DealLawyers.com Blog

You read that right! This Cleary blog addresses a late February Delaware Chancery opinion confirming an arbitration award. SM Buyer LLC v. RMP Seller Holdings, LLC (Del. Ch.; 2/24) involved an equity purchase agreement with a standard purchase price adjustment mechanism, but a post-signing amendment complicated the process:

After signing, at Buyer’s request, Buyer and Seller agreed to an amendment intended to protect Buyer from potential creditor claims against a separate grocery store joint venture (the “Joint Venture”), of which Save Mart owned a one-third general partner interest (the “GP Interest”). The amendment provided that at closing Seller would transfer its GP Interest in the Joint Venture to an affiliate, and that affiliate would transfer the GP Interest to one of Buyer’s affiliates for $90 million at closing. As a result of these transactions, the GP Interest was held by a subsidiary of the Seller at the closing.

While it was clear that the target’s indebtedness reduced the purchase price dollar for dollar, the parties disagreed on how to treat the joint venture’s debt. Buyer’s closing statement included the JV’s debt, and reflected a negative purchase price — meaning that the seller would have to pay the buyer for acquiring the target. Accordingly:

[T]he parties entered into a dispute resolution agreement, which appointed an arbitrator to resolve the dispute over treatment of the Joint Venture’s debt, and an accounting referee to resolve a different dispute. […]

The accounting referee did not propose a purchase price adjustment based on the Joint Venture’s debt, but the arbitrator ruled in favor of Buyer, awarding it an $87 million refund to be paid by Seller, based on a strict interpretation of the Agreement’s definition of “Closing Date Indebtedness.” […] Buyer filed suit with the Delaware Court of Chancery to confirm the arbitration award.

The Chancery Court confirmed, but the blog concludes that this was mostly due to the standard of review for arbitration awards and cautions parties about the unintended consequences of arbitrating disputes:

The court did not seem to agree with the outcome but confirmed the arbitrator’s decision because there were no available legal grounds for it to overturn the decision. It seems that the court would have reached a different outcome than the arbitrator based on language in the opinion, but with such a narrow standard for reviewing arbitration awards, it is important to consider the standard of review of arbitration awards before entering into an arbitration agreement.

Equally, in purchase agreements where a closing statement dispute resolution mechanism is provided for in the agreement, choosing to appoint an accounting firm to resolve the dispute as “an expert” rather than “an arbitrator” can take on substantial importance, as can the limitations on scope of any post-closing court review that are frequently included in M&A agreements.

– Meredith Ervine