October 19, 2022

Asset Purchases: Del. Chancery Interprets Assumption of Liabilities Language

The terms of the asset purchase agreement defining assumed and excluded liabilities are among the most carefully drafted & heavily negotiated provisions of the agreement. Since that’s the case, the Delaware Chancery Court’s recent decision in ITG Brands v. Reynolds American, (Del. Ch.; 9/22), interpreting an asset purchase agreement’s assumption of liabilities language is worth reading.

The case involved whether ITG Brands, which purchased several cigarette brands from Reynolds, was responsible for payments required to be made under a tobacco health settlement with the State of Florida. The asset purchase agreement obligated ITG to use its reasonable best efforts to join the settlement agreement, but more than seven years after the closing, it had not done so.  A Florida court held that Reynolds remained liable for settlement payments post-closing, and Reynolds filed an action in the Chancery Court to compel ITG to assume this liability.

Reynolds argued that the settlement was an assumed liability under the terms of the asset purchase agreement.  ITG alleged that the Florida court’s decision that it was not responsible for settlement payments should be binding on the Chancery Court, and that its obligations under the asset purchase agreement were limited to using its best efforts to join the settlement.  After holding that the Florida court’s decision wasn’t binding on the Court, Vice Chancellor Will went on to conclude that the settlement agreement was an assumed liability under the asset purchase agreement.  This excerpt from Shearman’s blog on the decision summarizes the Vice Chancellor’s reasoning:

The Delaware Court noted that liabilities that “‘aris[e], directly or indirectly, out of … the use of the Transferred Assets’” were assumed by the buyer.  The Court explained that the Florida settlement liability “‘aris[es],’ at least ‘indirectly,’ from ‘the use of the Transferred Assets.’”  The Court explained that the purpose of the APA was for the buyer to acquire assets (which included among other things, goods, intellectual property, books, records and files) that would enable it to sell the acquired cigarette brands, and that the buyer necessarily uses these assets for its sales.  The Court highlighted that “[i]f [the buyer] stopped using the Transferred Assets, it would not be able to sell [a]cquired [b]rands cigarettes.  And if [the buyer] sold no [a]cquired [b]rands cigarettes in a post-[c]losing year, [the seller] would have no liability to Florida” under the settlement.

Vice Chancellor Will also concluded that the provisions of the agreement requiring the buyer to use “reasonable best efforts” to join the Florida settlement agreement did not conflict with or override the language of the agreement allocating the Florida settlement liability to ITG.  Instead, she viewed that provision as a contractual “belt and suspenders” that was intended to make the buyer directly responsible for the post-closing obligations under the settlement.

John Jenkins