A recent Delaware Court of Chancery decision provides an important lesson about the downside of imprecise drafting, and the need to express with precision how specific risks are to be allocated between the purchaser and seller of a business. In Julius v. Accurus Aerospace Corporation, C.A. No. 2017-0632-MTZ (Del. Ch. Oct. 31, 2019), the court rejected the claims of the buyer that the loss of substantial revenue from the most important customer of the seller was neither an express representation that was breached, nor were there any other reasons to refuse to release the escrow funds that were withheld post-closing. (Notable in passing is that the court’s opinion did not address, and presumably neither did the parties, the potential lack of equitable jurisdiction despite the primary relief sought being the payment of escrow funds.)
Why this Opinion is Noteworthy:
As the court itself describes, this opinion can serve as a learning experience about the importance of a buyer expressly including representations in an agreement of sale for a business regarding specific material aspects of the deal that it seeks to enforce post-closing if those representations do not materialize.
This case also serves as an instructive example of how sellers of a business were careful not to include representations about aspects of business projections that they could not control–as well as the consequential protections provided by an integration clause.
Important Principles of Law Included in This Decision:
Although this 50-page opinion deserves careful reading of all of its pages, the following bullet points should be especially useful for the toolbox of a commercial litigator.
- One aspect of the decision that deserves attention is the impact of the exact terms of the integration clause, see Slip op. at pages 15 to 16, and a comparison of the reasoning in the rest of the 50-page opinion about why there were no representations outside of the four-corners of the APA and other transaction documents that could form the basis of the breach of representation.
- A key fact on which the court’s reasoning was based, in the context of cross-motions for summary judgment, was that both parties acknowledged that the APA did not include any explicit representations or warranties regarding the accuracy of the projections that the sellers shared prior to entering into the APA, notwithstanding the expression of the sellers’ “belief”–not warranty–about a substantial volume of revenue from a key customer, that never materialized, but which based on past history was likely to continue post-closing.
- The court discussed several basic contract interpretation principles including the truism of Delaware law that the court will not provide a contract remedy to a party that did not obtain that right to a contractual remedy at the bargaining table–and that Delaware presumes the parties are bound by the language of the agreement they signed, especially when the parties are sophisticated entities engaged in arm’s length negotiations. See footnotes 124 through 128 and accompanying text.
- The court explains a useful rule of contract interpretation used by the Delaware courts that allows the court to refer to dictionary definitions to discern the “usual and ordinary meaning of” words. That may require reliance on an “ordinary” dictionary as opposed to, by comparison, Black’s Law Dictionary–which would provide a special “term of art” or a meaning in the law for a word that might differ from the ordinary meaning of the word. See footnotes 132 through 135 and accompanying text.
- Another useful aspect of this decision is the court’s observation that certain canons of interpretation, such as the guidance that words in an agreement should be interpreted in the context of words surrounding them, only apply to ambiguous agreements, and the agreement in this case was deemed unambiguous.
- The court was also not restricted by the canon of construction that a contract should not be interpreted to render certain terms as being superfluous. The court explained that such a principle of construction “does not go so far as to counsel the creation of a contract meaning in which there is little or no support in order to avoid redundancy.”
- Rather, the court explained that: “My interpretation reflects conservative verbosity, not improper redundancy.”
- The court distinguished a prior Delaware decision that involved a finding of a breach of representations because in that case the misrepresentation occurred after the cut-off date for a balance sheet and before the purchase agreement. See footnote 166 (citing H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 143 (Del. Ch. 2003)).
- The court reasoned that if preserving an opportunity to bid on a material part of the business from a key customer was so valuable to the buyers, they should have bargained for explicit protections and express representations in the APA, but they failed to do so. See Slip op. at 40.
- Although not announcing new law, this opinion features a helpful overview of basic principles regarding the elements of a claim for breach of the implied covenant of good faith and fair dealing, as well as the high threshold, not met in this case, regarding the shifting of attorneys’ fees based on allegations of bad faith litigation conduct.