Buyer has moved for", "paragraph_id": "para_44" }, { "text": "judgment on the pleadings, arguing that the dispute resolution mechanism establishes a", "paragraph_id": "para_45" }, { "text": "mandatory path for resolving the parties’ disagreements. This decision grants the Buyer’s", "paragraph_id": "para_46" }, { "text": "motion.", "paragraph_id": "para_47" }, { "text": "I. FACTUAL BACKGROUND", "paragraph_id": "para_48" }, { "text": "The facts are drawn from the pleadings and the documents they incorporate by", "paragraph_id": "para_49" }, { "text": "reference. The standard for a motion for judgment on the pleadings calls for drawing all", "paragraph_id": "para_50" }, { "text": "reasonable inferences in favor of the non-movant. In this case, the standard has little", "paragraph_id": "para_51" }, { "text": "practical effect, because the plain language of the Purchase Agreement controls.", "paragraph_id": "para_52" }, { "text": "A. The Parties Enter Into The Purchase Agreement.", "paragraph_id": "para_53" }, { "text": "The Buyer designs nuclear power plants. Through its former subsidiary, CB&I", "paragraph_id": "para_54" }, { "text": "Stone & Webster, Inc. (the “Company”), the Seller built nuclear power plants.", "paragraph_id": "para_55" }, { "text": "In 2008, the Buyer and the Company were hired to design and build two nuclear", "paragraph_id": "para_56" }, { "text": "power plants. During regulatory review, the Buyer was forced to make changes to the", "paragraph_id": "para_57" }, { "text": "2", "paragraph_id": "para_58" }, { "text": "design. The projects suffered delays and severe cost overruns, and disagreements arose", "paragraph_id": "para_59", "court_paragraph": 2 }, { "text": "over who bore responsibility. From 2012 through 2015, various participants in the projects", "paragraph_id": "para_60" }, { "text": "litigated against each other over these issues.", "paragraph_id": "para_61" }, { "text": "In summer 2015, the Seller and the Buyer agreed to resolve their part of the dispute", "paragraph_id": "para_62" }, { "text": "by having the Buyer acquire the Company. They memorialized their deal in the Purchase", "paragraph_id": "para_63" }, { "text": "Agreement.", "paragraph_id": "para_64" }, { "text": "B. The Terms Of The Purchase Agreement", "paragraph_id": "para_65" }, { "text": "The Purchase Agreement provided for a purchase price at closing of $0, subject to", "paragraph_id": "para_66" }, { "text": "a post-closing adjustment and with the prospect of deferred payments in the future. In", "paragraph_id": "para_67" }, { "text": "exchange, the Buyer agreed to assume all of the Company’s current and potential liabilities,", "paragraph_id": "para_68" }, { "text": "including any liabilities that might arise from the cost overruns.", "paragraph_id": "para_69" }, { "text": "The purchase price provision was complex. Section 1.2(a) of the Purchase", "paragraph_id": "para_70" }, { "text": "Agreement stated:", "paragraph_id": "para_71" }, { "text": "(a) The aggregate consideration for the purchase of the Transferred", "paragraph_id": "para_72" }, { "text": "Equity Interests shall be an amount in cash equal to:", "paragraph_id": "para_73" }, { "text": "(i) (A) $0, less (B) the Closing Indebtedness Amount, (C) (x) if", "paragraph_id": "para_74" }, { "text": "the amount of the Target Net Working Capital Amount exceeds the Net", "paragraph_id": "para_75" }, { "text": "Working Capital Amount, less the amount by which the Target Net Working", "paragraph_id": "para_76" }, { "text": "Capital Amount exceeds the Net Working Capital Amount and (y) if the Net", "paragraph_id": "para_77" }, { "text": "Working Capital Amount exceeds the Target Net Working Capital Amount,", "paragraph_id": "para_78" }, { "text": "plus the amount by which the Net Working Capital Amount exceeds the", "paragraph_id": "para_79" }, { "text": "Target Net Working Capital Amount, less (D) the Company Transaction", "paragraph_id": "para_80" }, { "text": "Expenses (the amount resulting from the calculation in this Section 1.2(a)(i),", "paragraph_id": "para_81" }, { "text": "the “Closing Date Purchase Price”); plus", "paragraph_id": "para_82" }, { "text": "(ii) any Deferred Purchase Price that becomes due and payable to", "paragraph_id": "para_83" }, { "text": "[the Seller] . . . ; plus", "paragraph_id": "para_84" }, { "text": "(iii) any Net Proceeds Earnout Amounts that become due and", "paragraph_id": "para_85" }, { "text": "payable to [the Seller] . . . ; plus", "paragraph_id": "para_86" }, { "text": "3", "paragraph_id": "para_87" }, { "text": "(iv) any Milestone Payments that become due and payable to [the", "paragraph_id": "para_88", "court_paragraph": 3 }, { "text": "Seller] . . . (together with the Closing Date Purchase Price, Deferred Purchase", "paragraph_id": "para_89" }, { "text": "Price and Net Proceeds Earnout Amounts, the “Aggregate Purchase Price”).", "paragraph_id": "para_90" }, { "text": "PA § 1.2(a). Under this framework, the adjustments in Section 1.2(a)(i) affected the", "paragraph_id": "para_91" }, { "text": "calculation of the purchase price as of closing and generated the Closing Date Purchase", "paragraph_id": "para_92" }, { "text": "Price. The Deferred Purchase Price, the Net Proceeds Earnout Amounts, and the Milestone", "paragraph_id": "para_93" }, { "text": "Payments constituted deferred consideration that might be received over time. For", "paragraph_id": "para_94" }, { "text": "simplicity, this decision refers to the former as the “Closing Date Adjustment” and the", "paragraph_id": "para_95" }, { "text": "latter as the “Earnout