Delaware Court Of Chancery Finds Buyer Assumed Post-Closing Liability In Connection With Seller’s Pre-Existing Settlement Agreement
On September 30, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted summary judgment to the seller of several cigarette brands, finding that the buyer was responsible pursuant to an asset purchase agreement (“APA”) for post-closing liability in connection with a pre-existing settlement between the State of Florida and the seller. ITG Brands, LLC v. Reynolds American Inc., et. al., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022). As part of the settlement entered nearly twenty years before the sale of the brands, the seller and other tobacco companies agreed to make annual payments to Florida based on the companies’ respective market shares of annual tobacco product sales in the United States. The Court focused on a provision of the APA that stated that the buyer assumed “all Liabilities … to the extent arising, directly or indirectly, out of … the use of the Transferred Assets … from and after the Closing.” The Court found that the provision unambiguously assigned the post-closing liability in connection with the Florida settlement to the buyer.
Preliminarily, the Court found that it was not bound by a decision of a Florida court to hold the seller — and not the buyer — responsible for unpaid amounts under the Florida settlement. In that case, Florida and other parties to the settlement sued both the seller and the buyer because the seller allegedly ceased making the annual payments after the sale closed. The Florida court determined that the buyer did not assume the liability under the APA “but rather assumed the duty to employ ‘reasonable best efforts’ to enter into an agreement with Florida to assume the liabilities imposed” by the Florida settlement. The Florida court thus entered judgment against the seller. However, the Delaware Court concluded that the doctrine of issue preclusion did not apply (under Florida law) because the buyer and seller were not adversaries in that Florida suit.
As to its own interpretation of the APA, which was governed by Delaware law, the Delaware Court noted that liabilities that “‘aris[e], directly or indirectly, out of … the use of the Transferred Assets’” were assumed by the buyer. The Court explained that the Florida settlement liability “‘aris[es],’ at least ‘indirectly,’ from ‘the use of the Transferred Assets.’” The Court explained that the purpose of the APA was for the buyer to acquire assets (which included among other things, goods, intellectual property, books, records and files) that would enable it to sell the acquired cigarette brands, and that the buyer necessarily uses these assets for its sales. The Court highlighted that “[i]f [the buyer] stopped using the Transferred Assets, it would not be able to sell [a]cquired [b]rands cigarettes. And if [the buyer] sold no [a]cquired [b]rands cigarettes in a post-[c]losing year, [the seller] would have no liability to Florida” under the settlement.
The Court rejected the buyer’s argument regarding another provision, requiring the seller to use “reasonable best efforts” to join the Florida settlement agreement, finding that it did “not conflict with—and trump” the allocation of the Florida settlement liability to the buyer. The Court explained that the result of the “reasonable best efforts,” if successful, would have been that the buyer became directly responsible for the payment obligations to Florida. Thus, according to the Court, the provisions “work together to achieve the same result: to ensure [the buyer] (not [the seller]) is responsible for the use of the [a]cquired [b]rands post-[c]losing.” The Court referred to this as a “‘belt and suspenders’ approach.”