February 14, 2018

Your Deal’s the One You Sign, Not the One You Shake On

This Weil blog says that the worst words ever spoken by a deal professional are ““We have a deal, let’s let the lawyers work out the details.”  With that as a jumping-off point, the blog reviews  LSVC Holdings v. Vestcom Parent Holdings (Del. Ch.; 12/17), where both sides supposedly agreed to share equally the benefits of the seller’s transaction-related tax deductions (or TTDs) and then left the lawyers to work out the details.

Unfortunately, that’s once again where the devil proved to be:

LSVC Holdings involved a dispute over whether the final stock purchase agreement (“SPA”) between the parties to a corporate acquisition contemplated a 50-50 split between Buyer and Seller of all TTDs in all respects, pre- and post-closing, or merely required Buyer to share 50% of the benefit of any TTDs utilized to offset post-closing taxes with the Seller.

The executed letter of intent between the parties (the “LOI”) merely provided that the Buyer “would pay over to the seller 50% of the benefit of any transaction tax deductions on an ‘as and when realized’ basis.” (emphasis added).  The final SPA only stated that the Buyer would be entitled “to retain 50% of” the post-closing TTD-related refunds or tax savings.

Nevertheless, the Buyer filed suit alleging a breach of contract after learning that no TTDs would be available to it in the post-closing period because the Seller, anticipating the close of the transaction by year-end, accounted for the TTDs when making its fourth quarter tax payment to the IRS (i.e., claimed the deductions in the pre-closing period). The Buyer argued that doing so was both inconsistent with the deal and explicitly precluded by a provision in the SPA requiring the Buyer to include all TTDs on the post-closing tax returns.

The Chancery Court decided that it was necessary to review extrinsic evidence to address the apparent tension in the stock purchase agreement.  In so doing, Vice Chancellor Montgomery-Reeves noted that the Buyer tried but failed to incorporate language specifically entitling it to share equally in pre-closing TTDs.  That sealed the deal for the Vice Chancellor, who said that under Delaware law, “a party may not come to court to enforce a contractual right that it did not obtain for itself at the negotiating table.”

The blog says one of the key takeaways from the case is the importance of continued involvement by deal professionals during the documentation process:

Because the “deal” is typically reflected only in the four corners of the written agreement, deal professionals must stay involved and ask hard questions about the drafting—do not simply leave the details to the lawyers.

As the LSVC Holdings court highlighted, the Buyer’s counsel could have potentially foreclosed the issue had it pushed to include language explicitly proposed during the drafting process but omitted in the final SPA (i.e., explicitly prohibiting the target from accounting for TTDs in its pre-closing returns). And, of course, the Seller’s counsel could have avoided a trial involving the introduction of extrinsic evidence if the written agreement did not contain language that created the need for such extrinsic evidence.

So, just keep in mind that whatever the principals might think the deal was when they shook on it, they’re going to have to live with the one they sign – and it’s too important to just “leave it to the lawyers.”

John Jenkins