Amounts.” These are labels of convenience and do not alter the", "paragraph_id": "para_96" }, { "text": "treatment of the amounts under the Purchase Agreement.", "paragraph_id": "para_97" }, { "text": "The Purchase Agreement capped the Earnout Amounts. That cap was tied in part to", "paragraph_id": "para_98" }, { "text": "the Closing Date Adjustment. See PA § 11.1 (definition of “Sharing Band,” definition of", "paragraph_id": "para_99" }, { "text": "“Net Proceeds Earnout Increase Amount”). The Purchase Agreement did not, however, cap", "paragraph_id": "para_100" }, { "text": "the Closing Date Adjustment.", "paragraph_id": "para_101" }, { "text": "The magnitude of the Closing Date Adjustment could be quite large. The Purchase", "paragraph_id": "para_102" }, { "text": "Agreement defined the Target Net Working Capital Amount as $1.174 billion. It then", "paragraph_id": "para_103" }, { "text": "called for the purchase price to be adjusted based on the Net Working Capital Amount so", "paragraph_id": "para_104" }, { "text": "that the Company would have that amount of cash on its books as of closing. Assuming", "paragraph_id": "para_105" }, { "text": "the other elements of the formula remained constant, this meant that if the Net Working", "paragraph_id": "para_106" }, { "text": "Capital Amount was less than the Target Net Working Capital Amount, the Seller had to", "paragraph_id": "para_107" }, { "text": "pay the Buyer the difference. PA § 1.4(g). If the Net Working Capital Amount was zero,", "paragraph_id": "para_108" }, { "text": "then the Seller would have to pay the Buyer $1.174 billion. But the calculation was", "paragraph_id": "para_109" }, { "text": "4", "paragraph_id": "para_110" }, { "text": "reciprocal, so if the Company had more cash on its books than the Target Net Working", "paragraph_id": "para_111", "court_paragraph": 4 }, { "text": "Capital Amount, then the Buyer would pay the difference to the Seller.", "paragraph_id": "para_112" }, { "text": "The Purchase Agreement implemented the resolution of the parties’ disputes", "paragraph_id": "para_113" }, { "text": "through a broad mutual release, which extends to “any and all rights, defenses, claims or", "paragraph_id": "para_114" }, { "text": "causes of action . . . known and unknown, foreseen and unforeseen, arising prior to or on", "paragraph_id": "para_115" }, { "text": "the Closing” that the parties had or “may have in the future” against one another. PA §", "paragraph_id": "para_116" }, { "text": "12.18. The mutual release does not “limit[] the rights of [the Buyer] or the Company . . .", "paragraph_id": "para_117" }, { "text": "under [the Purchase] Agreement.” Id.", "paragraph_id": "para_118" }, { "text": "The parties signed the Purchase Agreement on October 27, 2015. They agreed to a", "paragraph_id": "para_119" }, { "text": "closing date of December 31, 2015. Between June 30, 2015 and closing, the Seller", "paragraph_id": "para_120" }, { "text": "contributed approximately $1 billion to the Company to fund ongoing work on the projects.", "paragraph_id": "para_121" }, { "text": "C. The Closing Date Adjustment", "paragraph_id": "para_122" }, { "text": "As the closing approached, the Seller prepared the Closing Payment Statement,", "paragraph_id": "para_123" }, { "text": "which had to include a “good faith estimate” of an “Estimated Closing Date Purchase", "paragraph_id": "para_124" }, { "text": "Price.” PA § 1.4(a). The Closing Payment Statement had to be prepared in accordance with", "paragraph_id": "para_125" }, { "text": "generally accepted accounting principles (“GAAP”) and a set of “Agreed Principles”", "paragraph_id": "para_126" }, { "text": "identified in Schedule 11.1(a) to the Purchase Agreement. Id. § 1.4(f). On December 28,", "paragraph_id": "para_127" }, { "text": "2015, the Seller provided the Buyer with a Closing Payment Statement that included an", "paragraph_id": "para_128" }, { "text": "Estimated Net Working Capital Amount of $1,601,805,000. The Seller’s estimate", "paragraph_id": "para_129" }, { "text": "exceeded the Target Net Working Capital Amount and suggested a payment from the", "paragraph_id": "para_130" }, { "text": "Buyer to the Seller of approximately $428 million.", "paragraph_id": "para_131" }, { "text": "5", "paragraph_id": "para_132" }, { "text": "After closing, the Buyer was obligated to provide the Seller with a “Closing", "paragraph_id": "para_133", "court_paragraph": 5 }, { "text": "Statement” setting forth the Buyer’s “good faith calculations” of the “Closing Date", "paragraph_id": "para_134" }, { "text": "Purchase Price.” PA § 1.4(b). The Closing Statement also had to be prepared in accordance", "paragraph_id": "para_135" }, { "text": "with GAAP and the Agreed Principles. Id. § 1.4(f). On April 28, 2016, the Buyer presented", "paragraph_id": "para_136" }, { "text": "the Seller with its Closing Statement. The Buyer calculated the Net Working Capital", "paragraph_id": "para_137" }, { "text": "Amount at closing as negative $976,500,000. This figure was dramatically less than the", "paragraph_id": "para_138" }, { "text": "Target Net Working Capital Amount and suggested a payment from the Seller to the Buyer", "paragraph_id": "para_139" }, { "text": "of approximately $2.15 billion.", "paragraph_id": "para_140" }, { "text": "The wide gap stemmed from four changes that the Buyer made to the Seller’s", "paragraph_id": "para_141" }, { "text": "Closing Payment Statement. First, the Buyer reduced by 30% an outstanding receivable on", "paragraph_id": "para_142" }, { "text": "the Company’s balance sheet called the “claim cost.” The claim cost asset represented", "paragraph_id": "para_143" }, { "text": "“costs incurred and paid for by the Company for items that would be presented for recovery", "paragraph_id": "para_144" }, { "text": "from either the project owners or the Buyer as a matter of contractual entitlement or as", "paragraph_id": "para_145" }, { "text": "claims for overruns for which the Company was not responsible.” Compl. ¶ 29. The Buyer", "paragraph_id": "para_146" }, { "text": "asserted that the Seller’s estimate of “100 percent collectability” violated GAAP.", "paragraph_id": "para_147" }, { "text": "Second, the Buyer adjusted the claim cost receivable to reflect the cost of the design", "paragraph_id": "para_148" }, { "text": "changes that were mandated during regulatory review. The Buyer established a reserve for", "paragraph_id": "para_149" }, { "text": "these costs and deducted the amount of the reserve from the Seller’s Closing Payment", "paragraph_id": "para_150" }, { "text": "Statement.", "paragraph_id": "para_151" }, { "text": "Third, the Buyer increased by 30% the estimates of the cost to complete the projects.", "paragraph_id": "para_152" }, { "text": "The Buyer made this adjustment because it believed that the projects would cost $3.2", "paragraph_id": "para_153" }, { "text": "billion more to complete than the Seller had initially predicted.", "paragraph_id": "para_154" }, { "text": "6", "paragraph_id": "para_155" }, { "text": "Fourth, the Buyer claimed that the Seller had violated GAAP by omitting a liability", "paragraph_id": "para_156", "court_paragraph": 6 }, { "text": "of $432 million that related to the Seller’s acquisition of the Company. The Buyer deducted", "paragraph_id": "para_157" }, { "text": "this amount.", "paragraph_id": "para_158" }, { "text": "D. The Seller Disputes The Buyer’s Closing Date Adjustment.", "paragraph_id": "para_159" }, { "text": "Once the Buyer submitted the Closing Statement, the Seller had sixty days to raise", "paragraph_id": "para_160" }, { "text": "any objections. If the Seller did not raise any timely objections, the Closing Statement", "paragraph_id": "para_161" }, { "text": "would become “final, conclusive, binding and non-appealable.” Id.", "paragraph_id": "para_162" }, { "text": "If submitted, the Seller’s objections would trigger the dispute resolution mechanism", "paragraph_id": "para_163" }, { "text": "in Section 1.4 of the Purchase Agreement. It required that the Buyer and the Seller negotiate", "paragraph_id": "para_164" }, { "text": "for thirty days “in good faith” in an effort to resolve the objections. PA § 1.4(c). If the", "paragraph_id": "para_165" }, { "text": "parties were unsuccessful, then either could submit to “[an] Independent Auditor for review", "paragraph_id": "para_166" }, { "text": "and resolution in accordance with the terms and provisions hereof, any and all matters that", "paragraph_id": "para_167" }, { "text": "remain in dispute with respect to the Objections Statement, the Closing Statement and the", "paragraph_id": "para_168" }, { "text": "calculations set forth therein.” Id. The Purchase Agreement provided that the", "paragraph_id": "para_169" }, { "text": "determinations of the Independent Auditor were “final, conclusive, binding, non-", "paragraph_id": "para_170" }, { "text": "appealable and incontestable by the parties hereto and each of their respective Affiliates", "paragraph_id": "para_171" }, { "text": "and successors and permitted assigns, and . . . [shall] not be subject to dispute for any", "paragraph_id": "para_172" }, { "text": "reason other than manifest error or fraud.” Id.", "paragraph_id": "para_173" }, { "text": "The Purchase Agreement provided that if either party invoked the Independent", "paragraph_id": "para_174" }, { "text": "Auditor process, then it became mandatory and the parties were required to “use their", "paragraph_id": "para_175" }, { "text": "commercially reasonable best efforts to cause the Independent Auditor to resolve all such", "paragraph_id": "para_176" }, { "text": "7", "paragraph_id": "para_177" }, { "text": "disputes as soon as practicable . . . .” Id. Section 1.4(c) characterized the Independent", "paragraph_id": "para_178", "court_paragraph": 7 }, { "text": "Auditor as an “expert and not . . . an arbitrator.” It further stated that", "paragraph_id": "para_179" }, { "text": "[i]n resolving any disputed item, the Independent Auditor may not assign a", "paragraph_id": "para_180" }, { "text": "value to any item greater than the highest value for such item claimed by", "paragraph_id": "para_181" }, { "text": "either [the Buyer] or [the Seller] or less than the lowest value for such item", "paragraph_id": "para_182" }, { "text": "claimed by either [the Buyer] or [the Seller]. The Independent Auditor’s", "paragraph_id": "para_183" }, { "text": "determinations shall be based solely on written submissions by [the Buyer]", "paragraph_id": "para_184" }, { "text": "and [the Seller] that are in accordance with the applicable guidelines and", "paragraph_id": "para_185" }, { "text": "procedures set forth herein . . . and on the definitions included herein.", "paragraph_id": "para_186" }, { "text": "Id. § 1.4(c).", "paragraph_id": "para_187" }, { "text": "After the Buyer presented the Seller with its Closing Statement on April 28, 2016,", "paragraph_id": "para_188" }, { "text": "the Buyer and the Seller agreed to extend the Seller’s sixty-day objections period. During", "paragraph_id": "para_189" }, { "text": "that time, the Seller raised several objections to the Buyer’s calculations. The Buyer