DealLawyers.com Blog

This Fried Frank article discusses the Delaware Chancery’s early July decision in WSP USA Services Inc. v. Versar, Inc. (Del. Ch.; 7/26), granting a motion to dismiss claims by a seller that the buyer breached their SPA by treating an undisclosed current liabilities disagreement as a purchase price adjustment dispute rather than a breach-of-representations dispute. The article summarizes the facts as follows:

In 2023, Versar (“Buyer”) acquired facility management company Louis Berger Services, Inc. (the “Company”) from WSP USA Services, Inc. (Seller”). Post-closing, Buyer alleged that the Company had not materially performed certain of its government contracts (the “Florida Contracts”). Seller had represented in the SPA that the Company had materially complied with and performed all of its government contracts. Under the post-closing purchase price adjustment process set forth in the SPA, Buyer proposed a purchase price adjustment of about $9.7 million, of which about $5.3 million was attributable to the alleged nonperformance of the Florida Contracts.

Seller did not argue that liabilities associated with underperformance of the Florida Contracts were not current liabilities within the SPA’s definition of “Net Working Capital”—but Seller argued that the SPA prohibited Buyer from treating the dispute over the Florida Contracts as the basis for a purchase price adjustment. Seller argued that the proper source of recovery was through the R&W insurance, given the representation in the SPA covering compliance with government contracts. Seller brought suit, claiming that Buyer breached the SPA by submitting the dispute to the SPA’s independent arbiter process for Net Working Capital disputes.

Chancellor McCormick disagreed and found that, because the SPA lacked a provision dictating a “hierarchy” of the post-closing remedies (the purchase price adjustment and R&W insurance recovery), the buyer was able to choose between them. The Fried Frank alert says:

The decision reinforces the need for careful drafting of post-closing purchase price adjustment and indemnification provisions. Where, as is typical, a purchase agreement (i) provides for a post-closing purchase price adjustment based on net working capital (or another metric), and (ii) requires that the seller indemnify the buyer for breaches of representations and warranties (or that the buyer obtain an R&W insurance policy to cover such breaches), the buyer may be entitled to elect between seeking recovery under (i) or (ii) if a post-closing dispute falls within the purview of both—unless the parties have specified in their agreement a “remedy hierarchy” stating that, in case of conflict between the two provisions, one would supersede the other. We note that these two remedies typically provide for different recoveries, particularly as indemnification usually is subject to caps and deductibles.

It goes on to suggest:

Drafters of purchase agreements should consider specifying a “remedy hierarchy” as between a purchase price adjustment and indemnification. Where a purchase agreement provides for (a) a purchase price adjustment based on net working capital (or other metric) and (b) indemnification (or recovery under R&W insurance) for breaches of representations, the drafters should consider specifying, with respect to disputes that implicate both, which remedy supersedes the other.

Drafters should consider carefully how the purchase price adjustment provisions interrelate with the indemnification provisions. Typically, an agreement will: specify that indemnification is the exclusive remedy for breaches of the seller’s representations under the agreement; carve out purchase price adjustment amounts (as well as fraud and other specified matters) from the exclusive remedy provision; and prohibit double recoveries by excluding purchase price adjustments from indemnification claims. Many agreements provide that a purchase price adjustment is the sole remedy for net working capital inaccuracies and that indemnification is the sole remedy for breaches of representations and warranties—but, as noted, the agreement should specify which of these remedies takes precedence over the other when the dispute falls under both. For additional clarity, parties could consider providing specific, hypothetical examples of how they intend that specific situations would be treated where both a post-closing purchase price adjustment and indemnification could be implicated.

– Meredith Ervine