June 13, 2024

Post-Closing Adjustments: Del. Chancery Interprets Working Capital True-Up Language

In CURO Intermediate Hldgs. v. Sparrow Purchaser, LLC, (Del. Ch.; 6/24), the Chancery Court was recently called upon to interpret an asset purchase agreement’s working capital adjustment provision. Vice Chancellor Cook’s opinion addresses two contract interpretation issues that the purchaser claimed needed to be resolved by the Court before the parties’ disputes concerning the adjustment could be submitted to the independent accountant designated in the agreement for resolution.

The asset purchase agreement in this case involved a fairly standard true-up mechanism under which the purchaser was required to provide the seller with an initial closing statement including a good faith, GAAP-compliant calculation of working capital no later than 60 days after closing. In turn, the seller had 60 days after receipt of the closing statement to provide notice of any objections to it, and the agreement then called for a 30-day period during which the purchaser and seller could attempt to resolve their dispute.  If the parties were unable to reach agreement, the dispute would be submitted to an independent accountant for resolution.

The seller disagreed with three aspects of the initial closing statement’s working capital calculation. The parties were able to reach agreement on one issue, but two others, a dispute over accrued vacation liability and accrued bonuses reflected in the working capital calculation remained unresolved.  The purchaser contended that the Court needed to resolve contract interpretation issues under the provisions of the agreement specifically addressing accrued vacations and accrued bonuses before the dispute could be submitted to the independent accountant for resolution.

With respect to the accrued vacation liability, the purchaser argued that the dispute was whether, under the terms of the agreement, that liability should be included in the working capital calculation. It contended that this issue needed to be resolved before the matter could be submitted to the independent accountant for resolution.  Vice Chancellor Cook disagreed, noting that the seller didn’t dispute that accrued vacation should be part of the working capital calculation, but the amount of that liability that should be included:

Put another way, as it relates to vacation liability, the parties only disagree on the amount of the liability included in the Working Capital calculation. This disagreement is based on differing views of how to calculate that figure. That is a GAAP question. Thus, under Section 2.06(c), the remaining dispute arising from the vacation liabilities is proper for presentation to an Independent Accountant.

The Vice Chancellor reached a different conclusion with respect to the language of the agreement relating to accrued bonuses. Specifically, he pointed to a proviso in the relevant section that said ““for the avoidance of doubt, certain amounts related to anticipated Cash Incentive Compensation will be reflected as a Liability in the calculation of Working Capital.” The purchaser contended that the language of the clause, including the proviso, permitted it to include as a liability in the working capital calculation the pro rata portion of anticipated bonuses payable with respect to the pre-closing period, including discretionary bonuses. The seller took the position that the proviso should be read to exclude discretionary bonuses that may not be paid, and that the only issues to be resolved related to what was appropriate under GAAP.

VC Cook concluded that the use of the term “certain amounts” in this proviso created ambiguity concerning whether that term was intended to mean amounts that are certain as of the time of the closing (“definite amounts”) or amounts that are of “a specific but unspecified character (i.e., “some amounts”).” This excerpt explains the implications of that conclusion:

If read as meaning “definite amounts,” it is reasonable, as Seller argues, to read the Proviso to exclude unpaid, discretionary bonuses from the Working Capital calculation. But if read as meaning “some amounts” it is also reasonable to believe the parties may have intended, as Purchaser argues, for all bonuses paid in respect of the pre-Closing part of 2022 to be included in the Working Capital calculation. The reasonableness of this point seems especially salient as it relates to anticipated but discretionary bonuses since, if reading “certain amounts” as “some amounts,” Section 6.04 does not appear to require discretionary bonuses to be treated differently from any other bonuses.

The Vice Chancellor noted that the parties ascribed different but reasonable meanings to the proviso’s use of the term “certain amounts,” which precluded him from dismissing the case and compelling the parties to submit the dispute concerning this aspect of the working capital calculation to the independent accountant.

John Jenkins