March 30, 2021

M&A Agreements: Del. Chancery Rejects Seller’s Attempt to Reclaim Pre-Closing Cash

Yesterday, the Delaware Chancery Court rejected a seller’s claims that it was entitled to cash held in the target’s bank account that it neglected to withdraw prior to the closing of its sale of the target’s stock.  In her letter opinion in Deluxe Entertainment Services Inc. v. DLX Acquisition, (Del. Ch.; 3/21), Vice Chancellor Zurn rejected the seller’s arguments that the agreement’s definition of “Net Working Capital” & extrinsic evidence about the parties undocumented agreement that the transaction “cash-free, debt-free” were sufficient to override what she viewed as the plain language of the contract.

Vice Chancellor Zurn observed that in a stock purchase transaction, a buyer acquires all of the assets and the liabilities of the target entity, and that when the seller agreed to transfer all of the target’s shares, it therefore agreed to transfer all of the target’s assets. As a result, by default, the target’s pre-closing assets and liabilities transferred with its shares. The seller argued that the purchase agreement’s exclusion of cash from the definition of  Net Working Capital – and thus from the closing date purchase price calculation –  indicated the parties’ intent that the deal would be “cash-free, debt-free.”  The Vice Chancellor disagreed:

Seller asks too much of these provisions: they simply exclude cash from the calculation of the final purchase price. The definition of Net Working Capital excludes cash from the calculation of Net Working Capital as a “definitional adjustment” for purposes of calculating the Closing Date Purchase Price.  The purchase price adjustments are just that: adjustments to how much Buyer paid, not to what assets the Buyer purchased. Nothing in these purchase price provisions indicate the parties’ intention to exclude cash, or any of the other adjustments to Net Working Capital, from the assets transferred by the Transaction.

She observed that if the parties intended to do so, they could have easily drafted a provision stating that assets excluded from the Net Working Capital definition are not transferred – and the fact that the agreement contained a provision addressing excluded assets made it clear the parties knew how to exclude assets from the deal.

John Jenkins