and", "paragraph_id": "para_190" }, { "text": "the Seller’s discussions regarding the objections continued into the summer.", "paragraph_id": "para_191" }, { "text": "E. This Litigation", "paragraph_id": "para_192" }, { "text": "On July 21, 2016, shortly before the expiration of the extension to the objections", "paragraph_id": "para_193" }, { "text": "period, the Seller filed this action against the Buyer. The Seller’s complaint asserts two", "paragraph_id": "para_194" }, { "text": "counts for declaratory relief. Count I contends that the Buyer’s calculation of the Closing", "paragraph_id": "para_195" }, { "text": "Date Adjustment breached the express terms of the Purchase Agreement. Count II contends", "paragraph_id": "para_196" }, { "text": "that the Buyer’s calculation of the Closing Date Adjustment breached the implied covenant", "paragraph_id": "para_197" }, { "text": "of good faith and fair dealing that inheres in the Purchase Agreement.", "paragraph_id": "para_198" }, { "text": "The gist of the Seller’s theory is that other provisions in the Purchase Agreement", "paragraph_id": "para_199" }, { "text": "foreclose the Buyer from making adjustments to items that appeared on the Company’s", "paragraph_id": "para_200" }, { "text": "balance sheet or adding liabilities with the avowed goal of complying with GAAP. The", "paragraph_id": "para_201" }, { "text": "8", "paragraph_id": "para_202" }, { "text": "Seller observes that in Section 2.6(a) of the Purchase Agreement, the Seller made the", "paragraph_id": "para_203", "court_paragraph": 8 }, { "text": "following representation:", "paragraph_id": "para_204" }, { "text": "2.6 Financial Statements.", "paragraph_id": "para_205" }, { "text": "(a) [The Seller] has delivered to [the Buyer] the financial", "paragraph_id": "para_206" }, { "text": "statements of the Company and its Subsidiaries (adjusted to reflect the", "paragraph_id": "para_207" }, { "text": "Business) included as Schedule 2.6(a) of the Seller Disclosure Schedule", "paragraph_id": "para_208" }, { "text": "(collectively, the “Financial Statements”). The Financial Statements have", "paragraph_id": "para_209" }, { "text": "been prepared in accordance with GAAP, except as otherwise indicated and", "paragraph_id": "para_210" }, { "text": "subject to normal and recurring year-end adjustments (which are not material", "paragraph_id": "para_211" }, { "text": "to the Business) and the absence of footnotes. The Financial Statements fairly", "paragraph_id": "para_212" }, { "text": "present, in all material respects, the financial position and results of", "paragraph_id": "para_213" }, { "text": "operations of the Company and its consolidated Subsidiaries (adjusted to", "paragraph_id": "para_214" }, { "text": "reflect the Business), as applicable, as of the dates, and for the periods,", "paragraph_id": "para_215" }, { "text": "indicated therein.", "paragraph_id": "para_216" }, { "text": ". . .", "paragraph_id": "para_217" }, { "text": "(e) There are no Liabilities of the Company or any of its", "paragraph_id": "para_218" }, { "text": "Subsidiaries, whether accrued, absolute, determined or contingent, except for", "paragraph_id": "para_219" }, { "text": "(i) Liabilities disclosed and provided for in the balance sheets included in the", "paragraph_id": "para_220" }, { "text": "Financial Statements, (ii) Liabilities incurred in accordance with or in", "paragraph_id": "para_221" }, { "text": "connection with this Agreement, (iii) Liabilities incurred in the Ordinary", "paragraph_id": "para_222" }, { "text": "Course of Business since June 30, 2015 and (iv) Liabilities that have not had", "paragraph_id": "para_223" }, { "text": "and would not be reasonably likely to have, individually or in the aggregate,", "paragraph_id": "para_224" }, { "text": "a Material Adverse Effect. None of the Company or any of its Subsidiaries", "paragraph_id": "para_225" }, { "text": "maintains any “off-balance sheet arrangement” within the meaning of Item", "paragraph_id": "para_226" }, { "text": "303 of Regulation S-K of the Securities and Exchange Commission.", "paragraph_id": "para_227" }, { "text": "PA § 2.6. In other words, the Seller represented that the Company’s financial statements", "paragraph_id": "para_228" }, { "text": "complied with GAAP and that the Company had no undisclosed liabilities.", "paragraph_id": "para_229" }, { "text": "The Seller next observes that in Section 10.1 of the Purchase Agreement, the parties", "paragraph_id": "para_230" }, { "text": "agreed that the Seller’s representations and warranties would not survive closing:", "paragraph_id": "para_231" }, { "text": ". . . [N]one of the representations, warranties, covenants . . . or agreements", "paragraph_id": "para_232" }, { "text": "set forth in this Agreement or any in any certificate, statement or instrument", "paragraph_id": "para_233" }, { "text": "delivered pursuant to this Agreement, including any rights arising out of any", "paragraph_id": "para_234" }, { "text": "breach of such representations, warranties, covenants or agreements, shall", "paragraph_id": "para_235" }, { "text": "survive the Closing (and there shall be no liability for monetary damages", "paragraph_id": "para_236" }, { "text": "9", "paragraph_id": "para_237" }, { "text": "after the Closing in respect thereof); provided that this Section 10.1 shall not", "paragraph_id": "para_238", "court_paragraph": 9 }, { "text": ". . . relieve either party for liability in respect of actual fraud.", "paragraph_id": "para_239" }, { "text": "Id. § 10.1. The Seller contends that by agreeing to