DealLawyers.com Blog

Last week, in Viasat, Inc. v. L3Harris Technologies, Inc. (Del. Ch.; 9/26), the Chancery Court addressed motions for summary judgment in a post-closing purchase price adjustment dispute. The asset purchase agreement provided that any dispute regarding the working capital adjustment would be resolved by an independent accounting expert. When the expert largely resolved the disputed items in buyer’s favor, the seller sued seeking to overturn those judgments on the basis that they were inconsistent with the APA.

The APA established a three-tier hierarchy of accounting principles for calculating adjustments to Working Capital and clarified that the “Reference Statement of Working Capital” shall “take precedence” over GAAP.

Viasat contends that Grant Thornton impermissibly interpreted the legal scope of the “shall take precedence” clause by proceeding to consider GAAP (Tier 2) after concluding that Viasat complied with the Reference Statement (Tier 1) as to the three disputed items. After doing so, Grant Thornton rejected Viasat’s calculations for non-compliance with GAAP, flipping the outcome to L3Harris. L3Harris counters that because the Reference Statement and GAAP are in different tiers, Grant Thornton properly sought to satisfy both requirements when possible. L3Harris also contends that Grant Thornton’s interpretation of certain APA terms is subject to manifest error deference.

On these questions, Vice Chancellor Will sided with Viasat.

L3Harris’s argument that the court should defer to Grant Thornton’s interpretation of the “shall take precedence” clause lacks merit. To be clear, the court defers to the expert’s accounting determinations—such as whether an item constitutes a “loss” or an “account receivable.” But Grant Thornton approached the Accounting Principles as a checklist and evaluated whether Viasat’s calculations complied with the Reference Statement and also with GAAP. Whether that approach is consistent with the text of the APA presents a pure “question of contract interpretation, and therefore, of law” that requires no specialized expertise. Grant Thornton’s interpretation of the “shall take precedence” clause is afforded no deference.

L3Harris’s reading of the “shall take precedence” clause—like Grant Thornton’s interpretation—conflicts with the plain terms of the APA. Black’s Law Dictionary defines “precedence” as “[g]enerally, the quality, state, or condition of going before something else according to some system of priorities.” Applied here, it means that if the Reference Statement resolves an issue, the inquiry ends. If the Reference Statement and GAAP produce conflicting outcomes, the Reference Statement is prioritized and controls [. . .]

Finally, L3Harris insists that this reading of the “shall take precedence” clause is absurd because no reasonable buyer would agree to an approach contrary to GAAP. “An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.” It is not absurd, however, for sophisticated parties to negotiate bespoke accounting metrics that depart from GAAP to allocate risk in a post-closing true-up. That L3Harris now wishes it had negotiated differently is of no consequence. “Parties have a right to enter into good and bad contracts, the law enforces both.”

Ultimately, Vice Chancellor Will determined that Grant Thornton misapplied the three-tier hierarchy set forth in the APA with respect to one disputed adjustment because the first tier of the hierarchy, not GAAP, applied. For two other adjustments, she found that it was appropriate that the inquiry didn’t end with the first tier.

Disputed Items 2 and 3 present a different situation. For each, the Reference Statement supplies a procedural mechanism for evaluating an adjustment but, unlike Disputed Item 1, lacks a definitive substantive constraint. For both Disputed Items 2 and 3, the Reference Statement does not fully resolve the disputed issue. Tier 1 is therefore not determinative, meaning that Tier 2—GAAP—applies under the Accounting Principles’ hierarchy.

– Meredith Ervine