June 29, 2017

Post-Closing Adjustments: Chancery’s “Chicago Bridge” Decision Reversed

In Chicago Bridge & Iron v. Westinghouse (Del. Sup.; 6/17) the Delaware Supreme Court reversed the Chancery Court’s earlier decision holding that post-closing adjustment claims were subject to mandatory arbitration under the terms of the agreement. That’s the narrow holding in the case – but it’s about a lot more than whether a post-closing adjustment was subject to arbitration.

First of all, the stakes in this case were enormous – the working capital true up in the Chicago Bridge agreement called for the purchase price to be adjusted based upon the difference between closing net working capital and target net working capital amount. The seller’s calculations would have resulted in a $428 million payment from the buyer. The buyer’s true-up calculations – which were premised on its quarrel with the seller’s historical compliance with GAAP – would have resulted in a $2.15 billion payment from the seller to the buyer.  Since that claim was cast as merely being part of the true-up, its outcome would have been summarily decided by an independent accountant.

From the Supreme Court’s perspective, the case was really about whether a fairly standard working capital true up provision could be used as a “can opener” to permit the buyer to avoid contractual limitations on liability through a challenge to the seller’s historic accounting practices.

The Court said that the answer to that question was “no.”  It said that in concluding otherwise, the Chancery Court had given short-shrift to how the true up fit in to the structure of the purchase agreement – which had, in other places, provided that the seller would have no liability in damages to the buyer. Here’s an excerpt summarizing the Court’s position:

By reading the True Up as unlimited in scope and as allowing Westinghouse to challenge the historical accounting practices used in the represented financials,the Court of Chancery rendered meaningless the Purchase Agreement’s Liability Bar. The Court of Chancery also slighted the requirement in the text of the Purchase Agreement that Westinghouse indemnify Chicago Bridge for a broad set of claims related to Stone. Not only that, it then subjected Chicago Bridge to unlimited post-closing liability by way of an expedited proceeding before an accounting expert who was charged with delivering a rapid decision based solely on written submissions of the parties.

The Court also observed that the reason parties sign-up for this type of dispute resolution method when it comes to working capital adjustments is that the arbitrator is focusing on a “confined period of time between signing and closing using the same accounting principles that. . . formed the foundation for the parties’ agreement to sign up and close the transaction.”

This blog from Stinson Leonard Street’s Steve Quinlivan has some additional insights into the Court’s opinion.

John Jenkins