Section 10.1, the Buyer gave up its post-", "paragraph_id": "para_240" }, { "text": "closing right to challenge any of the figures in its financial statements as non-GAAP", "paragraph_id": "para_241" }, { "text": "compliant, whether that challenge takes the form of a claim for indemnification, a suit for", "paragraph_id": "para_242" }, { "text": "breach of representations and warranties, or any other process. The Seller believes that the", "paragraph_id": "para_243" }, { "text": "Buyer is attempting to circumvent this commitment through the Closing Date Adjustment.", "paragraph_id": "para_244" }, { "text": "The Buyer recognizes that it has taken the position that the Seller’s estimates on the", "paragraph_id": "para_245" }, { "text": "Closing Payment Statement were not GAAP compliant. It also recognizes that the Seller", "paragraph_id": "para_246" }, { "text": "made the representations in Sections 2.6(a) and (e) and that the survival period for", "paragraph_id": "para_247" }, { "text": "enforcing those representations has lapsed. But the Buyer insists that it did not give up its", "paragraph_id": "para_248" }, { "text": "right to raise issues of GAAP compliance during the Closing Date Adjustment process.", "paragraph_id": "para_249" }, { "text": "The Buyer contends that the Closing Date Adjustment is a separate mechanism that", "paragraph_id": "para_250" }, { "text": "independently contemplates GAAP compliance. The Buyer cites Section 1.4(f) of the", "paragraph_id": "para_251" }, { "text": "Purchase Agreement, which states:", "paragraph_id": "para_252" }, { "text": "Each of the Closing Payment Statement and the Closing Statement shall be", "paragraph_id": "para_253" }, { "text": "(i) in a format substantially similar to the sample calculation with respect to", "paragraph_id": "para_254" }, { "text": "Net Working Capital Amount attached to this Agreement as Schedule 1.4(f),", "paragraph_id": "para_255" }, { "text": "it being understood that in the event of an inconsistency between such", "paragraph_id": "para_256" }, { "text": "illustrative calculation and the Agreed Principles, the Agreed Principles will", "paragraph_id": "para_257" }, { "text": "prevail; (ii) prepared and determined from the books and records of the", "paragraph_id": "para_258" }, { "text": "Company and its Subsidiaries and in accordance with United States generally", "paragraph_id": "para_259" }, { "text": "accepted accounting principles (“GAAP”) applied on a consistent basis", "paragraph_id": "para_260" }, { "text": "throughout the periods indicated and with the Agreed Principles; and (iii)", "paragraph_id": "para_261" }, { "text": "consistent with the provisions of this Agreement relating to the parties’", "paragraph_id": "para_262" }, { "text": "respective rights and obligations for the payment or reimbursement of costs", "paragraph_id": "para_263" }, { "text": "and expenses.", "paragraph_id": "para_264" }, { "text": "10", "paragraph_id": "para_265" }, { "text": "Id. § 1.4(f). The Buyer responds to the Seller’s contention about the no-survival provision", "paragraph_id": "para_266", "court_paragraph": 10 }, { "text": "in Section 10.1 by citing Section 10.3, which explicitly carved out and preserved the", "paragraph_id": "para_267" }, { "text": "Closing Date Adjustment mechanism in Section 1.4(c). Section 10.3 states:", "paragraph_id": "para_268" }, { "text": "This Article X shall not (i) operate to interfere with or impede the operation", "paragraph_id": "para_269" }, { "text": "of the provisions of Section 1.4(c) providing for the resolution of certain", "paragraph_id": "para_270" }, { "text": "disputes relating to the Final Purchase Price between the parties and/or by an", "paragraph_id": "para_271" }, { "text": "Independent Auditor or (ii) limit the rights of the parties hereto to obtain an", "paragraph_id": "para_272" }, { "text": "injunction or injunctions to prevent breaches of this Agreement, to enforce", "paragraph_id": "para_273" }, { "text": "specifically the terms and provisions hereof or to obtain other equitable", "paragraph_id": "para_274" }, { "text": "remedies with respect hereto.", "paragraph_id": "para_275" }, { "text": "Id. § 10.3.", "paragraph_id": "para_276" }, { "text": "The Buyer has moved for judgment on the pleadings. The Buyer contends that", "paragraph_id": "para_277" }, { "text": "regardless of who is right about the disputes, they should be resolved by the Independent", "paragraph_id": "para_278" }, { "text": "Auditor. The Buyer asks that judgment be entered in its favor so that the parties can proceed", "paragraph_id": "para_279" }, { "text": "with the dispute resolution mechanism in the Purchase Agreement.", "paragraph_id": "para_280" }, { "text": "II. LEGAL ANALYSIS", "paragraph_id": "para_281" }, { "text": "A motion for judgment on the pleadings pursuant to Rule 12(c) will be granted “only", "paragraph_id": "para_282" }, { "text": "when no material issue of fact exists and the movant is entitled to judgment as a matter of", "paragraph_id": "para_283" }, { "text": "law.” Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d", "paragraph_id": "para_284" }, { "text": "1199, 1205 (Del. 1993). “In determining a motion under Court of Chancery Rule 12(c) for", "paragraph_id": "para_285" }, { "text": "judgment on the pleadings, a trial court is required to view the facts pleaded and the", "paragraph_id": "para_286" }, { "text": "inferences to be drawn from such facts in a light most favorable to the non-moving party.”", "paragraph_id": "para_287" }, { "text": "Id. (citation omitted).", "paragraph_id": "para_288" }, { "text": "“Judgment on the pleadings . . . is a proper framework for enforcing unambiguous", "paragraph_id": "para_289" }, { "text": "contracts because there is no need to resolve material disputes of fact.” Lillis v. AT&T", "paragraph_id": "para_290" }, { "text": "11", "paragraph_id": "para_291" }, { "text": "Corp., 904 A.2d 325, 329–30 (Del. Ch. 2006) (citation and internal quotation marks", "paragraph_id": "para_292", "court_paragraph": 11 }, { "text": "omitted). An agreement is ambiguous if the “provisions in controversy are reasonably or", "paragraph_id": "para_293" }, { "text": "fairly susceptible of different interpretations or may have two or more different meanings.”", "paragraph_id": "para_294" }, { "text": "Rhone-Poulenc Basic Chems. v. Am. Motorists Ins., 616 A.2d 1192, 1196 (Del. 1992). “If", "paragraph_id": "para_295" }, { "text": "the contract’s meaning is unambiguous, the court must grant judgment on the pleadings in", "paragraph_id": "para_296" }, { "text": "favor of the moving party.” Lillis, 904 A.2d at 330.", "paragraph_id": "para_297" }, { "text": "Two precedents deal with the scope of similar dispute resolution mechanisms and", "paragraph_id": "para_298" }, { "text": "shed light on whether the Purchase Agreement is unambiguous. In OSI Systems, Inc. v.", "paragraph_id": "para_299" }, { "text": "Instrumentarioum Corp., 892 A.2d 1086 (Del. Ch. 2006), a seller provided a post-closing", "paragraph_id": "para_300" }, { "text": "estimate of net working capital that was 3% below the target, and the buyer responded with", "paragraph_id": "para_301" }, { "text": "a post-closing calculation of working capital that was 54% below the target. Id. at 1088–", "paragraph_id": "para_302" }, { "text": "89. The difference between the statements depended on whether the seller’s initial estimate", "paragraph_id": "para_303" }, { "text": "was GAAP compliant. The parties disputed whether this was a question for an independent", "paragraph_id": "para_304" }, { "text": "accountant to resolve under the purchase price adjustment provision or a claim for breach", "paragraph_id": "para_305" }, { "text": "of a representation to be resolved under the agreement’s indemnification framework.", "paragraph_id": "para_306" }, { "text": "Under the transaction agreement at issue in OSI, the seller was required to present a", "paragraph_id": "para_307" }, { "text": "“Reference Statement” estimating net working capital. The buyer’s subsequent calculation", "paragraph_id": "para_308" }, { "text": "had to use calculations in accordance with “Transaction Accounting Principles” established", "paragraph_id": "para_309" }, { "text": "by the agreement, “applied consistently with their application in . . . [the seller’s] Reference", "paragraph_id": "para_310" }, { "text": "Statement . . . .” Id. at 1087. The Transaction Accounting Principles required compliance", "paragraph_id": "para_311" }, { "text": "with GAAP. Id. at 1093. The seller expressly represented in the agreement that the", "paragraph_id": "para_312" }, { "text": "12", "paragraph_id": "para_313" }, { "text": "Reference Statement was derived from financial statements that adhered to the Transaction", "paragraph_id": "para_314", "court_paragraph": 12 }, { "text": "Accounting Principles and hence complied with GAAP. Id. at 1092.", "paragraph_id": "para_315" }, { "text": "The transaction agreement provided that any claim for breach of the seller’s", "paragraph_id": "para_316" }, { "text": "representation regarding the GAAP compliance of the Reference Statement would be", "paragraph_id": "para_317" }, { "text": "decided by arbitration. The transaction agreement provided that any dispute over the", "paragraph_id": "para_318" }, { "text": "working capital calculations, however, would be decided using a dispute resolution", "paragraph_id": "para_319" }, { "text": "mechanism involving an independent accountant. Id. at 1088.", "paragraph_id": "para_320" }, { "text": "Chief Justice Strine, then serving as a Vice Chancellor, construed the terms of the", "paragraph_id": "para_321" }, { "text": "dispute resolution mechanism narrowly and held that the independent accountant had not", "paragraph_id": "para_322" }, { "text": "been given authority to decide the question of GAAP compliance. Under the transaction", "paragraph_id": "para_323" }, { "text": "agreement, the independent accountant was empowered only to make a “final", "paragraph_id": "para_324" }, { "text": "determination, binding on the parties . . . , of the appropriate amount of each of the line", "paragraph_id": "para_325" }, { "text": "items in the Initial Modified Working Capital Statement as to which [seller] and [buyer]", "paragraph_id": "para_326" }, { "text": "disagree as set forth in the Notice of Disagreement.” Id. at 1088 (emphasis added). Chief", "paragraph_id": "para_327" }, { "text": "Justice Strine held that it would enlarge the independent accountant’s role beyond the", "paragraph_id": "para_328" }, { "text": "contractual delegation of authority to “involve[] the Independent Accounting Firm in an", "paragraph_id": "para_329" }, { "text": "entirely different and more ambitious role: that of determining that the Transaction", "paragraph_id": "para_330" }, { "text": "Accounting Principles used in the Reference Statement were not compliant with U.S.", "paragraph_id": "para_331" }, { "text": "GAAP.” Id. at 1091. In reaching this conclusion, he also noted that the representation", "paragraph_id": "para_332" }, { "text": "regarding GAAP compliance extended to the Reference Statement, which brought