November 10, 2020

Post-Closing Adjustment: Seller’s “Unclean Hands” Don’t Excuse Buyer’s Delay

Most of the time, the Delaware Chancery Court’s opinions that are blog-worthy are quite lengthy.  I run a volume business here, so when I find a short one that fits the bill, you can bet it moves to the top of the pile.  That’s the case with Vice Chancellor Zurn’s recent 12-page order granting plaintiff’s motion for judgment on the pleadings in Hallisey v. Artic Intermediate LLC, (Del. Ch.; 10/20).

The case arose of out the buyer’s failure to delivery a “Closing Date Report” detailing working capital & other post-closing adjustments that it sought within the time period specified in the purchase agreement. The plaintiff filed a declaratory judgment action alleging that the buyer’s failure to file the report in a timely fashion waived its rights to seek a post-closing adjustment under the terms of the purchase agreement.

In response, the buyer alleged that “[t]here were valid and justifiable reasons, caused by one or more Sellers, for any delay in Buyer’s submission of a Closing Date Report.”  In particular, the buyer alleged that the company’s former CFO, who was also a seller,  had “actively manipulated and misrepresented” the target’s financial information before and after the closing.

The buyer claimed that these misdeeds made it impossible for it to provide the Closing Date Report on a timely basis, and that the former CFO and the plaintiff, as sellers’ rep, “engaged in actions so egregious that they offend the very sense of equity” to which the plaintiff appealed, and that the plaintiff should be equitably estopped from the relief that he sought. The Chancery Court didn’t buy that argument:

Even assuming that [the former CFO’s] egregious actions could soil Hallisey’s hands, the doctrine of unclean hands is inapplicable because Hallisey appeals not to equity, but to the law of contract. The parties bargained to allow Buyer six months to submit a Closing Date Report. The parties also bargained to allow Buyer certain indemnity rights if all was not as was represented to be. Those contractual provisions govern the acquisition, purchase price, and the parties’ rights of recovery: they will be respected by this Court, and will not yield to unclean hands.

Vice Chancellor Zurn also rejected the defendant’s argument that the plaintiff was equitably estopped from enforcing the relevant provisions of the purchase agreement. She said that they buyer bargained for representations about the target’s financial information and records, as well as for the remedies applicable to breaches of those reps. VC Zurn concluded that “equitable estoppel is not available to enforce such a bargained-for contract right.”

John Jenkins