DealLawyers.com Blog

On Friday, in a half-page decision following briefs and oral argument, the Delaware Supreme Court affirmed the Chancery Court’s February ruling confirming an arbitration award in a post-closing purchase price adjustment dispute with a surprising — and scary — result. We blogged about the Chancery Court’s decision in SM Buyer LLC v. RMP Seller Holdings, LLC (Del. Ch.; 2/24) earlier this year because the confirmed arbitration award applied a “literal” reading of the post-closing purchase price adjustment to effectively require the seller to pay the buyer to acquire the company — at twice the purchase price! As we noted then, the decision was largely due to the standard of review for arbitration awards.

The appellant’s opening brief described the arbitration award as “staggering” and says it “inverted the understood economics of the parties’ deal—forcing the seller to pay for the business it sold—by disregarding express agreement terms intended to avoid such an absurd result.” It argued that the award and the Chancery Court’s decision to “reluctantly” confirm it “demonstrate the need to ensure that courts do not merely rubber stamp (and thereby encourage more) cynical post-closing gambits like those that led to the award here.” Unfortunately for the appellant, the Delaware Supreme Court disagreed and simply cited the basis and reasons for the Chancery Court’s order granting summary judgment.

Since the arbitration award was made public by the Financial Times and created quite “a stir in the private equity deal community,” over the summer in Weil’s Private Equity Sponsor Sync Newsletter (see page 20), Glenn West did a deep dive into the contractual provisions at issue, to the extent they were set forth in the arbitration award. Glenn ultimately concluded that “deal lawyers tend to like Delaware’s strict contractarianism” since “it provides certainty that the documented deal is the deal [but] that certainty can sometimes come at a cost in situations like this, particularly once an arbitrator applies that strict contractarianism.” Glenn’s analysis is a must-read to understand the “why” behind this outcome and also for its discussion of the serious questions about ethics in deal-making that this case seems to raise depending on who understood what and when.

– Meredith Ervine