the", "paragraph_id": "para_333" }, { "text": "dispute over GAAP compliance within the scope of a claim for breach of a representation", "paragraph_id": "para_334" }, { "text": "or warranty. Id. at 1092.", "paragraph_id": "para_335" }, { "text": "13", "paragraph_id": "para_336" }, { "text": "More recently, in Alliant Techsystems, Inc. v. MidOcean Bushnell Holdings, L.P.,", "paragraph_id": "para_337", "court_paragraph": 13 }, { "text": "2015 WL 1897659 (Del. Ch. Apr. 24, 2015), Chancellor Bouchard addressed a similar", "paragraph_id": "para_338" }, { "text": "issue but under a transaction agreement that called for a different result. As in OSI, the", "paragraph_id": "para_339" }, { "text": "Alliant transaction agreement contemplated a post-closing working capital adjustment", "paragraph_id": "para_340" }, { "text": "pursuant to which the seller and the buyer would exchange GAAP-compliant estimates and", "paragraph_id": "para_341" }, { "text": "calculations and any disputes would be resolved by an independent accountant. As in OSI,", "paragraph_id": "para_342" }, { "text": "the seller represented that its financial statements were GAAP compliant. As in OSI, the", "paragraph_id": "para_343" }, { "text": "buyer disputed in its calculations whether certain items on the seller’s working capital", "paragraph_id": "para_344" }, { "text": "estimate complied with GAAP. As in OSI, the seller argued that the buyer could not raise", "paragraph_id": "para_345" }, { "text": "GAAP compliance as part of the working capital adjustment and had to seek a remedy for", "paragraph_id": "para_346" }, { "text": "breach of representation. But unlike in OSI, the “sole remedy” provision in the Alliant", "paragraph_id": "para_347" }, { "text": "agreement’s breach of representation and warranty section stated that “nothing in this", "paragraph_id": "para_348" }, { "text": "sentence shall operate to interfere with or impede the operation of the provisions of” the", "paragraph_id": "para_349" }, { "text": "post-closing working capital adjustment procedure. Id. Also unlike OSI, the transaction", "paragraph_id": "para_350" }, { "text": "agreement in Alliant contained a separate provision that required the working capital", "paragraph_id": "para_351" }, { "text": "calculation to be GAAP compliant; it was not part of the representation and warranty", "paragraph_id": "para_352" }, { "text": "regarding the seller’s financial statements.", "paragraph_id": "para_353" }, { "text": "In light of this language, Chancellor Bouchard held that issues of GAAP compliance", "paragraph_id": "para_354" }, { "text": "in connection with the purchase price adjustment should be resolved by the independent", "paragraph_id": "para_355" }, { "text": "accountant charged with addressing disputes about the working capital adjustment. The", "paragraph_id": "para_356" }, { "text": "Chancellor reasoned that so long as the seller used GAAP when submitting its good faith", "paragraph_id": "para_357" }, { "text": "estimate, then the buyer was obligated to use the same GAAP-compliant method. Id. at *8.", "paragraph_id": "para_358" }, { "text": "14", "paragraph_id": "para_359" }, { "text": "But if the seller had not followed GAAP, then the buyer could put forward a GAAP-", "paragraph_id": "para_360", "court_paragraph": 14 }, { "text": "complaint calculation. Id. Chancellor Bouchard held that any other construction would", "paragraph_id": "para_361" }, { "text": "require that the buyer use the seller’s methodology, even if it did not comply with GAAP,", "paragraph_id": "para_362" }, { "text": "thereby reading the words “calculated in accordance with GAAP” out of the definition of", "paragraph_id": "para_363" }, { "text": "net working capital.", "paragraph_id": "para_364" }, { "text": "As in the current case, the Alliant agreement provided that the independent", "paragraph_id": "para_365" }, { "text": "accountant would act “as an expert and not as an arbitrator.” The seller argued that as in", "paragraph_id": "para_366" }, { "text": "OSI, this meant that its determinations should be limited to “pure mathematics” and should", "paragraph_id": "para_367" }, { "text": "not extend to determinations of GAAP compliance. Chancellor Bouchard rejected this", "paragraph_id": "para_368" }, { "text": "argument. He observed that courts in Delaware and elsewhere had already interpreted the", "paragraph_id": "para_369" }, { "text": "scope of similar provisions to encompass assessments of accounting methodology. Id. at", "paragraph_id": "para_370" }, { "text": "*10 n.74 (collecting cases). He also reasoned that “little, if any, accounting expertise would", "paragraph_id": "para_371" }, { "text": "be required simply to perform mathematical calculations,” and that if the parties truly", "paragraph_id": "para_372" }, { "text": "intended for the independent accountant to act as an “expert,” then they necessarily", "paragraph_id": "para_373" }, { "text": "contemplated that “the accounting firm will resolve the dispute as accountants do—by", "paragraph_id": "para_374" }, { "text": "examining the corporate books and applying normal accounting principles plus any special", "paragraph_id": "para_375" }, { "text": "definitions the parties have adopted . . . .” Id. at *10.", "paragraph_id": "para_376" }, { "text": "In reaching this outcome, Chancellor Bouchard considered the different holding in", "paragraph_id": "para_377" }, { "text": "OSI. He distinguished that case based on the different contractual language in the Alliant", "paragraph_id": "para_378" }, { "text": "agreement which carved out the post-closing