December 6, 2013

Delaware: Survival Clause in Stock Purchase Agreement Shortens Statute of Limitations

Here’s news from Berger Harris’ Lisa Stark:

In ENI Holdings, LLC v. KBR Group Holdings, LLC, C.A. No. 8075-VCG (Del. Ch.; 11/27/13), the Delaware Court of Chancery upheld a contractual statute of limitations contained in a survival clause of a stock purchase agreement which effectively shortened the otherwise applicable three-year statute of limitations to fifteen months. In December 2010, Plaintiff and Counterclaim Defendant, ENI Holdings, a holding company for a joint venture between two private equity firms, sold its stock in Roberts & Shaefer, to Defendant and Counterclaimant, KBR Group Holdings, pursuant to a Stock Purchase Agreement.

The parties agreed to a purchase price of $280 million, subject to working capital and indemnification adjustments. The parties also placed $25 million into an escrow fund to satisfy any indemnification claims brought pursuant to the SPA. Under the SPA, the Indemnity Escrow Fund constituted the parties’ “sole and exclusive remedy” for all claims relating to KBR’s acquisition of R&S, other than claims for fraud and claims that could only be addressed by equitable relief. Article VI of the SPA further provided that specified representations and warranties (the “Non-Fundamental Representations”) terminated on March 23, 2012.

On December 3, 2012, ENI filed a verified complaint alleging that KBR breached several provisions of the SPA, as well as the implied covenant of good faith and fair dealing. KBR responded with counterclaims, alleging that ENI had engaged in fraudulent misconduct and breached the SPA by, inter alia, manipulating R&S’s financial condition to inflate the purchase price. KBR sought to rescind the transaction and recover the purchase price, or alternatively, to recoup the $25 million in the Indemnity Escrow Fund, as well as damages for ENI’s fraud and attorney fees. ENI moved to dismiss KBR’s counterclaims on June 17, 2013. In this decision on ENI’s motion to dismiss, the Court dismissed certain of KBR’s counterclaims as untimely under the parties’ contractual statute of limitations.

Under Court of Chancery Rule 12(b)(6), a counterclaim will only be dismissed if it clearly lacks merit as a matter of law or fact. KBR’s counterclaims related to alleged breaches by ENI of its representations and warranties and fraud. ENI advanced a number of arguments for the dismissal of these claims. Notably, ENI argued that KBR did not file its claims relating to alleged false Non-Fundamental Representations prior to the Termination Date and were therefore untimely under the survival clause in the SPA, which provided, in pertinent part: “Except as set forth below, all of the representations and warranties of Seller contained in this Agreement shall survive the Closing until, and shall terminate on, the Termination Date….”

Slip op. at 19. KBR countered that the survival clause could not effectively shorten the applicable statute of limitations, under Delaware law, from three years to fifteen months, unless it provided that not only the representations, but also their corresponding remedies, expired on the termination date. KBR also argued that the contractual time limitation did not, and could not, apply to fraud claims.

The Decision

After reviewing Chancellor Strine’s 2011 decision in GRT, Inc. v. Marathon GFT Technology, Ltd., the Court held that the survival clause effectively shortened the applicable three-year statute of limitations for claims based on alleged breaches of Non-Fundamental Representations except to the extent the claims were based in fraud. Specifically, the Court found KBR’s contention that the survival clause was ineffective because it failed to address remedies unpersuasive, because, although the simultaneous expiration of representations and their remedies bolstered the Court’s finding in GRT, it did not provide the basis for the holding, which was that a period of survival of representations and warranties, followed by a date of termination, limited actions to the survival period. However, the Court did not find plausible a KBR contention that any allegation of an intentional breach of Non-Fundamental Representations sounding in fraud was not limited by the survival clause.

Under the SPA, fraud claims were expressly excluded from a $2.5 million escrow deductible and the cap on damages. In addition, the SPA provided that indemnification is not the “sole and exclusive remedy” for “claims relating to the extent [sic] arising from fraud of a party.” The Court found unclear, from the language of the SPA, whether the parties intended that fraud involving the Non-Fundamental Representations be governed by the indemnification provisions of Article VI and the related contractual limitations period. Thus, the Court granted EIN’s motion to dismiss KBR’s counterclaims relating to Non-Fundamental Representations as untimely except to the extent they sounded in fraud.