Sage Software, Inc. v. CA, Inc., No. 4912-VCS (Del. Ch. Dec. 14, 2010), read opinion here.
The Court of Chancery in this opinion interpreted the indemnification clause of a merger agreement to determine when the duty to indemnify was triggered in connection with a pre-merger tax assessment that was being contested in proceedings before a governmental agency.
This 31-page opinion involves the interpretation of a merger agreement between Sage Software, Inc. and CA, Inc. Sage acquired a CA subsidiary software company. The agreement required CA to indemnify Sage for any tax losses associated with the period before the merger closed. After the merger closed, the Canadian Revenue Agency (the “CRA”) made an assessment for underpaid Canadian taxes for the period prior to the merger. The parties initiated a “Resolution Proceeding” which started a process by which the CRA and the Internal Revenue Service of the United States were to review the assessment to determine the proper allocation of tax between the United States and Canada in order to decide whether the Canadian tax covered activity already taxed by the United States. During the pendency of this lengthy proceeding however, the CRA informed Sage that it was required to pay 50% of the proposed assessment (“Required Interim Payment”), subject to a final decision at the completion of the Resolution Proceeding.
Sage brought this suit seeking declaratory judgment that CA was required to reimburse Sage promptly for any payments made to the CRA, including the Required Interim Payment. Both parties moved for summary judgment.
Brief Summary of Legal Analysis
Even though there were cross-motions for summary judgment, each of the parties presented disagreements about certain factual issues. Those disagreements did not preclude summary judgment because the Court determined that those disagreements did not relate to material facts. Although each of the parties regarded the agreement as unambiguous, each interpreted the agreement to reach an opposite result.
The Court noted the well-settled contractual principle that “an agreement is not ambiguous because the parties disagree about its interpretation. The test for ambiguity in an agreement is an objective one. An agreement is ambiguous if the provisions are reasonably or fairly susceptible to more than one meaning.” The Court explained that the different factual positions of each party only prevent summary judgment if the Court determined that the agreement is ambiguous. The Court determined that the agreement was not ambiguous.
The Court’s reasoning was based in part on an extensive discussion of the grammatical structure of the sentence in the indemnification clause. The argument of Sage was that the second phrase of the sentence that created the obligation was a distinct category for timing purposes and was independent of the first half of the sentence. The Court did not find that to be a sensible interpretation. See footnote 69. The Court refers to two cases which interpreted a semicolon in a sentence as creating “an independent clause that modified the preceding text.” See footnotes 70 through 72.
The Court also observed that as a matter of corporate law there is a well-known distinction between advancement and ultimate indemnification, which exemplifies the common business practice that it is not unusual that an indemnitor would only pay when the amount to be paid is completely determined and certain. See footnote 77.
The Court also defines “judicial admissions” to include a party’s statements in pleadings but recognizes also that a Court has discretion to relieve a party from the conclusiveness of judicial admissions.
Finally, the Court recited the elements of the contract remedy of reformation and concluded that the remedy of reformation was not appropriate in this case because the requirements of that remedy were not met. See footnote 109.