adjustment procedure from the", "paragraph_id": "para_379" }, { "text": "indemnification framework:", "paragraph_id": "para_380" }, { "text": "15", "paragraph_id": "para_381" }, { "text": "The inclusion of [the carve-out] confirms that the parties contemplated that", "paragraph_id": "para_382", "court_paragraph": 15 }, { "text": "there could be circumstances in which a claim covered by the", "paragraph_id": "para_383" }, { "text": "indemnification provisions in Article IX also could be the subject of a dispute", "paragraph_id": "para_384" }, { "text": "under the Purchase Price Adjustment Procedure governed by Section 2.4. If", "paragraph_id": "para_385" }, { "text": "that were not the case, there would have been no reason to include [the carve-", "paragraph_id": "para_386" }, { "text": "out] in Section 9.5.", "paragraph_id": "para_387" }, { "text": "Id. at *9.", "paragraph_id": "para_388" }, { "text": "In this case, the Purchase Agreement tracks the Alliant agreement and contains", "paragraph_id": "para_389" }, { "text": "language that distinguishes this case from OSI. As in Alliant, the Closing Date Adjustment", "paragraph_id": "para_390" }, { "text": "provision requires that the Closing Payment Statement and the Closing Statement comply", "paragraph_id": "para_391" }, { "text": "with GAAP. As in Alliant and unlike in OSI, the Seller’s representation regarding the", "paragraph_id": "para_392" }, { "text": "Company’s financial statements being GAAP compliant did not encompass the Closing", "paragraph_id": "para_393" }, { "text": "Payment Statement. As in Alliant, the dispute resolution mechanism for the Closing Date", "paragraph_id": "para_394" }, { "text": "Adjustment provides that the Independent Auditor’s authority extends to “any and all", "paragraph_id": "para_395" }, { "text": "matters that remain in dispute with respect to the Objections Statement, the Closing", "paragraph_id": "para_396" }, { "text": "Statement and the calculations set forth therein.” This language is sufficiently broad to", "paragraph_id": "para_397" }, { "text": "encompass determinations about GAAP compliance. The Purchase Agreement also", "paragraph_id": "para_398" }, { "text": "contains a carve-out like the one found in Alliant. The survival provision that limits claims", "paragraph_id": "para_399" }, { "text": "for breaches of representations and warranties states that it “shall not (i) operate to interfere", "paragraph_id": "para_400" }, { "text": "with or impede the operation of the provisions of Section 1.4(c) providing for the resolution", "paragraph_id": "para_401" }, { "text": "of certain disputes relating to the Final Purchase Price between the parties and/or by an", "paragraph_id": "para_402" }, { "text": "Independent Auditor.” The controlling precedent is therefore Alliant, not OSI.", "paragraph_id": "para_403" }, { "text": "In a final attempt to analogize this case to OSI, the Seller observes that the size of", "paragraph_id": "para_404" }, { "text": "the adjustment is potentially quite large, noting that Chief Justice Strine relied on the size", "paragraph_id": "para_405" }, { "text": "16", "paragraph_id": "para_406" }, { "text": "of the dispute in OSI as one reason for holding that it should not be referred to the", "paragraph_id": "para_407", "court_paragraph": 16 }, { "text": "independent accountant. The Purchase Agreement in this case, however, contains specific", "paragraph_id": "para_408" }, { "text": "language, absent from OSI, which establishes that the Independent Auditor has authority", "paragraph_id": "para_409" }, { "text": "to determine GAAP compliance. Moreover, the parties recognized that size could be an", "paragraph_id": "para_410" }, { "text": "issue for the price adjustments, and they expressly capped the Earnout Amounts. They", "paragraph_id": "para_411" }, { "text": "chose not to cap the Closing Date Adjustment. The potential size of the adjustment is", "paragraph_id": "para_412" }, { "text": "therefore not a reason to take the issue away from the Independent Auditor.", "paragraph_id": "para_413" }, { "text": "The plain language of the Purchase Agreement thus establishes that the parties’", "paragraph_id": "para_414" }, { "text": "disputes over the Closing Date Adjustment are to be resolved by the Independent Auditor.", "paragraph_id": "para_415" }, { "text": "Judgment on the pleadings is granted in favor of the Buyer on the Seller’s claim for breach", "paragraph_id": "para_416" }, { "text": "of the express provisions of the Purchase Agreement.", "paragraph_id": "para_417" }, { "text": "The Seller also has asserted a claim for breach of interstitial provisions to be found", "paragraph_id": "para_418" }, { "text": "in the Purchase Agreement using the implied covenant of good faith and fair dealing. “The", "paragraph_id": "para_419" }, { "text": "implied covenant will not infer language that contradicts a clear exercise of an express", "paragraph_id": "para_420" }, { "text": "contractual right.” Nemec v. Shrader, 991 A.2d 1120, 1127 (Del. 2010). Because the", "paragraph_id": "para_421" }, { "text": "Purchase Agreement addresses the matter, there is no gap for the implied covenant to fill.", "paragraph_id": "para_422" }, { "text": "Judgment on the pleadings is granted in favor of the Buyer on the Seller’s claim for breach", "paragraph_id": "para_423" }, { "text": "of the implied covenant.", "paragraph_id": "para_424" }, { "text": "III. CONCLUSION", "paragraph_id": "para_425" }, { "text": "The Buyer’s motion for judgment on the pleadings is granted. 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