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Nearly every acquisition agreement has numerous “belt & suspenders” type provisions – one topic might be the subject of a detailed contractual provision, but also encompassed by one or more contractual “catch-all” provisions.  This Kirkland & Ellis memo reviews a recent Delaware Chancery Court decision that illustrates the perils of not addressing the hierarchy of these specific & general provisions in the acquisition agreement.

In ITG Brands v. Reynolds American, (Del. Ch. 9/19), Chancellor Bouchard was confronted with an asset purchase agreement that contained broad general descriptions of liabilities assumed by the buyer, as well as detailed descriptions of specific liabilities that would be the buyer’s responsibility.

The case involved the interplay between a general agreement to assume all liabilities for actions arising out of post-closing operations and specific language addressing the assumption of obligations under a tobacco settlement agreement with four states.  The problem was that, after the closing, another state showed up to the party.  This excerpt discusses how Chancellor Bouchard addressed the interpretive issues under the contract:

In simplified form, the question before the court was which party was responsible in the event of a fifth state investigation that generates liability from the post-closing conduct of the acquired business. The seller argued that the buyer is responsible as this clearly fell under the “general” post-closing Actions category. The buyer argued that the listing of only the four state investigations in the “specific” subsection showed an express intent to not assume responsibility for the fifth state investigation.

In the Reynolds decision, Chancellor Bouchard rejected both parties’ claims for judgment on the pleadings, finding that each reading was at least reasonable and therefore extrinsic evidence to determine the intent of the parties was required.

In support of the buyer’s reading, Chancellor Bouchard pointed to a 2005 Delaware Supreme Court decision (DCV) that addressed the overlapping representation question described in the first paragraph above. In DCV, the Supreme Court applied the contract interpretation principle that the specific takes precedence over the general and held that indemnification could only be sought by the buyer under the specific knowledge-qualified compliance representation.

Chancellor Bouchard did not accept the seller’s attempt to distinguish the DCV case, rejecting the seller’s argument that in DCV the two contradictory representations were in different sections while here the two “conflicting” sections were within the same list of seven assumed liabilities and therefore should be viewed as supplemental to each other.

The memo notes that the key takeaway from the Chancellor’s decision is not to put all of your faith in a “catch-all” provision, but to instead consider specifying a hierarchy among provisions that could be construed to cover the same matter or expressly indicate whether or not the specific terms “are intended as ‘including but not limited to’ examples of the general provision.”

–John Jenkins